Argentina - Forestry Development Project

Document of The World Bank Report No. 14314-AR STAFF APPRAISAL REPORT ARGENTINA FORESTRY DEVELOPMENT PROJECT SEPTEMBER 22, 1995 Country Department I Natural Resources, Environment and Rural Poverty Division Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS Currency Unit - Peso (Arg$) EXCHANGE RATE (September 22, 1995) US$1.00 Arg$1.00 Arg$1.00= US$1.00 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES The metric system has been used throughout the report.  ABBREVIATIONS AND ACRONYMS APM National Parks' Administration Bank/FAO-CP World Bank/Food and Agriculture Organization Cooperative Program CFI Federal Investment Council CIEFAP Center for Forest Investigation and Extension in Andean Patagonia CNB National Forestry Commission CONADEPA National Commission for the Promotion and Development of Patagonia DMU Database Management Unit DPF Directorate for Forestry Production (within SAGyP) DRFN Directorate for Native Forests (within SRNyAH) ESW Economic and Sector Work GDP Gross Domestic Product GEF Global Environment Facility GIS Geographic Information System GNP Gross National Product GTZ German Technical Assistance Agency ICA Institutional Capacity Analysis ICB International Competitive Bidding ICGs Institutional Capacity Gaps ICR Implementation Completion Report IFAD International Fund for Agricultural Development IFONA Argentinean National Forestry Institute INASE National Seed Institute INDEC National Institute of Statistics INTA National Institute for Agricultural Research ISC Institutional Strengthening Component LAC Latin America and the Caribbean LIB Limited International Bidding LOI Letters of Invitation MASL Meters Above Sea Level MERCOSUR Common Market consisting of Argentina, Brazil, Paraguay and Uruguay NCB National Competitive Bidding NGO Non-Governmental Organization OED Operations Evaluation Department PAR Project Audit Report POA Annual Work Plan PSA Social Program for Agricultural Development SAGyP Secretariat of Agriculture, Livestock and Fisheries SBD Standard Bidding Documents SOE Statement of Expenditure SRNyAH Secretariat of Natural Resources and Human Environment TOR Terms of Reference  I  ARGENTINA STAFF APPRAISAL REPORT FORESTRY DEVELOPMENT PROJECT Table of Contents' Page N LOAN AND PROJECT SUMMARY . ...................... i I. PLANTATIONS. TIMBER PROCESSING AND AGROFORESTRY 1 A. Background .1 B. Priorities for Government Action. 2 Economy-Wide Policies. 3 Sector Specific Policies. 5 C. Major Public Sector Institutions Involved. 7 D. Previous Bank Lending ................. . 8 E. Lessons from General Bank Experience. 8 F. Bank Strategy. 9 II. THE PROJECT .10 A. Origin and Concept .10 B. Project Objectives .10 C. Project Description ...................... 10 Project Components .10 Institutional Strengthening .............. 11 Research and Information Generation and Dissemination ................... 11 Small Farmers ..................... 17 D. Costs and Financing .20 Project Costs .20 Project Financing .20 1. This report incorporates the findings of an Appraisal Mission which visited Argentina between December 4 and 22, 1994. The mission consisted of Messrs. Michael McGarry (Task Manager), Robert Kirmse and Alain Tobelem (Bank). It is also based on the findings of previous Bank and Bank/FAO-CP missions consisting of Messrs. Michael McGarry, Robert Kirmse, Alain Tobelem, Luis Constantino (Bank); and Richard Owen (Bank/FAO-CP). The Peer Reviewers are Ms. Susan Chen (EA1AE) and Mr. William Beattie (LA2NR). The Division Chief, Projects Adviser, and Department Director are Ms. Constance Bernard, Mr. Orville Grimes, and Mr. Gobind T. Nankani, respectively.  Table of Contents (Continued) Page N' E. Procurement and Disbursements ....... . . . . . . . . 21 Procurement ............ .. .. .. .. . . . 21 Disbursements ........... . .. .. .. . .. . 25 F. Organization and Implementation ...... . . . . . . . . 25 Project Management . . . . . .. . . . . . . . . . . . 25 Monitoring, Supervision and Evaluation ..... . 28 Accounts, Audit and Reporting ...... . . . . . . 28 G. Rationale for Bank Involvement ....... . . . . . . . . 29 H. Program Objective Categories ....... . . . . . . . . . 29 I. Benefits, Risks and Environmental Impact ..... . . . . 30 Benefits .............. ... ... ... .. . 30 Risks ........................... . 30 Environmental Impact . . . . . . . . . . . . . . . . . 31 III. SUMMARY OF AGREEMENTS REACHED. AND RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Recommendation ......... .. . . .. . . .. . 33 ANNEXES A. Lessons Learned from Previous Related Bank Lending ..... . . . 34 B. Institutional Strengthening Component ...... . . . . . . . . . . . . 39 C. Research and Information Generation and Dissemination Component .............. ... .. ... ... .. ... .. . 55 D. Small Farmer Component ......... . .. . . .. . . . .. . . .. . 74 E. Project Costs ................................. 84 F. Allocation of the Loan Proceeds ...................... 95 G. Schedule of Loan Disbursements ..................... 96 H. Schedule of Monitorable Actions ..................... 97 I. Supervision Plan ............................... 102 J. Selected Documents and Data Available in the Project File ... .. 104 MAP: IBRD No. 26467  ARGENTINA FORESTRY DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: The Argentine Republic Implementing Agency: Secretariat of Agriculture, Livestock and Fisheries (SAGyP) Beneficiaries: Those parts of the private sector involved with forest plantations and timber processing industries; 3,000 poor farm families; and residents of Patagonia Poverty: Program of Targeted Interventions. The Small Farmer Component would be targeted at poor farm families in selected rural areas where the incidence of poverty is substantially higher than average. Amount: US$16.0 million equivalent Terms: Repayable in 15 years, including 5 years of grace, with loan amortization based on level repayments of principal, at the Bank's standard variable interest rate Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver Onlending Terms: Not applicable Financing Plan: See para. 2.38 Net Present Value: Not applicable Staff Appraisal Report: Report No. 14314-AR, dated September 22, 1995 Project Identification Number: AR-PA-6040 Map: IBRD No. 26467   ARGENTINA STAFF APPRAISAL REPORT FORESTRY DEVELOPMENT PROJECT I. PLANTATIONS, TIMBER PROCESSING AND AGROFORESTRY A. Background 1.1 Argentina's forest plantations have clear natural advantages compared with those in many countries. These advantages stem mainly from: (a) the fast growth rates of trees in Argentina resulting from relatively rich soils and favorable temperatures and rainfall; and (b) an abundance of land with few alternative uses. In spite of these advantages, forest plantations in earlier decades were not developed in line with the potential, principally because of unfavorable macroeconomic, trade, and other policies. In recent years many of these policies have been adjusted appropriately, and the improved economic and policy environment now encourages investments. 1.2 The forest resources of Argentina are made up of both native forests and plantations. Land with woody vegetation is estimated at about 64 million ha (23 percent of the total area of the country), of which forested land is estimated at between 35 and 45 million ha. The area of native forest with commercial potential is estimated at about 15 million ha; it produces about 7.3 million m3 of wood per annum, equal to about 40 percent of the country's annual production. The remainder comes from plantations, whose area is estimated at about 900,000 ha. 1.3 The forestry sector in Argentina contributes just under 2 percent of GDP and had a positive trade balance of US$132.1 million in 1989. While it now contributes positively to the trade balance, this was achieved only by 1988. The contrast between the performance of the forestry sectors in Argentina and Chile could hardly be more striking. While Argentina is about 3.7 times the size of Chile in area, and about 3 times its size in terms of GDP, Chile's exports of forest products, at about US$1.0 billion annually, are almost 4 times greater than Argentina's. 1.4 From 1980 to 1989, the area under plantations in Argentina grew only 7.5 percent. From 1970 to 1990, Argentina planted about 1 million ha of forests; over the same period, Brazil planted about 6 million ha, and between 1978 and 1990, Chile planted 1.3 million ha. Chile developed an export-oriented industry which enabled it to develop well beyond the requirements of the domestic economy. Brazil suffered from macroeconomic and policy distortions similar to those of Argentina, but the size of the domestic market was much larger, enabling its forestry sector to expand rapidly. Argentina was constrained both by macroeconomic and  - 2 - sector policy distortions and by the small size of its domestic market. In comparing Argentina with Chile, in particular, it becomes clear that a substantial gap exists in Argentina between the actual and potential levels of forest plantation production. Furthermore, much of the past growth in forest plantations in Argentina has not been efficient. B. Priorities for Government Action 1.5 The challenge facing the Argentine government in dealing with forest plantations, timber processing and agroforestry is how to narrow the gap that now exists between the actual and the potential sustainable levels of efficient output. Defining an appropriate role for the state is critical in the development and consideration of government options. 1.6 Commercial forestry may be defined as the planting, harvesting, transport, processing, and marketing of trees and/or forest products. There are two specific aspects of commercial forestry, so defined, that justify a role for the state different from that in other commercial activities. 1.7 Investments in forest plantations generate joint products: a commercial product, timber, and a non-commercial product, carbon sequestration, which is a global externality. While this is not a sufficient reason for Argentina to support a forest plantation payment scheme using domestic resources, it is a reason why such plantations should be considered for support in carefully selected circumstances by any international fund established to lower carbon levels in the atmosphere. A Carbon Sequestration Project, which would focus on sequestering carbon in forest plantations, native forests and scrubs, is under preparation, and the Government has approached the Global Environment Facility (GEF) for its support. 1.8 Native forests produce commercial products such as timber, charcoal, and nuts, but they also produce a range of non-commercial goods and services. Examples are: serving as sinks for carbon sequestration, a global externality; preventing soil erosion, buffering water flows, and protecting biodiversity and watersheds, which generate global, regional, and/or national externalities. The production of public goods by native forests requires that they be treated in special ways by the state and society at large, and this requires an appropriate incentive framework of laws and regulations. The government of Argentina decided in 1991 to assign public sector responsibility for green environmental issues and all aspects of native forests to a newly created Secretariat of Natural Resources and Human Environment (SRNyAH) within the Presidency of the Republic. A separate project (Native Forests and Protected Areas), which would be managed by SRNyAH and which would address the above issues, is under preparation, and the Government has approached the Bank for its support. In addition, a complementary Biodiversity Protection Project, which would focus on  - 3 - protecting biodiversity of global significance and importance, is also under preparation and the Government has approached the Global Environment Facility (GEF) for its support. 1.9 Given that the two exceptions just noted are being handled separately, the challenge remaining for the Government is to realize the efficient growth potential of forest plantations, timber processing industries, and agroforestry while avoiding the negative externalities associated with the loss of native forests to logging and conversion to other uses. This requires that the future source of growth in the output of commercial forestry products shifts progressively toward plantations and away from native forests. In turn, this requires a rapid increase in both the productivity and output of plantations, but this growth should be efficient and, therefore, quite different from much that occurred in the past. It should be driven by improved access to better quality information and incentives which reflect the full range of costs and benefits, both private and public. 1.10 The most important policies for the promotion and development of forest plantations, timber processing industries, and agroforestry are those that affect the economy as a whole. These may be grouped into several broad categories: (a) macroeconomic and trade policies; (b) capital markets; (c) transportation and ports; and (d) labor markets. Public sector policies affecting forest plantations, timber processing industries, and agroforestry specifically are also important and may be grouped into two broad categories, forestry sector laws and regulations, and research, standards, and information. Economy-Wide Policies 1.11 Macroeconomic and Trade Policies. Argentina's poor performance in forest plantations, timber processing industries, and agroforestry results in large part from the strategy of import substitution adopted after World War II. This strategy, which was economy-wide and was implemented through implicit taxation of agriculture and rural areas, and protection of industry and urban areas, benefitted in particular the pulp and paper industry within the forest sector. The pulp and paper industry is capital intensive with large economies of scale, and tends to be concentrated in a small number of large firms. This concentration facilitates lobbying activities. In addition to the economy-wide policies which supported industrial development in general, virtually every forest sector policy and regulation adopted was for the benefit of the pulp and paper group. The most important of these policies were tariffs on the import of pulp and paper products, export taxes on logs, grants for tree planting, and regulations requiring replanting when trees have been cut. The implicit result of the various instruments was a tax on privately owned native forest and a subsidy to forest plantations. The efficiency implications were: (a) an industry incapable of facing export markets competitively; (b) the crowding-out of non-pulp and paper industries competing for the same resource base, such as  - 4 - mechanical wood products; (c) land use misallocations towards specific types of plantations; and (d) environmental losses due to natural forest conversion to plantations. Public expenditure programs were similarly biased. 1.12 Continued liberalization of the economy is necessary to create a business climate conducive to the long-term investments required in plantations and timber processing industries if Argentina is to start realizing its potential in these areas. The reform program adopted by the Argentine government since 1989 is putting these conditions in place. For example, the level of inflation is now down to under five percent per annum, an extraordinary achievement considering the four-digit levels common in the 1980s. One direct effect of this is to lower the risk in long-term investments such as forest plantations. 1.13 Continued trade liberalization is necessary because forest plantations and timber processing industries will depend on export markets for the sale of much of their new production, and access to capital goods and other inputs priced at world levels is essential for competitiveness. Fortunately, the trade regime has been liberalized and made more neutral even if some further refining is still needed, particularly from the perspective of plantations. Remaining trade distortions are due mainly to the costs of port regulations, which in 1992 were estimated to be still 4.9 percent of border prices. 1.14 Capital Markets. Long-term investments such as those in forest plantations are critically dependent on the development and efficient functioning of Argentine capital markets. At least in the medium to long term, forest plantations must look to the capital markets for the solution to their financing needs. Therefore, any action the government takes to foster the development of efficient capital markets (including the lowering of inflation expectations, which, in turn, will lead to lower real interest rates) will directly benefit the forestry sector, particularly the processing stages in the short term, but ultimately the earlier plantation phase as well. 1.15 Equity financing is being welcomed by the government, and there is today considerable interest from foreign firms, particularly Chilean, in investing in the Argentine forest sector. 1.16 Transport and Port Sectors. High transport costs have also been among the critical factors hampering the development of forest plantations and timber processing industries; forest products have low value to volume or weight ratios, making transport costs a large share of total production and marketing costs (transport costs can amount to 50 percent of the FOB cost of unprocessed timber products). Furthermore, before the recent reforms, the average cost of handling wood in an Argentinean port was about three times the average international figure. Continuing and further deepening the reform process throughout the transport and port sectors are vital to forest plantation and timber processing development.  - 5 - Great progress has been made to date in deregulating transport and ports and in transferring activities to the private sector. The critical reform remaining is the further deregulation of road transport at the provincial level. 1.17 Labor Laws. Labor market imperfections have been very damaging, particularly for forest processing, but less so at the primary production level, at least directly. The critical issues in labor markets are the following: (a) workmen's compensation; (b) collective bargaining; (c) nature of labor contracts; and (d) labor taxes and contributions. Reform of labor laws and regulations has lagged reforms in other areas and must be further deepened if development of the forest sector is not to be stymied. The agenda of deregulation in place contains several projected reforms that are very relevant to commercial forestry, particularly the reform of workmen's compensation. Sector SpeciFic Policies 1.18 Laws and Regulations. Apart from maintaining and deepening the economy-wide policy reforms, the priority for forest plantations and timber processing industries is a review and reform of the legal and regulatory framework, both at the federal and provincial levels. Many regulations impose costs on forest plantations and timber processing operators yet achieve little in the way of public goals; they may even be perverse as, for example, when they create incentives to destroy native forests. These regulations should be identified, subjected to close scrutiny and, when they cannot be justified, changed. Identifying these will require a substantial amount of effort since nearly all forests (apart from national parks) are under provincial jurisdiction. The federal government will have to use persuasion and incentives to bring about the desired changes. 1.19 Research and Information Generation and Dissemination. Forest entrepreneurs and experts are unanimous in pointing to the absence of a forestry culture as a serious problem affecting forest plantations and timber processing. From an economic point of view, this argument reflects the high cost of information. Primary production in Argentina was directed almost exclusively at cereals and livestock, while other sectors were crowded out in terms of availability of information and statistics from public and private sources regarding the stock of plantation forests, grading standards, product development, and market opportunities. 1.20 A government investment role in the following areas related to forest plantations, timber processing industries, and agroforestry is justified by the public good content of these services: (a) inventory of forest plantations. and development and management of a commercial forestry database: completing an inventory of forest plantations, but only to the degree of detail required for purposes of public policy; inputting the data  - 6 - generated and other statistics (e.g., prices and production statistics) into a database; analyzing and disseminating information from the database to the Argentine public and private sectors and to potential foreign investors; (b) forest plantation and timber processing research and information generation and dissemination: (i) marketing study: while there are export marketing associations in Argentina for mechanical-wood products, small and medium-size producers with no direct links to foreign markets have little knowledge of export market conditions and requirements (i.e., size and quality classes). Furthermore, due to the dispersion and small scale of the mechanical-wood- products' industry, it is unlikely that such associations will be able to substantially change the situation in the near future due to the high transaction costs involved. There is, therefore, a role for the government in helping mechanical-wood processing industries perform a range of activities, which private marketing associations may sometimes perform successfully, such as adopting wood grading systems, completing market analyses, and transport feasibility studies to help the industry focus its investments and take advantage of appropriate niches in foreign markets. Another argument favoring a governmental role in grading is that even when marketing associations exist, grading systems they may operate are of limited effectiveness since they often lack consumer confidence. The pulp and paper industries do not need such assistance; (ii) improving yenetic material and seedling quality: in forest plantations, improving the genetic quality of seedlings has elements of a public good due to a market failure: the inability to distinguish improved genotypes from poor genotypes in the visible characteristics of a plant until late in its lifecycle, which could be 20 years. Therefore, in principle, a direct government role in the improvement and certification of genetic quality, and the certification of improved quality seedlings, is appropriate; and (iii) plantation management: a government role in researching and disseminating technical information on improved plantation management techniques is justified because of a market failure: the inability of private parties to capture a sufficient share of the benefits to  - 7 - justify the expenditures, and the high transactions costs should producer associations attempt to manage and finance such an activity. 1.21 The cold, arid Patagonia region occupies most of the southern part of Argentina. The region, which covers a total of 762,000 km2 (27 percent of the country's area), consists of three natural zones: (i) the Steppe, or arid grassland, which is the largest (650,000 km2) and most arid (750 to less than 300 mm precipitation/year); (ii) the Pre-Cordillera, which covers a narrow band of steeply sloping land of altitudes of around 1,000-2,000 meters above sea level (MASL), and with annual precipitation of around 750 to 2,000 mm; and (iii) the Cordillera, in the high Andes, with elevations above 2,000 MASL and annual precipitation of 1,000 to 3,000 mm. Strong winds are a characteristic of the entire region. While much of the Cordillera and Pre-Cordillera is well protected in the National Park's system, there are severe desertification problems in the Steppe zone. There is a lack of consensus concerning the underlying forces which are driving this phenomenon and the definition of an appropriate state role in responding to it. A comprehensive study of desertification in Patagonia is included in this project because: (a) of the interest shown by the government, specifically the Ministry of Economy; (b) the expectation that forestry will contribute to slowing the rate of desertification in that region; and (c) the past involvement and experience of the National Institute for Agricultural Research (INTA), which is part of SAGyP, in efforts to address the problem. 1.22 Outside the Pampa, small farmers comprise more than 40 percent of properties. Regionally, the highest concentration of small farmers is found in the Northeast and the Northwest where they are responsible for 40 percent and 20 percent, respectively, of the cropped area. According to the International Fund for Agricultural Development (IFAD) (1993), these two regions contain 53 percent (i.e., 245,000 homes) of the rural poor in Argentina. The government is keen to use every efficient means and opportunity available to help alleviate rural poverty. Agroforestry offers an effective way, in certain circumstances, to help alleviate rural poverty and, for that reason, a small farmer component is included in the proposed project. C. Major Public Sector Institutions Involved 1.23 The role of the state in plantations, timber processing and agroforestry in Argentina includes: (a) adapting existing legislation and regulations to new requirements; (b) generating and disseminating appropriate information and data; (c) generating appropriate technology and making it available to the private sector directly or through extension activities; and (d) fostering forest-related training at all levels, including universities. 1.24 To perform this role adequately, substantial improvement is needed in institutional capacity. Until it was dismantled in late 1991, the  - 8 - Argentine National Forestry Institute (IFONA), an autonomous institute under the institutional umbrella of SAGyP. was responsible for overall management of the forest sector2. IFONA's functions were divided between the SAGyP's Directorate for Forestry Production (DPF), which was given responsibility for forest plantations, timber processing industries and agroforestry, and the newly-created SRNyAH, which was given responsibility for native forests, protected areas, and green environmental issues. SAGyP is responsible for two semi-autonomous agencies: (a) the National Seed Institute (INASE); and (b) INTA, which has responsibility, inter alia, for forestry research and extension. The proposed project would be implemented by SAGyP and would be limited to plantations, timber processing and agroforestry. 1.25 The 23 Argentinean provinces have different structures of government and administration. In the forest sector, however, while the names of the administrative units differ, the general institutional design is relatively simple. The focal point is a provincial Forestry Directorate (Direccion de Bosques) with responsibility for coordinating the forestry- related activities of all entities, including national, for both native and planted forests. D. Previous Bank Lending 1.26 This is the Bank's first free-standing forestry project in Argentina; earlier, as part of the Agricultural Services and Institutional Development Project, the Bank supported a small sub-component for forestry research (US$1.9 million). E. Lessons from General Bank Experience 1.27 The Bank has lent over US$2 billion for forestry components and free-standing forestry projects. The Forestry Policy Paper of 1978 re- directed Bank financing from an almost exclusive focus on industrial forestry, to a new generation of social, rural development, and environmental forestry projects. Sector work was stressed as the critical link between the policy statement and the lending program. Only one Implementation Completion Report (ICR), and no Project Audit Report (PAR), exists for a forestry project in the Latin America and the Caribbean Region. Lessons learned and other conclusions are derived from Bank studies of sectoral experience. A 1991 OED study of the Bank's forestry experience concludes that the overall performance of this new generation of projects has been satisfactory'. However, consolidation may be a problem given the long maturation period of such projects, especially of their institutional development objectives. The main issues are national, relating to macroeconomic incentives and how these 2. Decree 2284 of October 31, 1991. 3. Forestry Development: A Review of Bank Experience, OED Report No. 9524. April 22, 1991.  affect land use patterns, while sectoral issues are financial, institutional and organizational. 1.28 OED analysis concludes that the development frontier for the forest sector in the 1990s is institutional and human resource-based, as well as research and information systems for forest and other natural resources. Macroeconomic policies and the incentive structure, including the legal and regulatory context, are vital. Government has a key role to play in encouraging the development and use of improved technology in plantation forests. Finally, forestry can have a major impact on alleviating rural poverty in selected locations while also helping to protect native forests. These lessons are also generally corroborated by the 1991 Board paper on Forestry and the 1994 Board paper on forestry project implementation. 1.29 The proposed project represents an appropriate set of public sector interventions aimed at boosting the productivity of plantation forests and timber processing industries while being sensitive to environmental issues in native forest and other ecologically sensitive areas. It heeds lessons from Bank and non-Bank projects that the government has a critical role to play in encouraging and facilitating the use of improved technology in plantation forests, and that forestry and agroforestry can play a key role in alleviating rural poverty in selected locations while also helping to protect native forests. A description of lessons learned and how the project was designed to take into account these lessons is given in Annex A. F. Bank Strategy 1.30 The Bank's country assistance objectives and strategy for dealing with forest plantations, timber processing and agroforestry have been defined through intensive mission contact since the start of 1992, leading to a Forestry Sector Review (Report No. 11833-AR, dated April 26, 1993), and continuing into the identification, preparation and appraisal of the proposed project. The solutions to the issues and problems that confront Argentine forest plantations, timber processing industries and agroforestry are consistent with the Bank's country assistance strategy and its forestry, environmental, and sector policies. Bank support for economy-wide policies and actions necessary, inter alia, for the realization of Argentina's commercial forestry potential is being pursued as part of the country dialogue and economic work program. 1.31 It is proposed that the other policies and actions deemed appropriate be pursued under the proposed Forestry Development Project. The Bank can be of great assistance to the government in helping it to develop and to implement an appropriate state role in support of the development of forest plantations, timber processing industries, and agroforestry.  - 10 - II. THE PROJECT A. Origin and Concept 2.1 Consistent with the recommendations of the Bank's recently- completed Forestry Sector Review (Report No. 11833-AR, dated April 26, 1993), the Government strategies for developing forest plantations and timber processing industries, fostering agroforestry, and dealing with the prevention of desertification in Patagonia imply a role for the private sector emphasizing the production and marketing of commercial goods and services. There would be a lean role for the state limited mainly to the creation of a supportive policy, legal and regulatory framework, the production of goods and services with a high public good content, and support of agroforestry in selected areas to alleviate rural poverty. Examples of public goods would be: (a) producing public information on the stock of trees in the nation's forest plantations; (b) producing market and price information; (c) developing genetically-improved seed and promoting the production and use of improved seedlings; and (d) producing and disseminating information about improved technical packages for the establishment and management of plantations. The proposed project, which was prepared with assistance from the Government of Japan in the form of a grant, would help the Argentine Government implement the public sector role outlined here. B. Project Objectives 2.2 The objectives of the project would be to contribute to efficient and sustainable growth of forest plantations and timber processing industries, to alleviate rural poverty, and to develop a strategy and consensus for addressing the desertification and soil erosion problems in Patagonia. C. Project Description Project Components 2.3 To achieve these objectives, the project would: (a) create a supportive institutional, policy, legal and regulatory framework; (b) generate and disseminate information which would enable all actors, both public and private, to contribute to narrowing the gap between actual and potential levels of output from forest plantations and timber processing industries; (c) target directly with technical assistance and grants, groups of small farmers in which the incidence of poverty is high, agroforestry can play a central role in improving farming practices, and, as a consequence, alleviate rural poverty and better protect important resources of nearby native forests; and (d) complete a comprehensive study on the Patagonia Region, focussing on the development of an appropriate role for the state to help prevent soil erosion and destruction of natural habitat.  - 11 - 2.4 The project would have three components: (a) institutional strengthening, including the policy, legal, and regulatory frameworks affecting forest plantations and timber processing industries; (b) research and information generation and dissemination; and (c) support to small farmers in the form of technical assistance and grants in about five areas adjoining important native forests to help them improve their farming practices partly through the use of agroforestry. Institutional Strengthening Component (Baseline Costs US$3.0 million) 2.5 The institutional capacity for dealing with forest plantations and timber processing industries is weak. Based on a comparison between existing institutional capacity and the one implied by the proposed project's development objectives, institutional strengthening would: (a) define a clearer role for the state in forest plantations and timber processing industries in consultation with the private sector; and (b) implement the proposed action program described below to eliminate, or at least mitigate, identified institutional capacity gaps for key capacity elements such as policy-making, legislation/regulations, inter-institutional and internal organization, personnel management, and skills. 2.6 A systematic institutional capacity analysis was carried out and institutional capacity gaps identified against project objectives and tasks. These capacity gaps are addressed in an institutional strengthening component which would: (a) analyze and strengthen the policy, legal, and regulatory frameworks affecting plantations and timber processing industries while ensuring consistency with Argentine environmental laws and regulations; and (b) address identified weaknesses in the principal institutions involved in project implementation: SAGyP's DPF, INASE, and INTA. The baseline cost of the component would be US$3.0 million, and would include expenditures for the acquisition of vehicles, equipment, training, studies, and technical assistance. Further details on this component are given in Annex B. Research and Information Generation and Dissemination Component (Baseline Costs US$13.2 million) 2.7 A research and information generation and dissemination component would support the following actions and investments aimed at generating information with a high public good content concerning commercial forest plantations and timber processing industries: (a) a national inventory of plantations, and establishment and operation of a related database; (b) studies on export markets and development of a grading system for mechanical wood products; (c) the development of a breeding program to achieve a higher level of species domestication; (d) the production and marketing of better seedlings; (e) plantation management research and extension; and (f) strengthening of the information base available (particularly to decision makers in the public sector) for improved management of the  - 12 - Patagonia region. Further details on this component are given in the following paragraphs and in Annex C. 2.8 Inventory of Forest Plantations and Management of a Related Database (Baseline Costs US$3.0 million). Reliable information on the extent, distribution and condition of forest plantations in Argentina is lacking. Furthermore, with the dissolution of IFONA in 1991, the monitoring of forest product output has ceased and there is now a dearth of up-to-date statistics on production and prices in the sector. A lack of reliable information on the growing stock, the geographical distribution of plantations, tree planting trends, and the annual output of forest products is a constraint to the formation of public policy for the sector. The objectives of the sub-component would be to: (a) complete a plantation forest inventory, and create and maintain current a database on forest plantations; (b) collect, input, and store such other statistics in the database as are necessary for SAGyP to meet its mandate in the commercial forestry sector; and (c) analyze data and disseminate information from the database. 2.9 The first objective would be realized by completing a low intensity, reconnaissance level inventory of plantations, which would collect essential qualitative and quantitative information on the extent, distribution, composition and age structure of forest plantations in Argentina, and inputting the data from the inventory into a database. The second objective would be pursued through strengthened relations between units within SAGyP handling the collection of raw data, but also in cooperation with other agencies, including, in particular, the Instituto Nacional de Estadistica y Censos (INDEC), the provinces, and SRNyAH. 2.10 Phase 1 of the plantation forest inventory would have a baseline cost of US$1.0 million. Baseline costs include: (a) the purchase of two sets of computer-compatible tapes of satellite imagery for the areas of Argentina containing plantations, one at the beginning of the project and the second toward the end (US$0.46 million); (b) the preparation from an analysis of the first set of these tapes of a basic map of plantations, which would be used, inter alia, to provide information on the broad distribution and extent of the principal plantation areas; and (c) the preparation from an analysis of the second set of these tapes of a basic map of plantations, which would form the foundation for monitoring changes in plantations. 2.11 Phase 2 of the plantation forest inventory would involve systematic field sampling, or ground truthing, to verify the spectral signatures of different plantation types (tree species, age and approximate standing volumes) on satellite images. To do this, a 2.5 km x 2.5 km grid would be used to locate sample plots, where species composition, age class (e.g., 0-5 years, 5-10 years, over 10 years) and standing volumes (using relascope sweeps) would be verified. This information would be sufficient to enable remote sensing techniques to be used in calculating plantation areas by species and volumes for the entire country.  - 13 - 2.12 Beyond the data generated by the plantation forest inventory, SAGyP would include in its database other priority statistics on commercial forestry. Examples of such statistics would be some of those related to prices, and those dealing with the production of roundwood and processed wood. SAGyP would transform all data, from whatever source, into information that would satisfy its own needs and those of others concerned with commercial forestry. During negotiations, agreement was reached that SAGyP would pursue the least cost option of inputting into its database raw statistics collected by other agencies, when available, and would collect only the raw data required by its mandate and not already collected by some other agency (para. 3.1 (a)). 2.13 In instances where the collection of statistics by SAGyP is justified, it would be done through: (a) the preparation of a standard methodology for collecting data; and (b) strengthening the capacity of the Statistics Unit within SAGyP to handle the task. This Statistics Unit would be renamed the Database Management Unit (DMU) because of its increased responsibilities. Inputs at SAGyP level would consist mainly of staff training and limited amounts of equipment (computers and telecommunications equipment) to receive, manage and publish commercial forestry data. At the provincial level, assistance would take the form of workshops to sharpen awareness of the importance of collecting reliable commercial forestry data. Phase 2 would have a baseline cost of US$2.0 million. 2.14 Markets and Grading Systems (Baseline Costs US$0.6 million). The processing of wood products is characterized by many small firms, hence, there are large transaction costs involved in putting in place and enforcing appropriate grading systems. Government involvement is aimed at resolving these problems and thereby increasing the competitiveness of Argentine wood products. This would involve three main activities: (a) a study, which would be carried out in close cooperation with the private sector, to identify export markets for sawnwood in which Argentine mills have, at least, the potential to be competitive; (b) adoption of grading systems and methods of enforcement for sawnwood appropriate to the markets identified; and (c) completion of a training program for mill operators and owners who express interest. 2.15 The first step would be to identify the export markets which appear most promising for mechanical wood products. For each of the promising markets identified (e.g., MERCOSUR, European Union, U.S.), the prevailing grading systems would be described in detail. The studies would also specify any other peculiarities of these markets, including sanitary restrictions. Once the priority markets have been identified, agreed and studied, and depending on the interest displayed by the private sector, a training program would be offered which would include: (a) workshops for private mill owners and operators; (b) partial cost sharing of overseas tours to the few selected markets for carefully selected public employees and private mill owners and operators in order to facilitate contacts with  - 14 - importers; and (c) on-the-job training of selected public and private sector employees who may be interested in positions as grading inspectors and instructors for small sawmills, or employees of large mills. The courses would be organized so that participants would be able to grade according to the rules of the identified priority markets. 2.16 Tree Selection and Breeding (Baseline Costs US$2.6 million). The tree selection and breeding program would initiate a long-term effort to reach a higher level of species domestication in Argentina. The tree breeding program would concentrate on pines and eucalypti, the two most important genera in Argentina's planting program. While the selection and breeding program would be inclusive of other species with good potential, experience has shown that the best success in domestication has been in instances in which efforts were concentrated on a single species or group of species. 2.17 The baseline cost estimate for this sub-component is US$2.6 million and would include the design and implementation of a breeding program for conifers, particularly pines, and for broadleaf species, particularly Eucalypti. 2.18 Seedling Improvement and Marketing Program (Baseline Costs US$1.8 million). Given that the tree breeding and selection program is part of a long-term strategy to improve the genetic quality of material available to nurseries, there is still the problem of improving the production, marketing and use of improved seedlings in Argentina. Even if excellent quality genetic material existed domestically, it would only be a source of somewhat superior quality seed over what is available now through importation. Nursery owners would still need to improve their nursery practices to improve the morphological characteristics of seedlings, and plantation owners would still have to overcome their present inability to distinguish between genetically and morphologically superior seedlings and those of lesser quality. A production and marketing research effort to address these latter problems would be the focus of this activity. 2.19 While there is no census of forest tree nurseries for Argentina, it is estimated that there are more than 1,000 operators in the areas covered by the existing government grant program in support of new forest plantation development. Generally, the large nurseries (i.e., 3-7 million seedlings capacity) in Argentina are part of large-scale reforestation operations for pulp mills or large export firms. These large nurseries, which produce about 40 percent of the country's nursery stock to service their own plantations, recognize and have the capacity to use advanced production technology and imported, certified seed. The small to medium-size nurseries, however, which supply more than 60 percent of the country's planting material, and normally sell to smaller producers, generally use genetically inferior seed and outmoded nursery practices, resulting in the production and planting of seedlings of highly variable, and usually poor, quality. With the use of good quality genetic material, along with already  - 15 - known, tried and tested improved nursery technologies, significant productivity gains--of the order of 20-50 percent--can be achieved. The objective, therefore, is to improve yields and survival rates of trees in new forest plantations by promoting the expanded use of improved genetic material by nurseries, and the production, marketing, and sale of improved seedlings by nurseries. 2.20 The strategy for achieving these objectives would involve three main elements: (a) making information on improved seed sourcing and nursery management techniques more readily available to nursery-people; (b) certifying improved seed, seedlings produced with that improved seed, seed producers, and nurseries; and (c) improving the market for good quality seedlings. Regarding information, technical assistance contracts would be awarded to two internationally recruited seed and wholesale nursery firms (one firm would probably specialize in broadleaf species, particularly eucalypti, the other in conifers) to carry out three main tasks: (i) helping interested nursery-people determine the best provenances of improved seed for the special soil and climatic conditions of each market area; (ii) facilitating the purchase of that seed by nurseries by providing information on sourcing; and (iii) training interested nursery operators in improved nursery techniques, and INASE staff in procedures for handling certification. Regarding certification, to encourage the development of a local supply of source identified, improved seed, INASE would initiate a seed certification program. INASE would also set up a system to certify nurseries that produce seedlings with desirable morphological characteristics and from improved seed. INASE would seek technical assistance from INTA or the consultants for both the certification of locally produced seed as well as for the certification of nurseries, and, thereby, seedlings. Concerning improvements in the market for good quality seedling, it would be boosted by SAGyP precluding the use of anything but certified planting material in any of its grant-assisted plantation programs. During negotiations, agreement was reached that for plantation owners to be eligible for participation in any government grant-assisted plantation program, SAGyP would require them, when establishing a new forest plantation, to use seedlings, when available, which are certified by INASE in accordance with the methodology to be developed under the project (para. 3.1 (b)). A receipt from a certified nursery could be used for verification. 2.21 Plantation Management Research and Extension (Baseline Costs US$4.2 million). Plantation management research would have baseline costs estimated at US$2.6 million: (a) US$2.1 million for research; and (b) US$0.5 million for related training. This research would be part of an INTA supported long-term program of applied field research involving trials on tree spacing (especially for silvopastoral purposed as well as for optimum production of timber), pruning, thinning, and plantation establishment (including fertilization, land preparation, and weed control). Such research would complement work already underway in Argentina and is justified as part of a broader effort to narrow the gap between the level of technical  - 16 - knowledge on such matters in Argentina and its competitors such as New Zealand, with which Argentina must compete in world markets. A major effort would be made to strengthen INTA's capacity to carry out applied plantation management research. Toward this end, two categories of training would be included: (a) extended training stays in New Zealand, Australia and the United States; and (b) graduate work, leading toward degree programs in overseas universities with excellent quality forestry programs. 2.22 Plantation management extension services would have baseline costs estimated at US$1.6 million. In order to disseminate the research findings to the more generalist extension agents and plantation owners and operators, INTA would help select, train and direct a small core of about 10 subject matter specialists to perform these functions. These subject matter specialists would also receive from INTA: (a) training to increase their awareness and sensitivity to the environmental issues raised by forest plantations; (b) education concerning Argentine environmental laws and regulations pertaining to forest plantation establishment and management; and (c) training concerning best environmental practices related to plantation establishment and management. INTA would prepare, and disseminate partly through these subject matter specialists, guidelines on plantation establishment and management, including appropriate material on best environmental practices. Baseline costs would include salaries, subsistence, vehicles, and funding to upgrade the level of training of this core group of 10 subject matter specialists. 2.23 Patagonia Sub-component (Baseline Costs US$1.0 million). The cold, arid Patagonia region occupies most of the southern part of the country. The region, which covers a total of 762,000 km2 (27 percent of the country), consists of three natural zones, namely: (i) the Steppe, or arid grassland, which is the largest (650,000 km2) and most arid (750 to less than 300 mm precipitation/year); (ii) the Pre-Cordillera, which covers a narrow band of steeply sloping land of altitudes of around 1,000-2,000 MASL, and with annual precipitation of around 750 to 2,000 mm; and (iii) the Cordillera, in the high Andes, with elevations above 2,000 MASL and annual precipitation of 1,000 to 3,000 mm. Strong winds are a characteristic of the entire region. While much of the Cordillera and Pre-Cordillera is well protected in the National Park's system, there are severe desertification problems in the Steppe zone. 2.24 The proximate main cause of land degradation is overgrazing, and grazing during the wrong season, mainly with introduced ruminants. Cattle, sheep and goats have largely replaced the indigenous animals in this region where extensive agriculture (meat, wood, furs and hides) is the main economic activity (US$271 million/annum), accounting for 40 percent of the region's GDP. Pasture management is rare, even on the larger holdings, partially because of the lack of interior and perimeter fencing on both small and large holdings. Overgrazing leads to a general degradation of the native grass ecosystem and a transition to a desert landscape, where unpalatable  - 17 - shrubs and bare ground begin to dominate. Degraded pastures, dust storms and increased flooding and other symptoms of desertification in the Patagonia have affected the living standards of the local people. Little is known, however, about the overall extent to which desertification has and will affect the ecosystem and the people living in the Patagonia, the underlying forces that drive the process, and the costs to Argentina if the process continues. 2.25 The objectives of this sub-component would be to: (a) collect, analyze, interpret, and report on what is known about the economic, social, biological, historic, climatic and other factors driving the desertification process in Patagonia; (b) determine the costs to Argentina, the local population, and biodiversity and hydrological systems if the process continues unabated; (c) assess the options available for addressing the problem based on research and experience in Argentina, Australia, South Africa, and the United States; (d) estimate the expected cost-benefit ratios of implementing a group of the best options available, both singly and collectively; (e) outline an appropriate role for the state in responding to the phenomenon; and (f) build a consensus among the main stakeholders (federal government, provincial governments concerned, private sector, NGOs) on an action plan consistent with an appropriate role for the state. 2.26 To meet this objective, the project would support a comprehensive study of Patagonia in response to the objectives outlined above. This study would be designed to develop a strategy and to help policy makers reach a consensus for better managing the Patagonia. This would require a combination of internationally and locally recruited expertise and experience. A workshop to discuss the findings of the study and to begin the process of consensus building would also be included. Small Farmer Component (Baseline Costs US$7.2 million) 2.27 The small farmer component would have twin objectives, the alleviation of rural poverty and the protection of native forest areas. To achieve these objectives, the project would address the two main limiting factors faced by poor small farmers: the availability of technical assistance and information on improved, sustainable technologies, and access to funds required to implement the technical packages. The strategy would be to expand successful small farmer oriented programs that are demand-driven and respond to some of the needs of small farmers. 2.28 The component would: (a) provide direct support in the fonn of technical assistance and grants to poor farm families in about five selected areas adjoining important native forests to help them improve their farming practices partly through the use of agroforestry and, as a consequence, alleviate their poverty and contribute to relieving the pressure on these native forests; (b) develop improved technologies adapted to small farming systems; and (c) increase small farmers' and their families' sensitivity toward  - 18 - environmental values, environmental degradation, and the need to conserve native forests. 2.29 Criteria developed by SAGyP for prioritizing broad ecological zones for inclusion include: (a) anthropic pressure on natural forests, especially those in or near national and provincial protected areas; (b) availability of improved technologies; (c) forestry potential; (d) diversification potential; (e) proportion of provincial small farmers, shifting cultivators and livestock producers to national total; and (f) level of small farmers' income. Five priority areas have been selected: (i) Sierra Central in the Province of Misiones; (ii) Yungas/Transici6n Parque Chaqueno in the Province of Salta; (iii) Chaco Humedo in the Province of Chaco; (iv) Departamento Minas in the Province of Neuquen; and (v) Chaco Seco in the Province of Salta. The target population has been estimated at some 3,000 small farm families. During negotiations, agreement was reached that, under the Small Farmer Component, the target population would be limited to those farm families having: (a) legal title to the land they farm; (b) a family income of less than two minimum rural salaries; (b) total assets (excluding land) of less than Arg$20,000; and (c) potential and motivation, in the opinion of the collaborating institution, to increase farm income while also contributing to protecting adjoining native forests (para. 3.1 (c)). 2.30 The main project activities would include (a) applied adaptive research; (b) extension/technology transfer; (c) public environmental/forestry education campaigns; (d) operation of an agroforestry fund; and (e) management of the activities listed under (b), (c) and (d). Further details on this component are given below and in Annex D. 2.31 Applied/Adaptive Research (Baseline Costs US$0.7 million): The sub-component would support applied research targeted at developing conservation-oriented technologies and sustainable productive systems to be used by small farmers in the project areas. Key research topics would include: agrosylvopastoral systems, including understory pasture development, introduction of new genotypes, and the development/adaptation of techniques to improve soil fertility and moisture holding capacity in areas where the small farmer component is being implemented. This sub- component would provide funding for the recruitment of international and national sustainable agriculture specialists as consultants to assist in the adaptation and development of specific technologies, including those successfully implemented in analogous areas of the world. This applied/adaptive research activity would also support staff training, study tours, publications, and some field equipment. 2.32 Extension/Technology Transfer (Baseline Costs US$3.2 million): The sub-component would build upon existing extension programs and methodologies which have proven their potential. This would be done by: (a) providing extension services for improved farming/management systems; (b) promoting farmers' organizations; (c) providing technical  - 19 - assistance for land-use planning; and (d) testing ways to diversify agricultural production. 2.33 Environmental Education Campaigns (Baseline Costs US$0.7 million): Forestry and environmental education campaigns, directed towards small farners and their families, school teachers and the local population as a whole, would be supported to raise public awareness of environmental issues. Activities would be developed by the extensionists in charge of the extension/technology transfer sub-component, thereby ensuring uniformity in information delivered to the target population. Activities to be supported would include school and community tree planting, and training of primary school teachers. 2.34 Agroforestry Fund (Baseline Costs US$2.3 million): To overcome one of the main obstacles faced by most small farmers in adopting new technology, namely, the lack of access to capital, the sub-component would establish an agroforestry fund with the twin objectives of: (a) increasing farmers' incomes; and (b) encouraging farmers to protect environmental values. 2.35 The proposed agroforestry fund would provide grants to about 3,000 small farmers. Activities to be financed by the fund would be of two main types: (a) those which are production-oriented; and (b) those which do not produce direct and/or immediate benefit to the small farmers, but which have environmental benefits. Activities to be financed would be defined by extensionists working with participating farmers in preparing projects to be submitted to the agroforestry fund. They could be group or individual farmer activities. During negotiations, agreement was reached that, under the Small Farmer Component, the cumulative amount of grants paid to any small farm family over the life of the project would not exceed US$1,000 equivalent (para. 3.1 (d)). 2.36 Management at Local Level (Baseline Costs US$0.3 million): The estimated fees which would be paid to local NGOs or governmental agencies to provide extension/technology transfer services and environmental education to beneficiaries, and monitor the use of the agroforestry fund have been estimated at about US$328,000, equivalent to about 5 percent of the total cost of these activities. During negotiations, agreement was reached that prior to the commencement of activities to be financed under the Small Farmer Component in any selected area, SAGyP would enter into a collaboration agreement for such selected area with a well qualified and experienced public or private institution in order to ensure the provision of extension/technology transfer services and environmental education to beneficiaries, and monitoring of the use of the agroforestry fund (para. 3.1 (e)).  - 20 - D. Costs and Financing Project Costs 2.37 Total baseline costs have been estimated at US$23.4 million. Physical contingencies (US$0.4 million) and price contingencies (10 percent of baseline costs plus physical contingencies) increase total project costs to US$26.2 million, including taxes and duties which are estimated at US$1.6 million. Project costs are shown below in Table 1, with further details given in Annex E. Table 1. Project Costs By Component (US$ millions) Component Cost (US$millions) Institutional Strengthening: (a) General Strengthening 2.2 (b) Policy Studies 0.8 Research and Information Generation and Dissemination: (a) Inventory and Database 3.0 (b) Markets and Grading 0.6 (c) Tree Breeding 2.6 (d) Seedling Improvement 1.8 (e) Plantation Management 4.2 (f) Patagonia Region 1.0 Small Farmers: 7.2 Baseline Cost 23.4 Contingencies (a) Physical 0.4 (b) Price 2.4 Total Project Cost 26.2 Project Financing 2.38 A Bank loan of US$16.0 million equivalent would finance about 65 percent of total project cost, exclusive of taxes and duties. Bank financing would cover all the foreign exchange expenditures of US$8.6 million, and about 42 percent of local costs. Government would finance the remaining US$10.2 million of total project costs. Details of counterpart funding requirements, including a breakdown by year and by agency, are  - 21 - given in Annex E. Table 2 shows the project financing plan by project component. Details on allocation of the loan proceeds are shown in Annex F. Table 2. Project Cost Financing (US$ millions) Components Bank Government Total Institutional Strengthening (a) General Strengthening 1.5 0.7 2.2 (b) Policy Studies 0.6 0.2 0.8 Research and Information Generation and Dissemination (a) Inventory and Database 2.3 0.7 3.0 (b) Markets and Grading 0.4 0.2 0.6 (c) Tree Breeding 1.5 1.1 2.6 (d) Seedling Improvement 1.5 0.3 1.8 (e) Plantation Management 2.6 1.6 4.2 (f) Patagonia Region 0.7 0.3 1.0 Small Farmers 3.2 4.0 7.2 Baseline Cost 14.3 9.1 23.4 Contingencies (a) Physical 0.2 0.2 0.4 (b) Price 1.5 0.9 2.4 Total Project Cost 16.0 10.2 26.2 E. Procurement and Disbursements Procurement 2.39 During negotiations, agreement was reached that the procurement of goods and services financed under the project would be undertaken in accordance with Bank Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995) and Bank Guidelines for the Use of Consultants (August 1981), using Bank-issued standard bidding documents (SBD) for procurement of goods under limited international bidding (LIB); standard documents, satisfactory to the Bank, for local/international shopping; and standard letters of invitation (LOI) and standard form of contract for consultant services (para. 3.1 (f)). 2.40 The review and approval of bid documents and procedures, including bid evaluations and contract award proposals, would be the  - 22 - responsibility of the Sub-Secretary of Production and he/she would be assisted in this endeavor by the Project Implementation Unit (PIU). Although a Country Procurement Assessment Report has not yet been completed for Argentina, this would be the fourth project in the agricultural sector for which SAGyP would be the principal implementing agency, including having responsibility for all procurement. In particular, the project would benefit from technical assistance which would be provided by the SAGyP staff responsible for the implementation of the ongoing Agricultural Services Project (Ln. 3297-AR). In addition, a procurement consultant familiar with Bank procedures would be retained to ensure adherence to the Bank's guidelines and procedures. Further details on procurement are presented in Table 3. 2.41 Works. Works under the project would be minor (total cost about US$300,000) and consist of the rehabilitation of existing laboratory facilities. Because of the small scale and dispersed nature of these works, they would be financed directly by the government, and not from the loan, using the borrower's own procurement regulations, which are satisfactory to the Bank. 2.42 Goods. The size of the contracts involved in the procurement of goods such as vehicles and computer equipment are such that they could not be grouped into packages large enough to justify international competitive bidding (ICB). Neither would national competitive bidding (NCB) be efficient because the goods involved are either manufactured abroad or they could not be grouped into packages large enough to justify the use of NCB procedures. Therefore, the following procurement procedures would be used. To the extent possible, contracts for vehicles and nursery equipment, estimated to cost in total about US$1.8 million, would be bulked into packages valued at not less than US$100,000, and contracts awarded on the basis of LIB. Contracts for other equipment (e.g., computers and software, and laboratory equipment) valued at between US$50,000 and US$100,000, and not exceeding US$500,000 in the aggregate, would be awarded on the basis of international shopping. Contracts for miscellaneous items of equipment (e.g., office and audio visual/extension equipment) and supplies valued at less than US$50,000, and not exceeding US$1.2 million in the aggregate, would be awarded on the basis of national shopping. Satellite images (computer-compatible tapes), which are estimated to cost about US$0.6 million, would be procured by direct contracting, because they are proprietary and obtainable only from one source once a technical choice is made between the various systems available. Contracts for the procurement of vehicles, technical equipment, and computer hardware and software would be awarded to agents or vendors with appropriate after-sales services, maintenance facilities and spare parts supplies. All vehicles procured (about 47) would include a four-year service contract.  - 23 - Table 3. Summary of Proposed Procurement Arrangements (US$ millions)a' Procurement l Project Element ICB NCB Other N.B.F.h_' TOTAL 1.Civil Works 1.1 Rehabilitation of laboratories 0.3 0.3 2.Goods 2.1 Vehicles 1.5Y' 1.5 (0.9) (0.9) 2.2 Equipment 1.44' 1.4 (0.8) (0.8) 2.3 Remote Images 0.6s' 0.6 (0.3) (0.3) 2.4 Materials & Supplies 0.6 0.6 3.Consulting Services' 3.1 Studies/Research 4.3 4.3 (4.3) (4.3) 3.2 Technical Assistance 4.8 4.8 (4.8) (4.8) 3.3 Training 1.0 1.0 (1.0) (1.0) 3.4 Project Management 1.1 1.1 (1.1) (1.1) 4.0ther Expenditures 4.1 PIU & Other Recurrent Costs 3.2 3.2 4.2 Workshops 0.3 0.3 (0.2) (0.2) 4.3 Training programs 1.6 1.6 (0.9) (0.9) 4.4 Research activities 3.0 3.0 (1.7) (1.7) 4.5 Agroforestry Fund 2.5 2.5 Total 19.6 6.6 26.2 (16.0) (16.0) Figures in parentheses are the amounts to be financed by the Bank. a/ Totals include taxes and contingencies. b/ Not Bank-financed. c/ Procured using LIB procedures (in more than 3 packages). d/ LIB or international or national shopping. e/ Direct contracting. f/ Consultant services include only fees and international travel costs. 2.43 Consulting Services. Studies and research, which would cost about US$4.3 million in consultant fees, would include: (a) studies on: (i) policies, laws and regulations for plantations and timber processing  - 24 - industries; (ii) interinstitutional and internal organization of SAGyP's DPF and INASE; (iii) personnel policies; (iv) wood product markets; and (v) desertification in Patagonia; (b) plantation inventories; and (c) a tree selection and breeding program. Technical assistance, which would cost about US$4.8 million in consultant fees, would include: (a) development of a commercial forestry database; (b) development of a wood grading system; (c) implementation of a seedling improvement and marketing program; and (d) transfer of plantation technology to extension agents; and (e) extension and environmental education services for promoting agroforestry and conservation management to small farmers living close to native forest areas. Training, which would cost about US$1.0 million in consultant fees, would include the provision of on-the-job training as well as local short courses and seminars in forest policy, inventory, database management, and seedling improvement. Project management, which would cost about US$1. 1 million in consultant fees, would include the consultant services required for the PIU to assist with project implementation. Of the total costs of consulting fees, it is estimated that about US$3.8 million would be awarded to internationally recruited consultants, and the balance (about US$7.4 million) to locally recruited consultants. In Table 3, consultant expenses other than fees and international travel costs (e.g., domestic travel and subsistence) are included under the "Other Expenditures" heading. 2.44 Farmers under the Small Farmer Component would procure the necessary agricultural inputs and contractors' services through normal commercial channels using vouchers. Individual purchases would be small, dispersed both spatially and temporally, and would be made in local markets where competition is keen. 2.45 Bank Review. During negotiations, agreement was reached that, regarding procurement, the process of Bank review outlined here would be followed (para. 3.1 (g)). All procedures, documents, Terms-of-Reference (TOR), bid evaluations, and contract awards would be subject to prior review by the Bank for: (a) procurement of goods under LIB; (b) direct contracting of the purchase of satellite images; and (c) for procurement of consulting services costing US$50,000 equivalent or more for firms and US$30,000 equivalent or more for individuals. The review thresholds proposed above provide for prior review by the Bank of approximately 55 percent of the total value of Bank-financed contracts. The Bank would review on an ex-post sample basis all other contracts awarded under shopping procedures; the sample size would aim to ensure that at least one contract in twenty would be examined. For consulting services costing less than US$50,000 equivalent for firms and less than US$30,000 equivalent for individuals, contracts would be signed based on a model contract and terms of reference previously agreed with the Bank. During negotiations, agreement was reached that the draft Terms-of-Reference (TORs) for consultants, as well as a standard letter of invitation and form of contract, would be included in the draft Project Implementation Manual which was agreed at negotiations (para. 3.1 (h)).  - 25 - Disbursements 2.46 Loan proceeds would be disbursed over eight years, in line with the standard disbursement profile for Bank-supported projects in Argentina. The allocation of the proposed loan and the disbursement percentages are presented in Annex F. A Special Account for Bank disbursements would be established in a commercial bank acceptable to the Bank with an authorized allocation of US$650,000. The initial deposit in the Special Account would be US$300,000; the full authorized allocation would be deposited once the amount of Bank disbursements reaches US$3.0 million. Bank disbursements to replenish the Special Account would be made on the basis of statements of expenditure (SOEs) against contracts which would not require the Bank's prior review. All other expenditures would be fully documented. The relevant documentation in support of SOEs would be retained by SAGyP, and would be made available to the appropriate auditors and Bank review missions. The estimated schedule of Bank loan disbursements is shown in Annex G. F. Organization and Implementation Project Management 2.47 Overall responsibility for project implementation would rest with SAGyP, and authority to make most decisions affecting the project would be delegated to the Sub-Secretary of Production. The Sub-Secretary would make maximum use of existing SAGyP capacity for project implementation but, in addition, would receive administrative and technical assistance from a Project Implementation Unit (PIU) which would be established under the project. 2.48 The PIU would include: (a) A Project Coordinator, who would be recruited locally for the coordination of implementation for the duration of the project. He/she would be responsible for, inter alia: (i) putting in place, and maintaining, a system for monitoring project implementation; (ii) coordinating the preparation of annual work programs ("POAs"), bi-annual progress reports to the Bank, production of audit reports; (iii) supervising the administration of the Special Account; (iv) preparing, in cooperation with the Technical Manager and the relevant line agencies, all documents for the Mid-Term Review and ensuring their quality; and (v) completing, in cooperation with the Technical Manager and the relevant line agencies, an evaluation of the project at the end of its life. He/she would ultimately be the link between Bank supervision staff and SAGyP;  - 26 - (b) A Technical Manager, who would be recruited locally for the duration of the project, and would be responsible for ensuring the technical quality of all work under the project, and, in cooperation with the Project Coordinator, for preparing the required documentation for the Mid-Term Review, and for preparing the project evaluation report at the end of the project's life; (c) A Procurement Specialist, who would be recruited for a total of about 20 months, and would be responsible for ensuring that procurement procedures follow Bank guidelines and for making recommendations on award of contracts; and (d) An Accountant, who would be recruited locally for the duration of the project, and would be responsible for financial record keeping, the Special Account, and disbursement requests. 2.49 The establishment of the PIU and the appointment of the Project Coordinator, the Technical Manager, the Procurement Specialist, and the Accountant would be conditions of effectiveness of the proposed loan (para. 3.2 (a)). 2.50 The Directors of DPF and INASE would work closely with the Sub-Secretary of Production in implementing the Institutional Strengthening Component in their respective areas of responsibility. 2.51 In implementing the Research and Information Generation and Dissemination Component, the Sub-Secretary of Production would: (a) directly manage the study of the Patagonia region working in close cooperation with other interested parties in the federal government, provincial governments concerned, the private sector, and NGOs; (b) implement, with the assistance of INTA, two sub-components, namely, tree selection and breeding, and plantation management research and extension; and (c) delegate to DPF authority: (i) to complete the national inventory of forest plantations and to manage the related database; (ii) to manage the study on export markets and the adoption of grading systems for mechanical wood products; and (iii) to manage, with the assistance of INASE (which would be responsible for certification), the program for promoting the production and marketing of improved seedlings. 2.52 Under the Research and Information Generation and Dissemination Component, the Sub-Secretary of Production would implement two sub-components with the assistance of INTA (tree selection and breeding, and plantation management research and extension) by building upon existing INTA programs and using or upgrading existing INTA laboratory facilities. INTA is best suited to assist with the implementation of these two sub-components because of its experience and proven capacity in  - 27 - implementing such research programs successfully. However, the Sub- Secretary of Production, with the assistance of INTA, would be encouraged to carry out the proposed research program jointly with private sector research organizations or universities. INTA would also recruit as consultants, manage, and train at its research facilities or other suitable locations the small core of subject matter specialists required for extension in plantation management. 2.53 Under the Research and Information Generation and Dissemination Component, DPF would implement the three sub-components assigned to it (the national inventory of forest plantations and management of the related database, the study on export markets and adoption of grading systems for mechanical wood products, and the program for promoting the production and marketing of improved seedlings) by recruiting consultant firms or individual consultants to complete the tasks. More particularly, the seedling improvement and marketing sub-component would be implemented with the assistance of two internationally recruited consultant firms and INASE, which would have responsibility for certification. Selection criteria for the two consultant firms would be based on the reputation of the firms in managing state-of-the-art nursery operations, and the quality of their proposals. 2.54 In implementing the Small Farmer Component, the Sub- Secretary would use: (a) the assistance of INTA to carry out applied research on small farmer issues; and (b) the institution with the best proven record in each of the approximately five selected areas to manage the agroforestry fund, to provide technical assistance and other support to poor farmers, and to carry out the environmental education campaigns. 2.55 During negotiations, agreement was reached on a draft collaboration agreement, which would be signed by SAGyP and a public or private institution, dealing with the provision of agreed services under the extension/technology transfer, agroforestry fund, and environmental education sub-components of the Small Farmer Component in each selected area (para. 3.1 (i)). 2.56 SAGyP would use the assistance of INTA in the implementation of the applied/adaptive research sub-component of the Small Farmer Component, and the following two sub-components of the Research and Information Generation and Dissemination Component: (i) tree selection and breeding; and (ii) plantation management research and extension. In order to ensure that this relationship is cooperative and productive, a contractual agreement would be entered into between SAGyP and INTA. During negotiations, agreement was reached on a draft of this agreement (para. 3.1 (j)). During negotiations, agreement was also reached that the contractual agreement between SAGyP and INTA would include the provision that SAGyP, with the assistance of INTA, would carry out the proposed plantation management research program of the Research and  - 28 - Information Generation and Dissemination Component, and the applied/adaptive research sub-component of the Small Farmer Component, jointly with private sector research organizations or universities (para. 3.1 (k)). The entry into effect of the contractual agreement between SAGyP and INTA would be a condition of effectiveness of the proposed loan (para. 3.2 (b)). Monitoring. Supervision and Evaluation 2.57 During negotiations, agreement was reached on the Schedule of Monitoring Indicators (Annex H) and the Supervision Plan (Annex I), which includes a Mid-Term Review (para. 3.1 (1)). 2.58 The responsibility for project monitoring, which is a task inseparable from effective project management, would rest with the Sub- Secretary of Production and he/she would be assisted in completing this task by the Project Coordinator. Project evaluation would also be the responsibility of the Sub-Secretary of Production and he/she would be assisted in completing this task by both the Project Coordinator and the Technical Manager. During negotiations, agreement was reached that these responsibilities would be detailed in the Project Implementation Manual which was agreed at negotiations (para. 3.1 (h)). 2.59 Reporting requirements would be designed to assist with the submission to the Bank by the Sub-Secretary of Production of annual and semi-annual progress reports, the Mid-Term Review, and the ex-post evaluation of the project, namely, the Implementation Completion Report (ICR). Project performance indicators and measures of project impact (Annex H) would guide possible mid-course adjustments. Accounts. Audit and Reporting 2.60 Under the overall direction of the Sub-Secretary of Production, the PIU would maintain separate project accounts and records for each project component and sub-component and prepare SOEs. Supporting documents provided by the various entities concerned would be maintained by the PIU and made available to visiting Bank missions and independent auditors, who on their judgement would make field visits to other entities concerned for the purpose of the overall audit. A standard chart of accounts would be prepared for the project. 2.61 Project accounts, including the Special Account and SOEs, would be audited annually in accordance with appropriate auditing principles. The audit terms of reference would be included in the draft Project Implementation Manual which was agreed during negotiations (para. 3.1 (h)), and would, inter alia, ask the auditors to: (i) certify that procurement had been carried out using bidding documents agreed with the Bank; (ii) certify that procurement documents presented to the Bank for prior review were  - 29 - representative; and (iii) carry out a physical audit of procurement actions taken under the project. It was also agreed during negotiations that the Borrower would hire independent auditors acceptable to the Bank, and that certified copies of their audits would be submitted to the Bank no later than six months after the end of each fiscal year (para. 3.1 (m)). 2.62 It was agreed during negotiations that SAGyP would present to the Bank for review and comment, no later than June 30 each year, its proposed Annual Operating Plan (POA) for the project for the following calendar year (para. 3.1 (n)). During negotiations, agreement was reached that at the end of each year SAGyP would produce a Progress Report for the project, and in the middle of each year an Interim Progress Report, for submission to the Bank; these would be provided to the Bank no later than January 31 and July 31, respectively (para. 3.1 (o)). The Progress Reports would provide the basic information and data for supervision missions and the Mid-Term Review. It was also agreed at negotiations that a mid-term review would be carried out by November 1998, focussing in particular on progress being made in reaching a consensus on reforming the policy, legal, and regulatory framework affecting plantations and timber processing industries, and in implementing the Small Farmer Component and the Patagonia sub-component (para. 3.1 (p)). G. Rationale for Bank Involvement 2.63 The proposed project is fully consistent with the Country Assistance Strategy (CAS), which was discussed by the Board on May 4, 1995. The CAS highlights three broad objectives: (a) consolidating structural reform; (b) poverty reduction and strengthening social services; and (c) rebuilding infrastructure. The proposed project would be the Bank's first forestry project in Argentina. It would provide a vehicle for the Bank to pursue CAS objective (a) by enhancing the competitiveness of forest- plantation based industries through policy, legal and regulatory reform, and by strengthening public sector institutions and applied research and extension systems; objective (b) by improving the incomes of small farmers through the use of agroforestry in selected rural areas where the incidence of poverty is high; and objective (c) by promoting soil conservation through a study to identify the causes of, and to develop remedies for, desertification in the Patagonia region. H. Program Objective Categories 2.64 The program objective categories affected by the project would be private sector development, poverty reduction and human resource development, and environmentally sustainable development. The emphasis would be on private sector development and poverty alleviation.  - 30 - I. Benefits. Risks and Environmental Impact Benefits 2.65 The project would contribute to efficient and sustainable growth in forest plantations and timber processing industries by reorienting the role of government toward its core functions in providing appropriate public sector support. The rural economy would be strengthened by the improved allocation of rural resources and by the increased competitiveness of forest plantations and timber processing industries. About 3,000 poor rural families would benefit directly from efforts to alleviate poverty while at the same time protecting native forests. As a result of studies to be completed under the project, the state would be better positioned to play an appropriate role in addressing problems stemming from the destruction of the Patagonia region's natural resources and habitats. 2.66 Project sustainability would be enhanced through the strengthening of the implementing agencies, particularly DPF, INASE, and INTA, and the reform of the incentive structure that affects forest plantations, timber processing industries, and desertification and soil erosion in Patagonia. Research-generated information would make possible more efficient plantations which, in turn, would help to make project activities more sustainable. Risks 2.67 The major risk is that the key institution charged with executing the project, namely SAGyP, would not be up to the task. This risk stems mainly from the changed demands the project would place on SAGyP's DPF and INASE. The source of these new demands is the changed role of the state in forest plantations and timber processing industries which underlies and has guided project design. In response to this concern, great emphasis would be placed on institutional strengthening as part of the project. The incremental recurrent cost after project completion would be modest at about US$1.1 million per annum (further details are given in Annex E). There is also a risk that a complementary project which is under preparation with SRNyAH, dealing with native forests and protected areas, may not proceed as scheduled. Should this occur, the benefits from the Forestry Development Project would be unaffected, but the issues confronting native forests, protected areas, and related green environmental issues would receive inadequate attention. However, this outcome is unlikely since preparation of the complementary project with SRNyAH is proceeding on schedule.  - 31 - Environmental Impact 2.68 The proposed project would have no adverse environmental impact; the small farmer component is specifically designed to have a positive impact on the environment. The project has an Environmental Assessment category B because of the need to ensure that reform of the policy, legal and regulatory framework affecting forest plantations and timber processing industries would avoid negative consequences for the environment. III. SUMMARY OF AGREEMENTS REACHED. AND RECOMMENDATION 3.1 The following agreements were reached at negotiations: (a) SAGyP would pursue the least cost option of inputting into its database raw statistics collected by other agencies, when available, and would collect only the raw data required by its mandate and not already collected by some other agency (para. 2.12); (b) for plantation owners to be eligible for participation in any government grant-assisted plantation program, SAGyP would require them, when establishing a new forest plantation, to use seedlings, when available, which are certified by INASE in accordance with the methodology to be developed under the project (para. 2.20); (c) under the Small Farmer Component, the target population would be limited to those farm families having: (a) legal title to the land they farm; (b) family incomes of less than two minimum rural salaries; (b) total assets (excluding land) of less than Arg$20,000; and (c) potential and motivation, in the opinion of the collaborating institution, to increase farm income while also contributing to protecting adjoining native forests (para. 2.29); (d) under the Small Farmer Component, the cumulative amount of grants paid to any small farm family over the life of the project would not exceed US$1,000 equivalent (para. 2.35); (e) prior to the commencement of activities to be financed under the Small Farmer Component in any selected area, SAGyP would enter into a collaboration agreement for such selected area with a well qualified and experienced public or private institution in order to ensure the provision of extension/technology transfer services and environmental  - 32 - education to beneficiaries, and monitoring of the use of the agroforestry fund (para. 2.36); (f) the procurement of goods and services financed under the project would be undertaken in accordance with Bank Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995) and Bank Guidelines for the Use of Consultants (August 1981), using Bank-issued standard bidding documents (SBD) for procurement of goods under Limited International Bidding (LIB); standard documents, satisfactory to the Bank, for local/international shopping; and standard letters of invitation (LOI) and standard form of contract for consultant services (para. 2.39); (g) regarding procurement, the process of Bank review outlined in para. 2.45 would be followed; (h) the draft terms of reference for consultants, a standard letter of invitation and form of contract, and the allocation of responsibility for project monitoring and evaluation would be included in the draft Project Implementation Manual which was agreed at negotiations (paras. 2.45, 2.58, and 2.61); (i) on a draft collaboration agreement, which would be signed by SAGyP and a public or private institution, dealing with the provision of agreed services under the extension/technology transfer, agroforestry fund, and environmental education sub- components of the Small Farmer Component in each selected area (para. 2.55); (j) on a draft of the contractual agreement between SAGyP and INTA (para. 2.56); (k) the contractual agreement between SAGyP and INTA would include the provision that SAGyP, with the assistance of INTA, would carry out the proposed plantation management research program of the Research and Information Generation and Dissemination Component, and the applied/adaptive research sub-component of the Small Farmer Component, jointly with private sector research organizations or universities (para. 2.56); (1) on the Schedule of Monitoring Indicators (Annex H) and the Supervision Plan (Annex I), which includes a Mid-Term Review (para. 2.57); (m) the Borrower would hire independent auditors acceptable to the Bank, and certified copies of their audits would be submitted  - 33 - to the Bank no later than six months after the end of each fiscal year (para. 2.61); (n) SAGyP would present to the Bank for review and comment, no later than June 30 each year, its proposed Annual Operating Plan (POA) for the project for the following calendar year (para. 2.62); (o) at the end of each fiscal year, SAGyP would produce a Progress Report for the project, and in the middle of each year an Interim Progress Report, for submission to the Bank; these would be provided to the Bank no later than January 31 and July 31, respectively (para. 2.62); (p) a mid-term review would be carried out by November 1998, focussing in particular on progress being made in reaching a consensus on reforming the policy, legal, and regulatory framework affecting plantations and timber processing industries, and in implementing the Small Farmer Component and the Patagonia sub-component (para. 2.62). 3.2 The following would be conditions of effectiveness of the proposed loan: (a) the establishment of the PIU and the appointment of the Project Coordinator, the Technical Manager, the Procurement Specialist, and the Accountant (para. 2.49); and (b) the entry into effect of a contractual agreement between SAGyP and INTA (para. 2.56). Recommendation 3.3 Subject to the above conditions and assurances, the proposed project would be suitable for a Bank loan of US$16.0 million equivalent, repayable in 15 years, including 5 years of grace, with loan amortization based on level repayments of principal, at the Bank's standard variable interest rate.  - 34 - Annex A ARGENTINA FORESTRY DEVELOPMENT PROJECT Lessons Learned from Previous Related Bank Lending 1. The Bank has lent over US$2 billion for forestry components and free-standing forestry projects. The Forestry Policy Paper of 1978' re- directed Bank financing from an almost exclusive focus on industrial forestry, to a new generation of social and rural development, and environmental forestry projects. Sector work was stressed as the critical link between the policy statement and the lending program. A 1991 OED study of the Bank's forestry experience concludes that the overall performance of this new generation of projects has been satisfactory.2 However, consolidation may be a problem given the long maturation period of such projects, especially of their institutional development objectives. The main issues are national, relating to macroeconomic incentives and how these affect land use patterns, while sectoral issues are financial, institutional and organizational. These projects are complex, requiring non-traditional institutional arrangements which go beyond sectors and geo-political regions. Complexity also comes from the involvement of groups other than traditional forest services and commercial users, much larger numbers of beneficiaries, and greatly expanded development objectives. Lessons for New Forestry Projects 2. OED analysis concludes that the frontier for forest sector development in the 1990s is institutional and human resource-based, and also lies in the development of research and information systems for forest and other natural resources. Macroeconomic policies and the incentive structure, including the legal and regulatory context, are vital, and the Bank should help countries incorporate forestry and natural resource management concerns into macroeconomic planning. Strong technical criteria are essential to support government planning and sustainable development for the forest sector. An optimal organizational framework and effective management systems are needed for forest resources, and the sector. Government has a key role to play in encouraging the development and use of improved technology in plantation forests. Finally, forestry can have a major impact on alleviating rural poverty in selected locations while also helping to protect native forests. 1. World Bank 1978. Forestry: Sector Policy Paper. Washington D.C. 2. Forestry Development: A Review of Bank Experience, OED Report No. 9524, April 22, 1991.  - 35 - Annex A 3. Strong sector work is the critical link in assisting government to develop a forestry strategy, in the program lending approach, and in overall forestry project quality. Project complexity and implementation should reflect institutional limitations, and inadequate systems of land tenure and use, both of which should be analyzed during project formulation and an action plan developed for their improvement, where appropriate. Project preparation should include market analysis and programs where appropriate, effective coordinating mechanisms, and focus on the recurrent cost/total project cost ratio, and pricing policies. Lending should be program rather than project-based, conceived as long-term engagements which are mapped out up-front, and have a participatory framework involving government, communities and individuals. A thorough understanding is necessary of the socio-economic and socio-cultural situations of beneficiary populations, especially in forestry projects dedicated inter alia, to poverty alleviation. The manner in which beneficiaries are approached, organized and involved in project activities is often critical. Forestry projects need to be technologically-sound, and incorporate growth-related and/or forest management incentive structures. Finally, resource planning, geographic information systems and cadastres, and monitoring and evaluation, must be central. 4. Recent forestry sector work shows a shift in focus, and is generating project design innovations. It stresses: (a) the importance for forestry of rational economic policies; (b) definition of the role of the state in commercial and non-commercial forestry, and establishment of a favorable climate for private involvement in expanding plantation forestry; (c) the conservation and sustainable management of remaining natural forest areas rather than their conversion to other uses; (d) greater attention to comprehensive use planning, and the need to capture economic rents and halt the mining of forest resources; and (e) the linkages including: (i) between sectors; (ii) between forestry and the conservation of biological diversity, wildlands and other environmental values; and (iii) to rural poverty alleviation. The recent "Forestry Sector Review" (Report 11833-AR, dated April 26, 1993), which has been discussed extensively with the Government and is an important reference point for its evolving forest strategy, is in the mainstream of this new focus and is the basis for proposed Bank actions in the sector. The Project 5. The proposed project heeds relevant lessons of Bank and non- Bank experience and studies. It is grounded in recent sector analysis whose conclusions are broadly-agreed with the Government. Ongoing liberalization of the Argentine economy including in the areas of macroeconomic policy, capital markets and trade policy will provide a favorable context for its preparation, implementation, and sustainability. Implementation would be essentially the responsibility of one institution: Secretariat of Agriculture, Livestock and Fisheries (SAGyP). Components would address the following:  - 36 - Annex A institutional deficiencies including the policies, laws and regulations relevant to the forest sector; research aiwd information generation concerning commercial forest plantations and timber processing; and use of forestry to reduce small farm poverty and protect the environment. A separate, complementary forestry initiative, the Native Forests and Protected Areas Project, now under preparation, will deal with green environmental issues and be managed by SPNyAH. 6. In LAC, the Minas Gerais Forestry Project in Brazil (Ln. 2895-BR) is comparable in key respects, and supervision is producing relevant lessons including that: collaboration is essential between forest agencies and extension services in promoting reforestation programs; tree planting can increase land values, stimulating greater small farmer interest in reforestation and conservation activities; and, minimum land size requirements for small farmer participation in seedling distribution and planting programs can be counterproductive. The forest management aspects of the project reveal the importance of: expert technical assistance for research subprojects; data collection, especially financial; forest inventories and database systems for law and direct enforcement efforts, and for broad planning purposes; and, more generally, forestry agencies having clear strategies, long-term plans and appropriate technical and administrative capacity for reaching governments' forestry development and conservation goals. Bank Lendina Experience in Argentina 7. The current lending portfolio in Argentina comprises 19 loans, principally in the infrastructure and finance sectors, totalling US$5.4 billion. The Bank has undertaken five operations in the agricultural sector since 1967. Periodic economic and sectoral difficulties and profound institutional weaknesses have provided a daunting context for project planning and execution, affecting commitment and counterpart funding, implementation schedules, and the ability to sustain a longer-term perspective and project benefits. An Agricultural Credit Project (Ln. 1564-AR), which was approved in 1978, was canceled in 1980 without disbursement due to sectoral conditions unconducive to investment. The Grain Storage Project (Ln. 1521- AR), which was also approved in 1978 and designed to assist grain exports and strengthen the financial position of the Argentine Railways, did not, for the most part, achieve its objectives, although it did have important institutional benefits. The Agricultural Sector Loan (Ln. 2675-AR), which was approved in 1986, was intended to support sectoral adjustment fostering increased agricultural productivity and exports. The loan was fully disbursed and in that regard had a valuable resource transfer impact in a period of macroeconomic crisis, but it did not achieve its central policy objective, the substitution of a land tax for agricultural export taxes. Finally, the Agricultural Credit Project II (Ln. 2970-AR), which was approved in 1987, was successful in re-capitalizing the sector and increasing producer  -37 - Annex A confidence, but institutional and financial sector objectives were not sustained beyond loan closing. Project Strategy 8. The proposed project addresses the enabling environment for forestry management by reviewing and where appropriate drafting revisions to existing policies, laws and regulations which impose costs on commercial forestry, and strengthening the implementing institutions. The project institutional development strategy would help to define the role of the state and develop policy in consultation with the private sector. An action plan would address policy-making, legislation and regulations, cross-institutional and internal organization, personnel management and skills upgrading at the federal and provincial levels. An important aim is to develop sufficient institutional capacity to implement the other project components. 9. OED has concluded that the nature and structure of institutional and legal/regulatory frameworks, along with property rights, are critical determinants of the extent, magnitude and sustainability of forestry project impacts. This is likely to intensify into the 1990s as political and public pressure is exerted on forestry institutions to do more in the area of protection and management of native forests, in new agenda items such as poverty alleviation, conservation of biodiversity, and as governments deal with diminishing areas of native forest for timber and fuelwood. Management and conservation of native forests is the responsibility of the Secretariat of Natural Resources and Human Environment (SRNyAH) and is not a part of the proposed project; they would, however, be included in a separate project which would focus on SRNyAH and its mandated functions. 10. The project also focuses on commercial forestry research and information generation and dissemination stressing competitiveness and conservation. First, an inventory would obtain qualitative and quantitative information on the extent, distribution, composition and age structure of plantation forests, and a database would be developed. A database would also be established to enable SAGyP to fulfil its forestry mandate and meet public and private sector information needs. Second, research would: identify promising export markets for Argentine wood products, and develop market-tailored grading systems for sawnwood; initiate a long-term effort to improve the quality and hence, potential of commercial tree species in Argentina, and complementary actions to improve the production, marketing and use of this improved material in Argentina; and increase and disseminate cost-effective technologies necessary to enhance Argentine competitiveness in world markets. Finally, to combat severe land degradation and desertification in Patagonia, which represents 27 percent of the country, a study would be financed to determine the causes of desertification, the effects of desertification on the ecosystem and population, and its socio-economic costs. This study would support strategy development and actions to halt or reverse the process.  - 38 - Annex A 11. The importance of database development is stressed repeatedly in the literature and lessons on forest management. Bank analysis also shows that forest technology research is an important source of productivity growth. Further, there is a high pay-off from investment in socio-economic policy research aimed at increasing understanding of the underlying causes of deforestation and land degradation, and of incentive policies that will encourage improved conservation of forest and other natural resources.3 12. Finally, the project strategy envisages including forestry development among the means for alleviating rural poverty, and thereby protecting native forests. This would be done by providing incentives to small farmers to adopt sustainable farming systems which reduce the intense pressure on natural forests from expanding and shifting agriculture, and over- grazing. Small farmers would benefit from research on conservation technologies, extension and agroforestry grants. These actions would build on existing participatory, successful small farmer-oriented programs, be group-based and target only those producers who legally occupy their land, since the project seeks to avoid providing incentives for further encroachment on natural forests. Broad ecological zones have been prioritized by SAGyP on the basis of criteria which include environmental and commercial potential, technology availability, numbers, income and interest of small farmers, and political commitment. 13. The issue of forest encroachment by small farmers has received much attention but solutions are not easy to design. There is broad agreement that traditional "command and control" and "custodial" regimes for forest management have not worked and that a variety of solutions including technical advice, extension, and agroforestry farming systems, can improve land use and discourage encroachment by low-income farmers. Consensus indicates that future policies and strategies should promote local community participation and responsibility for controlling and managing forest resources for their own long-term benefit, stabilizing marginal agriculture and developing conservation awareness, especially among rural youth.4 3. Forestry Management for Sustainable Development, EDI Report 0032, August 1993. 4. Ibid.  - 39 - Annex B ARGENTINA FORESTRY DEVELOPMENT PROJECT Institutional Strengthening Component A. Introduction 1. Argentina started to define the role of the State in the forest sector in comprehensive legislation embodied in Law 13273 of 1948. Under this law, the National Forestry Administration of SAGyP, later to become the National Forestry Institute (IFONA, Law 20531 of 1973), was created. Law 13273 of 1948, encompassed only areas under Federal responsibility ("Territorios Nacionales"). At that time, the government adopted forestry management methods commonly used in European countries. It was in fact an Italian firm, later to become Argentinean, that started a pulp industry in the 1920s. Europe further developed its influence in this sector after World War II, when refugees from many European countries, but most particularly foresters from Croatia, helped Argentine policy makers and its private sector to become aware of the sector's potential and the need for improving production and processing technologies. This coincided with the government's decision to expand its agriculture frontier and become increasingly self sufficient. A Forestry Directorate ("Direcci6n de Bosques") was created in most provinces by provincial governments. Under the influence of European immigrants, the forestry sector started to develop the necessary technology and to boost logging as well as commercial activities. 2. Despite such a promising start, the Provincial Forestry Directorates never had the human resources or the institutional capacity to really enforce Law 13273 of 1948. Provinces did not have skilled professionals to enforce federal or provincial legislation, even when it was effectively created. Instead, private entrepreneurs were left to continue their increasingly predatory use of the forests, and the prudence spelled out in the law was largely ignored. In other words, the provincial capacity to manage the forest sector was limited by their weak administrative ability to enforce existing laws, to formulate policies, or follow a structured course of action. These constraints contributed to the limited economic development of the forest sector over the years. This was further aggravated by the intense competition from crops and livestock, which have always enjoyed greater support in Argentina. 3. The creation of IFONA in 1973 reflected a renewed government interest in the forest sector for both natural resource protection and commercial development. However, as the above-listed constraints were largely ignored, or not addressed effectively, forest resources continued to be  -40 - Annex B depleted. High wastage and production costs helped to make Argentinean timber uncompetitive in foreign markets. The increasing awareness of this situation over the years explains why the current government wants to reconsider its sectoral policy and give this sector a higher priority. Based on the Government's forest sector development policy and, more specifically, on the proposed project objectives, component by component, an institutional capacity analysis (ICA) was carried out during project preparation, and capacity gaps identified systematically. They are described below. Finally, the project-supported institutional strengthening component (ISC) that follows, includes inputs aimed at addressing all such identified capacity gaps, helping to strengthen the Government's institutional strengthening plan and ability to implement its strategy for this sector. B. The Role of the State and Development Policy 4. Both because of growing awareness of environmental threats and of business opportunities, the Government has recently moved from a de facto to a more conscious national forest policy. Important decisions made over the last several years illustrate the perceived need for change in the sector. However, the measures taken in this direction need to be considerably strengthened to yield the expected results in policy reform. Measures already taken include especially: (a) the creation (in 1992) of a Secretariat of Natural Resources and Human Environment (SRNyAH), directly reporting to the President of the Republic; and (b) the decision to create the Directorate for Forestry Production within SAGyP (DPF), reporting to the Secretary of SAGyP, itself belonging to the Ministry of Economy. For forest plantations, DPF has assumed the functions of the now extinct IFONA, an autonomous entity that had been accused of inefficiency since its creation in 1973. 5. The emerging policy points towards a role for the private sector that would focus on production and marketing, and a stronger, but still lean, role for the State limited virtually to: (a) norm-making and enforcement, especially to protect natural resources; and (b) stimulating expansion and productivity growth in the private sector. Private sector stimulation would aim at increasing the area under plantations and enhancing considerably the level of technology and productivity in forest production. Eventually, this would result in the penetration of new markets (the European Union in particular), and in boosting the contribution of forestry products to Argentine exports. 6. Derived from the above, the implicit role of the State in the forestry sector would include: (a) adapting existing legislation and regulations to new requirements; (b) getting organized to ensure harmony and an adequate network of institutional relationships, both at the national and provincial levels; (c) disseminating relevant information and data; (d) generating relevant technology and making it available to the private sector directly or through extension activities; (e) directly intervening in areas in  - 41 - Annex B which there is insufficient interest or capacity in the private sector, but which generate substantial positive externalities; (f) managing directly national parks; and (g) fostering forestry-related training at all levels, including universities. C. Sectoral Institutional Universe 7. Institutional Network Mapping. To achieve such objectives and to support the above-defined role of the State, substantially enhanced institutional capacity is required. Prior to addressing specific institutional capacity gaps (ICGs), a review of the sectoral institutional universe is given below as well as a description of the identified ICGs that became the basis for the design of the institutional development strategy and action plan included in the proposed project. The forest sector's institutional network is complex and unstable. This network is described below in some detail. 8. Federal Institutions. Six ministries are involved in the forestry sector in Argentina. After the dismantling of IFONA in 1991, its functions were redeployed and assigned to SAGyP for plantations and related commercial and processing activities, and the rest to a newly created Secretariat of Natural Resources and Human Environment (SRNyAH) within the Presidency of the Republic. The Directorate for Native Forests within SRNyAH, DRFN, has responsibility for managing all aspects of native forests, while the National Parks Administration (APN), a semi-autonomous entity within SRNyAH, has the responsibility for the administration of national parks. SAGyP is also responsible for INTA, a semi-autonomous research and extension entity that includes a forestry research unit. SAGyP also supervises the work of another decentralized entity having some responsibilities or an indirect role in the forestry sector: Argentina's National Seed Institute (INASE). 9. Other Ministries have minor but significant roles. The Ministry of Education and Culture is responsible for universities which have forestry training at the undergraduate and graduate levels. The Secretariat of Science and Technology, among others, has some responsibility for forestry research. Finally, the Secretariat of Industry and Commerce includes: (a) a National Directorate of Industries which has jurisdiction over forestry processing industries; and (b) a National Industrial Technology Institute, offering extension services to timber industries. 10. Other Forestry Entities at the National Level. In addition to the universities that carry forestry programs at the undergraduate and graduate levels, quite a few other entities have been created at the national level to address specific needs. Still others may have a substantial influence on decisions taken at the regional level, although they do not necessarily have an identity strictly related to the forestry sector. In addition to INTA's involvement with research and technology dissemination, there is: (a) INTI, which is involved in the modernization of industrial processes and reports to  - 42 - Annex B the Ministry of Economy; (b) CITEMA, a technical arm of INTI, which has responsibility for testing industrial processes and supporting private industry; (C) CICELPA, also a technical arm of INTI, which does work similar to CITEMA but only for the pulp industry; (d) CONICET, which reports to the Ministry of Education and Culture, and which is in charge of coordinating all research activities and financing those which are important for development in Argentina; (e) CONAQUE, which has responsibility for fostering the development and protection of the Quebracho tree; and (f) CNA, which has the same functions for the poplar tree. Institutions dealing with overall or regional coordination are: (a) CONADEPA, which reports to the President of the Republic on coordination of activities in the Patagonia region, where forestry resources are an important asset; and (b) CFI, which coordinates actions of the provincial ministers of finance, including the municipal authorities of Buenos Aires, to ensure harmony and coherence in development decisions affecting one or more provinces. In addition, the legislative effort dealing with forestry is coordinated by two ad hoc Forestry Commissions in the House of Representatives and the Senate, respectively. 11. Provincial Institutions. The 23 Argentinean provinces have different organizational arrangements for provincial government and administration. In the forestry sector, however, while the name of the administrative unit may change, the general institutional design is relatively simple. This reflects the organizational setting in all provinces. The focal point is a provincial Forestry Directorate (Direcci6n de Bosques), which is generally located at the third management layer of government, with responsibility for both native and planted forests. Each provincial Forestry Directorate is responsible for coordinating forestry-related activities of all other entities, including national, within its province. These generally include INASE and INTA. 12. The Private Sector. Since an Italian company began the pulp industry in Argentina in the 1920s, the private sector has organized itself into powerful associations and guilds of all sorts. While the private sector has undoubtedly contributed to the development of the forestry sector, it has also been a major obstacle to the full implementation of Law 13273, because of its perception that this law was an impediment to quick and substantial profits. The most important private sector entities are: (a) AFOA, a grouping of all forestry producers; (b) AFCP, which includes the most powerful and wealthy part of the forestry-related private sector; (c) FAIMA, which includes about 2,000 timber companies; and (d) CIEF, a private research entity which conducts research on behalf of its associated members that supplements that carried out by the public sector. Finally, there are many NGOs dealing directly or indirectly with the forest sector and dedicated mostly to raising awareness about the need for protecting natural resources. 13. Overall Sectoral Coordination. To ensure a minimum of harmony and coherence in the forestry-related decision-making process at the national level, a National Forestry Commission (CNB) was created with  - 43 - Annex B representatives from the national and provincial governments, and from the private sector institutions listed above. The main role of CNB is to advise the authorities on policy and/or investment decisions, while at the same time ensuring that the private sector receives clear signals. D. Institutional Capacity Analysis (ICA) 14. To ensure the design of an institutional development strategy and action plan that would address most pressing priorities, a thorough ICA was carried out at the national and provincial levels, and specific ICGs were identified from the five viewpoints reviewed, namely, rules of the game; interinstitutional relationships; internal organization and management at the entity level; personnel policies and reward systems; and skills of individuals in both the public and private sectors. The analysis has been carried out in an attempt to analyze to what extent the forest sector in Argentina will be able to efficiently achieve the proposed project objectives. A description of the identified ICGs follows. Rules of the Game 15. Within this broad category of institutional capacity, four elements have been identified as limiting the sector's ability to develop, namely, governance, legislation, regulations, and culture. They are analyzed below. 16. Governance. The first element of governance is a clearly articulated and recognizable sectoral role of the State. Unfortunately, no such role is written anywhere, and can only be deduced from Government's decisions and/or informal declarations. Another important element of governance is the transparency and amount of participation allowed in the decision-making process; there is much room for improvement. 17. Poor policies have been the main constraint to the efficient growth of the forest sector in Argentina and to the protection of "green" environmental values. Most of the constraints stemmed from the lack of a clear policy environment outside the sector, including macroeconomic, credit, trade, transportation and labor policies. In recent years, as part of the macroeconomic liberalization and privatization programs of the Government, much has been achieved in eliminating policy distortions affecting the sector. These measures will go a long way toward fostering efficient and sustainable growth in the sector and in removing incentives for depleting the "green" environment. 18. When private sector representatives are interviewed about changes they would like to see in the role of the State, they generally have precise ideas: (a) increased awareness on the part of the Government of the sector's potential; (b) more public sector stimuli (direct promotion and fiscal incentives) to expand production; (c) more openness to the private sector to  - 44 - Annex B ensure its participation in the decision-making process, in particular on matters relating to international markets; and (d) research and extension programs more in line with private sector priorities and dictated by market conditions. 19. Legislation. Policy constraints to forestry growth and environmental protection still exist, however, mainly contained in sector- specific legislation. National forest policy in Argentina, as stated in Law 13273 of 1948, was very advanced for its time in that it struck a balance between conservation and commercial objectives. The law was less successful in its choice of policy instruments, because it favored "command and control" mechanisms rather than market-based mechanisms, which would have been more appropriate given the dominance of private forests in most of Argentina. Important policy constraints to forest development and environmental protection also remain at the provincial level. Provinces play a critical role in forest policy, but in most cases they have failed to implement the farsighted approach contained in law 13273 of 1948. Furthermore, provincial legislation tends to exacerbate the weakness of law 13273 by relying too much on "command and control" mechanisms that, for the most part, are misdirected and fail to achieve the underlying objectives. For example, some of these measures attenuate property rights by reducing private option values. This creates incentives against forests and in favor of competing uses, and introduces disincentives for conservation and forest development. Also, because provincial sectoral legislation varies widely between regions, it creates inefficiencies in the location of the industry and fosters a provincial bureaucracy that, in many cases, does little more than collect special taxes to finance itself. 20. Non-forest provincial policies also play an important role in distorting sector activities. Some provinces adopted special taxation schemes to promote value-added processing within provincial borders. Other provinces impose a tax on shipments of timber raw materials to outside the province, a practice that may even be unconstitutional. Transportation is still highly regulated at the provincial level, leading to the appearance of trucking associations that behave like oligopolies and increase the transportation costs of timber products. Finally, provincial legislation is particularly poor in the area of "green" environmental protection. Although most environmental values are national or global in scope, and it would not make sense for a province to take most initiatives in the absence of transfer payments from the federal government or the global community, there are still important local values, particularly for quality water supply and soil conservation, that are poorly protected. 21. Regulations. Furthermore, the related regulations are inadequate. For instance, in case of fire, there is no special mechanism to mobilize the population as provided for in the law. Also, there are no professionals to fight forest fires. This may result in the situation being worsened when only volunteer fire fighters, without training or guidance,  - 45 - Annex B are available. Regulations are also missing to help minimize risks. The existing fine system is obsolete and does not stimulate prudence. In the field of regulations related to commerce and industry, there is also a need for updating or creating new rules of the game, in particular to foster productivity increases and exports. Finally, the regulations related to watershed management are particularly weak. 22. Culture. Finally, it is readily acknowledged in Argentina that there is little or no "forestry culture" as compared with neighboring countries such as Chile. Awareness of both the sectoral development potential and the possibility of expanding the forestry capital stock, instead of just destroying it, is far from being sufficient. The development of such an awareness is seen by the private sector as an important role of the public sector. Another example of weak institutional capacity because of prevailing cultural patterns is given by native populations (Mapuches in particular) who used to invade forests of araucaria and araucana to eat their nutritious fruits, thus, depleting wide areas of valuable trees. Interinstitutional Relationships 23. The network of interinstitutional relationships within the forestry sector is complex and unstable. In addition, most of the relationships are de facto or informal rather than thought through on the basis of the need for many entities to cooperate and interrelate to efficiently implement their work programs. Even when specific mechanisms exist such as CNB, it has no power whatsoever except to give advice. Experience has shown that this advice is rarely taken. At least this is the feeling in the private sector when CNB is mentioned. Internal Organization and Management at the Entity Level 24. Organization at the entity level within the forestry sector is at least as weak as it is at the interinstitutional level. In SRNyAH, weaknesses derive from its recent creation and the lack of overall experience as to how to get organized to respond to the specific needs of the country in protecting the environment and preserving natural resources. In the case of SAGyP's DPF, it is evidently located at too low a level hierarchically to have much influence or prestige. 25. This picture is further aggravated by gaps related to other elements of capacity also included in the broad category of "organization". These gaps are less specific to the forestry sector and more common to many public entities in Argentina. Management procedures and styles often seem antiquated. They do not include participatory mechanisms, except in very rare occasions. The entity-level interpretation of prevailing civil service rules is narrow and many entities' staff "work to rule", slowing down all processes and certainly activating only part of their skills. Only rarely are there adequate and updated manuals at the administrative and technical levels.  - 46 - Annex B Finally, as in many other sectors, entities are given responsibilities and work programs without the corresponding physical and financial resources (operating budgets) commensurate with the scope of their work. Facilities are not well maintained and run. Office equipment and technology generally do not cover the needs and tend to be obsolete as well. This situation has often been denounced by the private sector when explaining the low credibility level of the public sector. As a result, this element of capacity is far from adequate. On the contrary, any sector modernization effort aimed at achieving higher levels of performance and competitiveness in international markets, while simultaneously renewing the forestry sector's capital stock, both quantitatively and qualitatively, is going to be severely hampered by the above-described situation. Personnel Policies and Reward Systems 26. On this subject there is not much to say that would be specific to the forestry sector. However, this does not make the identified ICGs less severe when trying to achieve sectoral development objectives. It is well- documented that the civil service in Argentina needs to be reorganized in line with other government efforts to modernize the entire administrative machinery. Salary levels in the forestry sector are not at all competitive with the private sector. As a result, the private sector retains the best specialists, which is not necessarily a bad thing in itself. However, as the role of the State in the sector becomes leaner, the need for a competent core of specialists within sector institutions is critical. Current personnel policies do not give any premium for the number of years specialists have spent in the same job and/or specialty. The system is seen as broadly unfair. Many of the existing higher- and mid-level specialists have a second job working in private activities that have nothing to do with the forestry sector. This is particularly serious in a sector in which a high level of competency is necessary to implement reforms such as the ones under the proposed project, including policy-making, definition of strategies to stimulate efficiently the private sector, strategies to expand exports, and to enforce natural resource legislation and regulations. There is an acute need to hire and retain higher- level professionals, but these cannot be attracted by the present levels of compensation. Skills of Individuals in Both the Public and Private Sectors 27. Finally, from the viewpoint of the last institutional capacity category that has been reviewed while preparing the proposed project, namely, skills of people at all levels involved in interinstitutional relationships, wide capacity gaps exist, largely, but not exclusively, explained by the previously-described capacity gaps. Information obtained through informal interviews of both public sector officials and private sector entrepreneurs show that skills are missing at all levels, including in the private sector, to achieve the development tasks implied in the Government priority objectives. The majority of decision-makers are new to the sector.  - 47 - Annex B About 70 percent of the professionals and technicians, including those in the private sector which is supposed to get the best professionals as a result of better compensation packages, would need, at least, to update their skills. In the private sector, managers do not have the management or technical skills at the level required by an industry that wants to aggressively penetrate highly competitive international markets. Workers in the industry are generally unskilled, contributing to a well-known wastage of primary products. Finally, the population in general, including the groups visiting national parks or other protected areas, have neither a conservation culture nor awareness of what is expected from them as a contribution to natural resource protection. In other words, the global skill capital of the people, including within the sectoral institutional universe, is deficient. This probably will be a severe impediment to implementing the proposed sectoral development strategy if it is not addressed speedily and adequately. Conclusion 28. The Argentine Forest Sector has a weak institutional capacity because: (a) the sectoral role of the State and related development policy is only vaguely defined and is not sufficiently explicit or transparent; (b) the institutional environment is which the sector is developing is not conducive to the achievement of the highest development potential in terms of preserving natural resources and, at the same time, realizing the sector's full productive potential; and (c) the capacity of the sectoral institutional universe is weak. Based on a comparison between existing institutional capacity thus described for the sector, and the one that is implied by the proposed project's development objectives, an institutional strengthening strategy is recommended that would help: (a) define a clearer role of the state and develop policy in effective consultation with the private sector; and (b) implement the proposed action program described below and included in the proposed project so as to eliminate, or at least mitigate, identified institutional capacity gaps for key capacity elements such as policy-making, legislation/regulations, interinstitutional and internal organization, personnel management, and skills. The proposed institutional development program described below includes specialist assistance, training activities, and the improvement of equipment and facilities. E. SAGyP Institutional Strengthening Component (ISC) Component Objectives 29. This component aims to develop sufficient institutional capacity in order to implement the other project components successfully. This means that all ICGs that have been identified against project tasks, themselves derived from components' objectives and resources, are systematically addressed by the following program, in time to ensure adequate and efficient  - 48 - Annex B task implementation over time.' This component for SAGyP would include technical assistance, training, vehicles and equipment for a total cost of about US$3.0 million, as summarized in Tables B. 1 and B.2, and later in the text. Table B. 1. SAGyP Institutional Strengthening Component (ISC) Breakdown of Baseline Costs Breakdown by Objective (US$'000) Policies, laws, and regulations for commercial plantations, including those affecting the production of planting material 796 Interinstitutional and internal organization 228 Personnel policies and reward systems 20 Skills upgrading 316 Support for project implementation 1,670 Total cost 3,030 Again, using the language of the ICADS method, one would say that a successful ISC will have yielded a ICI-I of 45 (compared to 34 as of today), and a ICI-2 of 210 (compared to 105 as of today), through either eliminating identified ICGs and/or reducing overall project development ambitions to a certain extent.  - 49 - Annex B Table B.2. SAGyP Institutional Strenathening Component (ISC) Breakdown of Baseline Costs Input Description (US$'000) Internationally recruited consultants (36 p/m): calculated at the rate of US$10,000 per month, including all expenses, except domestic travel and subsistence outside Buenos Aires 360 Locally recruited consultants (290 p/m): calculated at the rate of US$5,000 per month, including all expenses, except domestic travel and subsistence when outside Buenos Aires 1,450 Domestic travel and subsistence outside Buenos Aires calculated at the rate of about US$1,500 per consultant month 490 Vehicles and equipment 180 Workshops 120 Training tours 110 Other training-related expenses 130 Incremental operating costs 190 Total costs 3,030 Component Inputs for SAGyP 30. The ISC's inputs are described below for DPF and INASE: (a) Policies, Laws and Regulations for Commercial Plantations (US$796,000) (i) Study of policies, laws and regulations at the federal level (US$141,000). Detailed study of existing federal legislation and regulations affecting the establishment, management, exploitation, transportation, processing, and exporting of commercial products from plantations, and identification of main obstacles to the efficient functioning of the sector, including related environmental consequences. Some of this activity was started during project preparation. This item would include 6 person/months (p/m) of an internationally recruited economist, 4 p/m of a national economist, 3 p/m of a national environmentalist, and 4 p/mr of a national lawyer;  50 - Annex B (ii) Workshop for prioritizing federal obstacles (US$20,000). Workshop for consultations with the public and private sectors, and NGOs on the policy and regulatory constraints at the federal level. The objectives of the workshop would be to obtain feedback on the results of the above study, to agree on a hierarchy of problems, and to prioritize obstacles to be removed. Costs include a facilitator and travel expenses; (iii) Drafting revised federal legislation and regulations (US$65,000). Drafting of legal documents and regulations, following the priorities in (a) (ii), while ensuring consistency with Argentine environmental laws and regulations. This would be done using about 10 p/m of local lawyers; (iv) Workshops with federal legislators and government officials (US$20,000). Workshops with interested legislators and government officials to explain the importance, content, and implications of revised draft legislation and regulations. These workshops would include a facilitator and travel costs; (v) Study of policies, laws and regulations at the provincial level (US$238,000). Detailed study of existing provincial legislation and regulations affecting the establishment, including appropriate environmental screening of plantation activities, management, exploitation, transportation, processing, and exporting of commercial products from plantations, and identification of main obstacles to the efficient functioning of the sector, including related environmental consequences. This item would include 6 p/m of an internationally recruited economist, 20 p/m of national economists/environmentalists/researchers, and 6 p/m of a national lawyer; (vi) Workshop for consultation with provinces (US$30.000). Workshop for consultations with the public and private sectors, and NGOs on the policy and regulatory constraints at the provincial level. The objectives of the workshop would be to obtain feedback on the results of the above study, to agree on a hierarchy of problems, and to prioritize obstacles to be removed. Costs include a facilitator and travel expenses;  - 51 - Annex B (vii) Drafting of revised provincial legislation and regulations (US$130,000). Drafting model legal documents and regulations in close coordination with the provinces, and following the priorities in (a) (vi), while ensuring consistency with Argentine environmental laws and regulations. This would be done in about 10 provinces. Costs include about 20 p/m of local lawyers; (viii) Workshops with provincial legislators and goverrnents (US$50.000). Workshops with interested legislators and governments to explain importance, content, and implications of revised draft legislation and regulations. These workshops would be carried out in each affected region, Mesopotamia, Buenos Aires, and Patagonia Provinces, and would include a facilitator and travel costs; (ix) Study tour to Chile (US$50000). Study tour to Chile of a maximum of 20 representatives of provincial and federal governments and legislatures directly involved with commercial forest activities. Priority would be given to provinces further advanced in putting in place adequate legislation and regulations. The tour would be for a week; and (x) Preparation of a plan and agenda for the approval and implementation of the new policies (US$52,000). In close coordination with the federal and provincial legislatures, propose an agenda for the approval of the revised draft legislation and regulations. Eight p/m of local consultants would be required. (b) Interinstitutional and Internal Organization (US$228,000) (i) Review the interinstitutional relationships network and design internal organizational structures and management procedures for entities and administrative units that require them in line with implementation requirements (US$138,000). The interinstitutional relationship network would be reviewed carefully and adapted to the new development policy that is fostered by the proposed project. An international organization specialist would be identified and hired to work for a year in SAGyP's DPF and INASE to help define updated and more adequate organizational structures and foster more modern management procedures and styles in administration. Similar efforts would be  - 52 - Annex B extended to selected Provinces' "Direcciones de Bosques"; and (ii) Management skills' upgrading (US$90,000). Related to the above input, training would be provided to higher and mid-level management staff to upgrade their skills so as to increase the chances of success of the international consultant's work. This would include about three two-week management courses for groups of participants in management procedures adapted to SAGyP's DPF's and INASE's work programs, and managers at the provincial level dealing with plantations, three two-week study tours for six of the highest-level managers, including possibly one or two representatives of the private sector, to visit leading commercial forestry entities in the U.S. or Europe. The cost of training courses would be minimized because of the work of the international consultant and would amount to US$30,000, and the study tours to US$60,000; (c) Personnel Policies and Reward System (US$20,000). A study would be completed on how public sector personnel policies affect the forestry sector. Such a study would be aimed at making clear what are the related constraints that weaken the potential for sectoral development and proposing ad hoc or more permanent schemes that could help bridge identified capacity gaps. A local civil service expert would be hired for 3 months and would work in coordination with his/her counterpart in SAGyP's DPF and INASE; (d) Skills' Upgrading (US$316,000) (i) Professional and technical training activities (US$266,000). Professional and technical training activities would be financed under this ISC to help bridge individual capacity gaps in technical fields related to forest plantations. About 20, one to three- week courses would be organized for a total of about 200 national and provincial civil servants and a few private sector employees who would participate in every course to ensure better communication and exchange of experiences. An international forest- related trainer would be hired for 6 p/m as well as two local consultants. Together they would organize and deliver the courses required. An additional 6 p/m of international consultants in different specialties would be hired for short periods of time as warranted by the  - 53 - Annex B different training activities. Other costs related to this training are estimated at US$50,000; (ii) Training activities for other levels of staff (US$50,000). Other training activities would be delivered by the same international and local experts defined above. About 30 training activities of a duration of between two to eight days would be organized, mainly in the Provinces as required for the strengthening of about 250 mid- or low-level staff members of the Direcciones de Bosques; (e) Support for Project Implementation (US$1,670,000). The ISC would strengthen the capacity of SAGyP to manage and coordinate project implementation. A Project Implementation Unit (PIU) would be established to assist the Sub-Secretary of Production in implementing the project. The PIU would comprise a Project Coordinator, a Technical Manager, a Procurement Specialist, and an Accountant. The Project Coordinator would be recruited locally for the coordination of implementation for the duration of the Project and would be responsible for, inter alia: (i) putting in place, and maintaining, a system for monitoring project implementation; (ii) coordinating the preparation of annual work programs ("POAs"), bi-annual progress reports to the Bank, and the production of audit reports; (iii) supervising the administration of the Special Account; (iv) preparing, in cooperation with the Technical Manager, all documents for the Mid-Term Review and ensuring their quality; and (v) completing, in cooperation with the Technical Manager, an evaluation of the Project at the end of its life. He/she would ultimately be the link between Bank supervision staff and SAGyP. The Technical Manager would be recruited locally for the duration of the project and would be responsible for ensuring the technical quality of all work under the project, and, in cooperation with the Project Coordinator, for preparing the required documentation for the Mid-Term Review, and for preparing the project evaluation report at the end of the project's life. The Procurement Specialist would be recruited locally for a total of about 20 months and would be responsible for ensuring that procurement procedures follow Bank guidelines, and for making recommendations on award of contracts to the PIU. The Accountant would be recruited locally for the duration of the Project and would be responsible for financial record keeping, the Special Account, and disbursement requests. All of these experts would work under the overall direction of the PIU. The ISC would also include provision for vehicles and equipment (telephones, photocopiers, fax machines and  - 54 - Annex B computers) as required, for about US$180,000, and include incremental operating costs for the PIU of US$190,000.  -55- Annex C ARGENTINA FORESTRY DEVELOPMENT PROJECT Research and Information Generation and Dissemination Component A. Sub-Component: Plantation Forest Inventory and Development and Management of a Commercial Forestry Database (Baseline Costs US$3.0 million)' Objective and Rationale 1. Reliable information on the extent, distribution and condition of forest plantations in Argentina is lacking. Furthermore, with the dissolution of IFONA in 1991, the monitoring of forest product output has ceased and there is now a dearth of up-to-date statistics on production and prices in the sector. A lack of reliable information on the growing stock, the geographical distribution of plantations, tree-planting trends, and the annual output of forest products is a constraint to the formation of public policy for the sector. The objective of the sub-component would be to: (i) complete a plantation forest inventory, and create and maintain current a database on forest plantations; (ii) collect, input and store such other statistics in the database as are necessary for SAGyP to meet its mandate in the commercial forestry sector; and (iii) analyze data and disseminate information from the database. 2. The first objective would be realized by completing a low intensity, reconnaissance level inventory of plantations, which would collect essential qualitative and quantitative information on the extent, distribution, composition and age structure of forest plantations in Argentina, and inputting the data from the inventory into a database. The second objective would be pursued partly through strengthened relations between units within SAGyP handling the collection of raw data, but also in cooperation with other agencies, including, in particular, the Instituto Nacional de Estadistica y Censos (INDEC), the provinces and SRNyAH. In all instances where it is feasible, SAGyP would be encouraged to pursue the least cost option of inputting into its database raw statistics generated by other agencies. SAGyP should concentrate on collecting only the incremental and unavailable raw data required by its unique mandate, and transforming all data, from whatever source, into information that would satisfy its own needs and those of others concerned with commercial forestry. The third objective would be realized by strengthening the capacity of SAGyP to discern the needs of its I. Additional background information and more detailed technical specifications are given in FAO/CP Technical Annex 6--See Documents in Project File, Annex J.  - 56 - Annex C clients and to respond appropriately by analyzing data and disseminating the information required either by the private sector or other public agencies. Description 3. Phase 1 would involve: (a) the purchase of two sets of computer-compatible tapes of satellite imagery for the areas of Argentina containing plantation forests, one at the beginning of the project, and the second toward the end; (b) the preparation from an analysis of the first set of these tapes of a basic map of plantations at a scale of 1:100,000; and (c) the preparation from an analysis of the second set of these tapes of a map of plantations at a scale of 1:100,000, which would form the foundation for monitoring changes in plantations. 4. Phase 2 of the plantation forest inventory would involve systematic field sampling, or ground truthing, to verify the spectral signatures of different plantation types (tree species, age and approximate standing volumes) on satellite images. To do this, a 2.5 km x 2.5 km grid would be used to locate sample plots, where species composition, age class (e.g., 0-5 years, 5-10 years, over 10 years) and standing volumes (using relascope sweeps) would be verified. This information would be sufficient to enable remote sensing techniques to be used in calculating plantation areas by species and volumes for the entire country. Around 50 percent of the plots laid down would be permanently marked and mapped, and would be remeasured every 5 years to monitor changes in the growing stock. 5. Beyond the data generated by the plantation forest inventory, SAGyP may wish to include in its database other priority statistics on commercial forestry. Such statistics may not now be collected, and federal and provincial capacities to regularly collect these would have to be strengthened, at least in some instances. Examples of such statistics would be some of those related to prices, and those dealing with the production of roundwood and processed wood. As already stated earlier, in all instances where it is feasible, SAGyP would be encouraged to pursue the least-cost option of inputting into its database raw statistics collected by other agencies. SAGyP should concentrate on collecting only the incremental and unavailable raw data required by its unique mandate, and transforming all data, from whatever source, into information that would satisfy its own needs and those of others concerned with commercial forestry. 6. In instances where the collection of statistics by SAGyP is justified, it would be done through: (i) the preparation of a standard methodology for collecting data; and (ii) strengthening the capacity of the Statistics Unit within SAGyP to handle the task. This Statistics Unit would be renamed the Database Management Unit (DMU) because of its increased responsibilities, and henceforth in this report will be referred to by that name. Under the project, the capacity of the existing Statistics Unit in SAGyP, renamed the DMU, to take the lead in guiding and assisting  - 57 - Annex C provinces in commercial forest product data collection would be strengthened. Inputs at the SAGyP level would consist mainly of staff training and limited amounts of equipment (computers and telecommunications equipment) to receive, manage and publish commercial forestry data. At the provincial level, assistance would take the form of workshops to sharpen awareness of the importance of collecting reliable commercial forestry data. Depending on the response and demonstrated commitment of individual provinces (to be assessed after the workshops by the resources they are willing to commit to the task), SAGyP would provide provincial staff with hands-on assistance in initiating data collection work in the field. All work would be done through short-term consultancies and every effort would be made to collect data in a cost-effective way, bearing in mind the other data collection activities already being undertaken by SAGyP and others. Cost Estimates and Implementation of Phase 1 7. Phase 1 would have a baseline cost of US$1.0 million. Baseline costs include: (a) the purchase of two sets of computer-compatible tapes of satellite imagery, one at the beginning of the project, and the second toward the end (US$460,000); (b) 40 person-months of internationally recruited consultants for image analysis and map production; and (c) 20 person-months of locally recruited consultants to work with those recruited internationally. 8. The preparation of Terms of Reference (TORs) for the lead consultant firm, selection criteria, appraisal of consultant proposals, selection of a lead consultant firm to execute Phase 1, and their supervision, would be carried out by DPF. A breakdown of costs is given in Table C. 1.  -58- AnnexC Table C. 1. Baseline Costs for Phase 1 of the Inventory of Plantations Input Description (US$'000) Computer-compatible tapes of satellite imagery 460 Internationally recruited lead consultant firm, including consultants for about 40 person-months (p/m) at US$10,000 per month, which includes all expenses except domestic travel and subsistence outside Buenos Aires 400 Locally recruited consultants for 20 months at US$4,000 per month, which includes all expenses except domestic travel and subsistence outside place of residence 80 Domestic travel and subsistence outside Buenos Aires for internationally recruited consultants, and outside place of residence for locally recruited consultants, calculated at the rate of about US$900 per consultant month 60 Total cost of Phase 1 1,000 Cost Estimates and Implementation of Phase 2 9. Phase 2 would have a baseline cost of US$2.0 million. This would include: (a) design, completion, and maintenance of the inventory of plantations: (i) 45 person months (p/m) of internationally recruited consultants (the lead consultant firm) for designing and obtaining agreement to the approach and methodology for the inventory, preparing terms-of- reference and inventory manual, and managing the inventory work of other locally-recruited consultants, exercising quality control; (ii) 12 p/m of internationally recruited consultants for training; these would be supplied by the lead consultant firm as part of its contract; (iii) 120 p/m of local consultants for field sampling and data reporting and training; and (iv) two vehicles and equipment;  -59- Annex C (b) development and management of a database in the Database Management Unit (DMU) of SAGyP: (i) 16 person-months of internationally recruited consultants for selecting and installing the software for data processing, and training and managing the Statistics Unit staff until they are capable of taking on responsibility for managing the database; (ii) 12 person-months of internationally recruited consultants for training provincial staff in data collection and database management; (iii) 40 person-months of locally recruited consultants for training provincial staff in data collection, and inputting data into the database in the Statistical Unit in SAGyP; (iv) workshops at the provincial level; and (v) software and hardware for the Geographic Information System (GIS). 10. All inventory work would be carried out under consultant contracts. Cost estimates are for guidance only and may differ from bid submissions. For ground truthing, plantations areas would be divided into different geographical areas, and field work in these areas could be done by either one or more consultant firms or entities. SAGyP, through the internationally recruited lead consultant firm, would check the quality of field work by carrying out a 15 percent field check on sample plots. The administrative procedures for issuing contracts would be governed by the Project Implementation Manual prepared by SAGyP. A summary of baseline cost is given in Table C.2.  - 60 - Annex C Table C.2. Baseline Costs for Phase 2 of Inventory of Plantations Input Description (US$'000) Vehicles and equipment 290 Internationally recruited consultants for 85 person months (p/m) at US$10,000 per month, which includes all expenses except domestic travel and subsistence outside Buenos Aires 850 Locally recruited consultants for 160 months at US$4,000 per p/m, which includes all expenses except domestic travel and subsistence outside place of residence 640 Domestic travel and subsistence outside Buenos Aires for internationally recruited consultants, and outside place of residence for locally recruited consultants, calculated at the rate of about US$730 per consultant month 180 Workshops at the provincial level 70 Total Phase 2 2,030 B. Sub-Component: Markets and Grading Systems (Baseline Costs US$0.6 million) Objective and Rationale I1. The processing of wood products is dominated by many small firms; hence, there are large transaction costs involved in putting in place appropriate grading systems and enforcing them. Government involvement is aimed at resolving this problem, and thereby increasing the competitiveness of Argentine wood products. This would involve three main activities: (i) studies to identify export markets for sawnwood in which Argentine mills have at least the potential to be competitive; (ii) development of a grading system for sawnwood appropriate to the markets identified; and (iii) completion of a training program for qualified mill operators and owners who express interest. Description 12. The first step would be to identify the export markets which appear most promising for wood products. For each of the two most promising markets identified (e.g., the European Union and the United States), the prevailing grading system would be described in detail. The studies should also specify any other peculiarities of these markets, including sanitary restrictions. Once the priority markets have been identified and  - 61 - Annex C agreed on, and depending on the interest displayed by the private sector, a training program would be offered which would include: (a) workshops for private mill owners and operators; (b) partial cost sharing of overseas tours to the two selected markets for carefully selected public employees and private mill owners and operators in order to facilitate contacts with importers; and (c) on-the-job training of selected public and private sector employees who may be interested in positions as grading inspectors and instructors for small sawmills, or employees of large mills. The courses would be organized so that participants would be able to grade according to the rules of the identified priority markets. Cost Estimate and Implementation 13. Table C.3 gives a breakdown of baseline costs. Table C.3. Baseline Cost for Markets and Grading Systems Input Description (US$'000) Markets and grading systems: an internationally recruited firm or firms would be selected to handle the completion of the marketing studies, development of appropriate grading systems, development of an implementation plan for the grading systems, and training. Costs were calculated as follows: 24 p/m of internationally recruited consultants at US$10,000 per month (US$240,000); 24 p/m of locally recruited consultants at US$5,000 per month (US$120,000); travel and subsistence outside Buenos Aires at the rate of about US$1,500 per consultant month (US$72,000); workshops and training, including overseas trips (US$168,000) 600 14. The markets and grading systems studies and related training would be carried out under the overall management of DPF. It would select an internationally recruited consultant firm or firms, which, in turn, would be assisted by local consultants, and they would complete the task based on terms-of-reference prepared by DPF.  - 62 - Annex C C. Sub-Component: Tree Selection and Breeding (Baseline Costs US$2.6 million) Objectives and Rationale 15. The tree selection and breeding program would initiate a long- term effort to reach a higher level of species domestication in Argentina. The tree breeding program would concentrate on pines and eucalypti, the two most important genera in Argentina's planting program. While the selection and breeding program would be more inclusive of other species with good potential, experience has shown that the best success in domestication has been in instances in which efforts were concentrated on a single species or group of species. Description 16. The first step of the program would be to thoroughly review growth and form characteristics of any known sources of conifers, particularly pines, and broadleaf species, particularly eucalypti, in Argentina and compare them with published data. At the same time, sources of improved seeds or clones should be imported from countries with successful breeding programs. On the basis of this superior genetic material of known origin, a seed supply and clonal planting stock program would be developed. The breeding program would include both a seed and a clonal program. The seed program would involve open pollinated seed collections from selected trees for half-sib progeny trials, and also centralization of the selected trees through grafting to establish populations for controlled pollination work. The espalier system with flower inducing chemical treatments developed at CSIRO in Australia would provide the quickest results. The clonal program would establish cutting orchards and propagation facilities, then develop two initial planting populations: one of carefully identified clonal populations for progeny testing, and the other for training in cloning procedures. Cost Estimates and Implementation 17. The baseline cost estimate is US$2.6 million and would include: (a) design and implementation of a breeding program for conifers, particularly pines: (i) 5 p/m of internationally recruited consultant for a thorough review and international comparison of available genetic material of pines in Argentina; (ii) 15 p/m of internationally recruited consultant geneticist to assist with the design and start-up of a pine breeding operation;  - 63 - Annex C (iii) 60 p/m of locally recruited consultant specialist to manage the program; (iv) 65 p/m of field assistance to establish and care for plantings; (v) supplies (imported genetic material, chemicals, fertilizers, laboratory and nursery supplies, tools, etc.), costing about US$109,000; (vi) vehicles and equipment (clonal unit, seed unit, scale, and two vehicles), costing about US$292,000; (vii) construction (modifications to existing laboratory), costing about US$138,000; (viii) land preparation, fencing and establishment cost of orchards, costing about US$25,000; and (ix) training, including short courses for local specialists in cloning and other breeding technology (US$110,000). (b) design and implementation of a breeding program for broadleaf species, particularly Eucalypti: (i) 5 p/m of internationally recruited consultant for a thorough review and international comparison of available genetic material of eucalypti in Argentina; (ii) 15 p/m of internationally recruited consultant geneticist to assist with the design and start up of a eucalypti breeding operation; (iii) 65 p/m of locally recruited specialist to manage the breeding program for five years; (iv) 60 p/m of field assistance to establish and care for plantings; (v) supplies (imported genetic material, chemicals, fertilizers, laboratory and nursery supplies, tools, etc ), costing about US$109,000; (vi) vehicles and equipment (clonal unit, seed unit, scale, and 2 vehicles), costing about US$293,000;  - 64 - Annex C (vii) construction (modifications to existing laboratory), costing about US$137,000; (viii) land preparation, fencing and establishment cost of orchards, costing about US$25,000; and (ix) training, including short courses for local specialists in espalier system and other breeding technology (US$110,000). 18. A breakdown of baseline costs is shown in Table CA. Table C.4. Baseline Costs of Tree Selection and Breeding Program Input Description US$'000) Construction 275 Vehicles and Equipment 585 40 p/m of internationally recruited consultants at US$10,000 per month, which includes all expenses except domestic travel and subsistence outside Buenos Aires 400 120 p/m of locally recruited consultants at US$5,000 per month, which includes all expenses except domestic travel and subsistence outside place of residence 600 130 p/m of field workers at US$400 per month 52 Domestic travel and subsistence outside Buenos Aires for internationally recruited consultants, and outside place of resident for locally recruited consultants, calculated at the rate of about US$1,000 per consultant month 160 Supplies 218 Orchard establishment 50 Training 220 Total for tree breeding and selection 2,560 Implementation 19. The tree selection and breeding program and related training would be carried out by SAGyP with the assistance of INTA.  - 65 - Annex C D. Sub-Component: Seedling Improvement and Marketing Program (Baseline Costs US$1.8 million) Objectives and Rationale 20. Given that the tree breeding and selection program is part of a long-term strategy to improve the genetic quality of material available to nurseries, there is still the short-term problem of improving the production, marketing and use of improved planting material in Argentina. Nursery owners need to improve their nursery practices to improve the morphological characteristics of seedling, and plantation owners have to overcome their present inability to distinguish between genetically and morphologically superior seedlings and those of lesser quality. A production and marketing research effort to address these latter problems would be the focus of this sub-component. 21. While there is no census of forest tree nurseries for Argentina, it is estimated that there are more than 1,000 operators in the areas covered by the existing government grant program for new plantation development. The Province of Misiones alone has about 150 nurseries, most of which are small- to medium-size operations (i.e., 50,000 to 1,000,000 seedlings). Generally, the large nurseries (i.e., 3-7 million seedlings capacity) in Argentina are part of a large-scale reforestation operation for a pulp mill or a large export firm. These large nurseries, which produce about 40 percent of the country's nursery stock to service their own plantations, recognize and have the capacity to use advanced production technology and imported, certified seed. The small to medium-size nurseries, however, which supply more than 60 percent of the country's planting material, generally use genetically inferior seed and outmoded nursery practices, resulting in the production and planting of seedlings of highly variable, and generally poor, quality. This results in poor survival rates and less than optimal growth rates, and, thus, inefficient and uncompetitive plantations. With the use of good quality genetic material, along with already known, tried and tested improved production technologies, significant productivity gains--of the order of 20-50 percent--can be achieved. 22. Although these technological conditions are important for improving planting material, the degree to which they may be immediately applied is limited by the local knowledge base, the higher costs of improved seedling production, and the general inability of plantation owners to distinguish good from poor quality seedlings, and, hence, an unwillingness to pay a price which would at least compensate for the incremental costs of producing good quality planting material. The higher cost of production is mainly attributable to the cost of quality germplasm, which must be imported because of the low level of species domestication in the country. The public sector could play an important role in providing the information needed for adoption of improved planting material, which would have positive economic benefits throughout the country. The objective, therefore, is to improve  - 66 - Annex C yields and survival rates of trees in new forest plantations by promoting the expanded production, marketing and use of improved planting material by nurseries. Description 23. The strategy for achieving this objective would involve three main elements: (a) making information on improved seed sourcing and nursery management techniques more readily available; (b) certifying improved seeds, seed producers, planting material produced with that improved seed, and nurseries; and (c) improving the market for good quality seedlings. 24. Information. Technical assistance contracts would be awarded to two internationally recruited seed and wholesale nursery firms (one firm would probably specialize in broadleaf species, particularly eucalypti, the other in conifers) to carry out three main tasks: (i) helping interested nurserymen determine the best provenances of improved seed for the special soil and climatic conditions of each market area; (ii) facilitating the purchase of that seed by nurseries by providing information on sourcing; and (iii) training interested nursery operators in improved nursery techniques and INASE staff in procedures for handling certification. 25. The first task would involve computer matching of soil and climatic conditions in specific micro regions with identified sources of improved seed from analogous areas where improved seed is commercially available. 26. The second task would be carried out by advising nursery owners on where and how to buy their seed, or by assisting them through advise on how to procure the seed in bulk (total demand for seed would be in the range of US$1.0 million annually). It would probably be advantageous for nurserypeople to opt to buy the seed in bulk, because it would probably mean a lower price, if they can overcome the transaction costs involved. The two consultant firms would work closely with INASE and nursery owners and would assist them in identifying seed sources for each site. 27. Considering the relatively small size of Argentine nurseries, the most cost-effective way of implementing the third task would be through workshops and field visits to the demonstration nursery operation. Improved nursery management techniques would probably involve: (i) species to site matching; (ii) improved seed source selection; (iii) use of best planting containers and organic potting media; (vi) use of improved watering systems to ensure a reliable and even application; (vii) application of scientific  - 67 - Annex C planting stock culling; (viii) root pruning; (ix) appropriate use of fertilizers and pesticides; and (x) shading. Training of INASE staff in certification procedures would be through courses specifically tailored by the consultants for this purpose. 28. Certification. To allow for, and encourage the development of, a local supply of source identified, improved seed, INASE would initiate a seed certification program. INASE would also set up a system to certify nurseries that produce stock with improved seed and use improved technology. INASE would seek technical assistance from INTA or the consultants for both the certification of locally produced seed as well as for the certification of nurseries, and, thereby, seedlings. 29. Increasin2 the Market for Good Quality Seedlings. The demand for good quality planting material would be boosted by SAGyP precluding the use of anything but certified planting material in any of its assisted plantation programs. To be eligible for participation in SAGyP- grant-assisted plantation programs, applicants would agree to abide by "Technical Guidelines", which, inter alia, would require that all new plantations be established with seedlings that have been certified as "source identified", or with clonal material from outstanding trees from the best provenances (if and when available), and raised in nurseries that meet minimal requirements in applying improved technology designed to produce morphologically improved seedlings. These later nurseries would be limited to those that would carry the INASE certificate. A receipt from a certified nursery could be used for verification purposes. Cost Estimates 30. The baseline cost of this activity has been estimated at US$1.8 million over five years, and would include: (a) 6 person months (p/ni) of internationally recruited consultants to assist INASE design and initiate a work program for certifying seed and nursery stock; (b) 10 p/m of internationally recruited consultants to design and implement a seedling and seed demand survey and for computer matching of specific sites with improved seeds from analogous areas; (c) 14 p/m of internationally recruited consultants to advise/assist nursery owners identify sources and procure improved seed; (d) 44 p/m of internationally recruited consultants to transfer improved nursery techniques to nursery operators through demonstration, workshops, field visits, and other means;  - 68 - Annex C (e) 60 p/m of locally recruited consultants to help INASE implement the seed and seedling certification programs; (f) 80 p/m of locally recruited consultants for field assistance with the seed demand survey, the certification program, the detailing of seed, and the training program; (g) equipment and materials to upgrade four carefully selected private nurseries in different parts of the country so they could serve as demonstration nurseries; (h) two vehicles and equipment for the seed certification program; and (i) printing manuals. 31. A breakdown of base costs is shown in Table C.5. Table C.5. Baseline Costs for Seedling Improvement and Marketing Program Input Description (US$'000) Vehicles and equipment 306 Two firms of internationally recruited consultants for a total of 74 p/m at US$10,000 per month, which includes all expenses except domestic travel and subsistence outside Buenos Aires 740 Locally recruited consultants for 140 p/m at US$4,000 per month, which includes all expenses except domestic travel and subsistence outside place of residence. 560 Domestic travel and subsistence outside Buenos Aires for internationally recruited consultants, and outside place of residence for locally recruited consultants, calculated at the rate of about US$1,000 per consultant month. 214 Publishing/Printing 10 Total costs 1,830 Implementation 32. The seedling improvement and marketing program would be implemented by DPF with the assistance of INASE which would have responsibility for certification. DPF and INASE would be assisted by two  - 69 - Annex C internationally recruited consultant firms: one specializing in broadleaf species, particularly eucalypti, and the other in conifers. Selection criteria for the two consultant firms would be based on the reputation of the firms in managing state-of-the-art nursery operation, and the quality of their proposals. E. Sub-Component: Plantation Management Research, Training and Extension (Baseline Costs US$4.2 million) Objectives and Rationale 33. Plantation management research would be part of an INTA- supported long-term program of applied field research involving trials on tree spacing (especially for silvopastoral purposes as well as for optimum production of timber), pruning, thinning, and plantation establishment (including fertilization, land preparation, and weed control). Such research would complement work already underway in Argentina and is needed to narrow the gap between the level of technical knowledge in Argentina on such matters and among competitors such as New Zealand with which Argentina must compete in world markets. Careful records of all research would be kept and economic analysis completed in order to assess the cost effectiveness of proposed improved technologies. 34. Also under this activity, and in order to disseminate the research findings, and provide guidelines for plantation establishment consistent with Argentine environmental laws and regulations, to the more generalist extension agents, SAGyP with the assistance of INTA would select, train and direct a small core of about 10 subject matter specialists to perform this function. 35. Under research, a major effort would be made to strengthen INTA's capacity to carry out applied plantation management research. Toward this end, two categories of training would be included: (a) extended training stays in New Zealand, Australia and the United States; and (b) graduate work, leading toward degree programs in overseas universities with excellent quality forestry programs. Cost Estimate and Implementation 36. The baseline cost estimate are as follows: (a) US$2.1 million for plantation research; (b) US$0.5 million for training research staff; and (c) US$1.6 million for the small core of subject matter specialists in plantation technology transfer to more generalist extension agents, who, in turn, would disseminate the information to plantation owners and operators. Each subject matter specialist would be paid about US$1,500 per month, plus an additional allowance of about US$110 per month for fuel and subsistence when away from his/her residence. The total cost of these two items would be about  -70 - Annex C US$966,000. To equip this core of specialists with vehicles would cost an additional US$400,000. The balance of the US$1.6 million would go to upgrading the level of training of this core of 10 subject matter specialists. 37. The research part of this activity would be implemented by SAGyP with the assistance of INTA because of INTA's experience and proven capacity in implementing such research programs successfully. SAGyP, with the assistance of INTA, would be encouraged, however, to carry out the proposed research program jointly with private sector research organizations or universities in all cases where this is feasible. 38. SAGyP, with the assistance of INTA. would also implement the extension part of this sub-component. As already stated, SAGyP with the assistance of INTA would train a small core of subject matter specialists at INTA's research facilities or other suitable locations. These subject matter specialists would be recruited as consultants. F. Sub-Component: Patagonia (Baseline Costs US$1.0 million) Objectives and Rationale 39. The cold, arid Patagonia region is endemic to Argentina and occupies most of the southern part of the country. The region, which covers a total of 762,000 km2 (27 percent of the country), consists of three natural zones, namely: (i) the Steppe, or arid grassland, which is the largest (650,000 km2) and most arid (750 to less than 300 mm precipitation/year); (ii) the Pre-Cordillera, which covers a narrow band of steeply sloping land of altitudes of around 1,000-2,000 MASL, and with annual precipitation of around 750 to 2,000 mm; and (iii) the Cordillera, in the high Andes, with elevations above 2,000 MASL and annual precipitation of 1,000 to 3,000 mm. Strong winds are a characteristic of the entire region. While much of the Cordillera and Pre-Cordillera is well protected in the National Park's system, there are severe desertification problems in the Steppe zone. 40. The proximate main cause of land degradation is overgrazing and grazing during the wrong season, mainly with introduced ruminants. Cattle, sheep and goats have largely replaced the indigenous animals in this region where extensive agriculture (meat, wood, furs and hides) is the main economic activity (US$271 million/annum), accounting for 40 percent of the region's GDP. Pasture management is rare, even on the larger holdings, partially because of the lack of interior and perimeter fencing on both small and large holdings. Overgrazing leads to a general degradation of the native grass ecosystem and a transition to a desert landscape, where unpalatable shrubs and bare ground begin to dominate. Degraded pastures, dust storms and increased flooding and other symptoms of desertification in the Patagonia have affected the living standards of the local people. For example, in Santa Cruz--a province where information is available--some 200 ranches have been  - 71 - Annex C abandoned due to decreased yield of 15 percent or more, brought about by desertification. Little is known, however, about the overall extent to which desertification has and will affect the ecosystem and the people living in Patagonia, the underlying forces that drive the process, and the costs to Argentina if the process continues. 41. Studies carried out by INTA on some 40,000 km2 of the Patagonia Steppe--using an FAO system for measuring degrees of desertification--have shown that 80 percent of the area surveyed has been at least moderately degraded, and 10 percent has reached severe levels of desertification. Those studies have also shown that an additional 250,000 ha of desert are being created each year. Although INTA/GTZ commenced work on monitoring the desertification process on three narrow transects in 1990, there is no strategy for addressing the problem and there have been no on-the-ground activities to halt or reverse the process. 42. The objectives of this sub-component, therefore, are to: (a) collect, analyze, interpret, and report on what is known about the economic, social, biological, historic, climatic and other factors driving the desertification process in Patagonia; (b) determine the costs to Argentina, the local population, and biodiversity and hydrological systems if the process continues unabated; (c) assess the options available for addressing the problem based on research and experience in Argentina, Australia, South Africa, and the United States; (d) estimate the expected cost-benefit ratios of implementing a group of the best options available, both singly and collectively; (e) outline an appropriate role for the state in responding to the phenomenon; and (f) develop a consensus among federal, state and local governments, the private sector, and NGOs on an action plan for the state in the Patagonia region. Description 43. To meet this objective, the project would support a comprehensive study of Patagonia in response to the objectives outlined above. This study would be designed to help policy makers develop a strategy for better managing the Patagonia. This would require a combination of internationally and locally recruited expertise and experiences. A workshop to discuss the findings of the study and to begin the process of consensus building would also be included. Cost Estimate 44. The baseline cost of this sub-component is estimated at US$1.0 million. A breakdown of costs is given in Table C.6.  - 72 - Annex C Table C.6. Baseline Cost of the Patagonia Sub-component Input Description (US$'000) Lead Consultant Finn: 36 p/m of internationally recruited consultants at US$10,000 per month to: (i) manage the overall study, provide guidance and quality control to other consultants recruited to complete particular parts of the work, and prepare final report, including an executive summary; (ii) analyze options available for addressing the problem based on research and experience in Argentina, Australia, South Africa, and the United States; (iii) analyze the expected benefit costs ratios of implementing a group of the best options available, both singly and collectively; and (iv) analyze the appropriate role for the state in responding to the phenomenon, including investment proposals, if appropriate 360 18 p/m of internationally recruited consultants at US$10,000 per month to synthesize and report on the Australian, South African, and U.S. experiences 180 Local consultants: (i) 20 p/m of locally recruited consultants at US$5,000 per month to synthesize and report on the Argentine experience (US$100,000); (ii) 10 p/m of locally recruited consultants at US$5,000 per month to analyze the costs to Argentina, the local population, and biodiversity and hydrological systems if the process continues unabated (US$50,000) 150 Workshop for consensus building and feedback 60 Travel and subsistence at about US$1,500 per consultant month outside Buenos Aires for internationally recruited consultants in Argentina, and outside place of residence for others 150 Communications by fax and phone 50 Miscellaneous 50 Total cost 1,000 Implementation 45. Because of the scope of the study, the Patagonia sub- component would be managed directly by the Sub-Secretary of Production (with assistance from the PIU) working in close cooperation with other interested parties in the federal government, provincial governments concerned, the private sector, and NGOs. The studies under this sub-  - 73 - Annex C component would be carried out by an internationally recruited lead consultant firm, assisted by other internationally and locally recruited consultants, based on terms-of-reference prepared by SAGyP.  - 74 - Annex D ARGENTINA FORESTRY DEVELOPMENT PROJECT Small Farmer Component (Baseline Costs US$7.2 million)' A. Rationale and Objectives Forest Degradation 1. The native forests of Argentina, estimated to cover some 23 percent of the country (i.e., 64 million ha), are used by small farmers and rural populations as a source of firewood, timber, non-wood forest products, forage and, above all, arable land. These forests are under considerable pressure from small farmers and their expanding/shifting agriculture and overgrazing, which is resulting in deforestation, forest degradation, soil erosion and other forms of environmental damage such as loss of biodiversity. The most recent estimates place the loss of natural forests and woodlands at about 120,000 ha per year. Although it has one of the lowest rates in Latin America in percentage terms, Argentina now ranks 5th in total area deforested annually, after Brazil, Venezuela, Colombia and Bolivia. Since the turn of the century, the area of native forests has been halved. The most endangered forest areas are the Parque Chaqueno in the north western part of the country, the subtropical humid forests of Misiones (also called the Mata Atlantica) and the selva Tucuman orandense (yungus vegetation type). 2. The ecological stability of Argentina is threatened by the rapid rate of natural forest degradation. Nationally, forests help regulate water supply and soil erosion, and, thus, help sustain urban and rural water and hydroelectric infrastructure. Sedimentation of streams, brought about by soil erosion following deforestation, is now considered a major and immediate threat to some hydro-electric projects. Locally, forests buffer the hydrological cycle, and when disturbed, the resultant flooding can become a severe threat to life and infrastructure. The degradation of the Chaco forest in particular, which covers a large part of the great watersheds of the Parana, is believed to contribute to the chronic flooding and siltation of that great river. Table D. 1 gives examples, totalling US$120 million, of the costs to State agencies over the period 1984-1985, of repairing infrastructure damaged by flooding, due in part to the deforestation of watersheds. 1. This annex is derived from: (i) SAGyP document--Proyecto de Desarrollo Forestal (versi6n Preliminar). Diciembre de 1993. Capitulo 13, "Capacitaci6n, Promoci6n, Investigaci6n, Extensi6n e Informaci6n (pages 416-442); and (ii) FAO/CP Report No 133/94 CP-ARG.17--"Conservation Incentives to Small Farmers in Buffer Zones".  - 75 - Annex D Table D. 1. Repair Costs of Flood Damage to Public Infrastructure (1984-'85) Agency (US$'000) Ferrocarriles Argentinos 22,908 Direcci6n Nacional de Vialidad 14,955 Gas del Estado 5,625 Direcciones Provinciales de Vialidad, Tucuman 1,985 Direcciones Provinciales de Vialidad, Salta 1,072 Direcciones Provinciales de Vialidad, Jujuy 1,266 Direcciones Provinciales de Obras Sanitarias. Tucuman 5,211 Departamento General de Irrigaci6n de Tucuman 4,158 Direcciones Provinciales del Agua de Tucuman 9,302 Administraci6n General de Aguas de Salta 1,586 Direcci6n de Agua Potable y Saneamiento, Jujuy 985 Direcciones Provinciales de Hidrdulica, Jujuy 3,414 Other public sector agencies (energy, packing) 27,500 Servicios de transporte y Provisi6n de Agua 20,000 Total costs 119,967 Source: P.N.P.C.I.--MOSP--PNUD, Arg 85/008 (1988). 3. Globally, forests are host to a large biodiversity of still undiscovered importance and retain a substantial stock of carbon that, if released into the atmosphere, would contribute to the greenhouse effect. The young and fragile geological formations of the Yungus forest (Selva Tucuman), which is believed to be the country's richest in terms of biodiversity, is subject to severe erosion as well as loss of wildlife habitat. Some of the more endangered mammals include the tapir, the corzuelas (Mazama spp), the oso melero, the yaguarete, the cai monkey (Cebus apella) and the lobito comun (Lontra longicaudis). Furthermore, native forests are the basis for the production of many forest products, which are collected through informal mechanisms and benefit mostly rural poor populations. Small Farmers 4. The SAGyP has defined small farmers as those who: (i) live on a separate property; (ii) use mostly family labor; (iii) have an income less  - 76 - Annex D than two minimum rural salaries per month (Arg$450/month); and (iv) have assets (excluding land) valued at Arg$20,000 or less. Small farmers so defined are also characterized by: (i) small farm area in relation to family size; (ii) uncertain or undefined land tenure; (iii) low remuneration for family labor; (iv) limited access to improved technology and technical assistance; (v) very limited access to formal credit; (vi) low capacity to negotiate farm product prices; and (vii) weak farmers' organizations. Outside the Pampa, small farmers comprise more than 40 percent of properties. Regionally, the highest concentration of small farmers is found in the Northeast (NEA) and the Northwest (NOA) where they are responsible for 40 percent and 20 percent, respectively, of the cropped area. According to IFAD (1993), these two regions contain 53 percent (i.e., 245,000 homes) of the rural poor in Argentina. 5. The average small-farm property and income size is highly variable, but there are some regional trends. The average size of a small farm is 3-5 ha in Salta, 10-100 ha in the Parque Chaqueno, 12-25 ha in Misiones, and over 100 ha in Patagonia. According to the Instituto Nacional de Estadistica y Censos (INDEC), Salta has the highest provincial percentage of poor farmers in the country (71 percent of its producers are qualified as poor), followed by Neuquen (64.5 percent). In Misiones, with the largest subtropical forests in Argentina, 49 percent of the producers are classified as poor. 6. The minifundio, as a subsistence unit, has an economic rationale that differs substantially from that of larger farms: its goal is to secure the family's food supply and other subsistence requirements by whatever means possible. Some of the main agricultural activities of small farmers by region are: (i) cotton, tobacco, yerba mate, cassava, horticulture and cattle in the NEA region; (ii) sugar cane, tobacco, cotton, sheep, goats and andean camelids in the NOA region; (iii) fruits and goats in the Salta- Jujuy region; (iv) sheep and goat raising in the Patagonia region; and (v) dairy cattle, goats and cereals in the Center region. The production scheme of the minifundio is essentially a subsistence system based on the use of the farmer's own labor and the available natural resources. 7. Because of the tremendous pressure that small farmers place on the natural forest resources, mainly through their farming and grazing practices, Government has recognized the need to assist these people to adopt more sustainable and less environmentally-destructive farming systems. Work being done by agencies such as Fundaci6n INTA, Provincial Ministries, GTZ, Universities and NGOs (such as FUNDAPAZ), has shown that improvement is possible, but only when farmers' interest and needs are properly understood and their limitations adequately considered.  - 77 - Annex D Objective 8. The objective of the small farmer component, therefore, would be: (a) to alleviate rural poverty; and (b) to protect native forest areas, by addressing the two main limiting factors faced by small farners as they attempt to improve their farming practices: (i) availability of technical assistance and information on improved, sustainable technologies; and (ii) access to the funds required to implement the technical packages. The strategy would be to expand successful small farmer-oriented programs which are either demand-driven or that respond to some of the needs of minifundistas. Efforts would be directed at: (a) stabilizing shifting cultivation and reducing overgrazing in fragile forest areas of particular significance to the conservation of natural resources; (b) intensifying and diversifying farming activities in areas where crop production and transhumant pastoralism are threatening fragile areas; (c) developing improved technologies adapted to small farming systems; and (d) increasing small farmer's and especially their children's sensitivity toward environment values, environmental degradation, and the need to conserve natural resources where possible. To be successful, activities would have to expand and sustain the participation of local people and be executed through farmer's groups or associations, so as to facilitate the adoption of technological alternatives that could not be easily integrated by individual farmers. Farmer's groups or associations--formed spontaneously or promoted by Fundaci6n INTA, by other public and private institutions or by NGOs-- would be the main instruments for the implementation of this component. B. Target Areas and Populations 9. Criteria developed by SAGyP for prioritizing broad ecological zones for inclusion include: (i) anthropic pressure on natural forests, especially those in or near national and provincial protected areas; (ii) availability of improved technologies; (iii) forestry potential; (iv) diversification potential; (v) proportion of provincial small farmers, shifting cultivators and livestock producers to national total; and (vi) level of small farmers' income. Other criteria used for determining priority areas included: farmers' interest, political commitment at provincial/departmental level, and degree of farmer organization. As outlined in Table D.2 below, the priority areas are located in the Provinces of Misiones, Salta, Chaco and Neuquen. The target population has been estimated at some 3,000 small farmers who legally occupy their land.  - 78 - Annex D Table D.2. Target Areas for Small Farmer Component Number of Priority Areas Farmers Major Protected Areas in Zone Iguazu National Park, Uruga-i Sierra Central, Provincial Park and Provincial Misiones Province 1,250 Protected Areas Yungas/Trans. Parque Chaquenno, Salta 500 Baritu and Calilegua Ntl Parks Chaco Humedo, Chaco National Park and P. de La Chaco Province 500 Plaza Multiple Use Reserve Lagunas de Equlauquen Prov. Reserve Dept. Minas, and Canada Molina Ntl Prov. Neuquen Province 350 Monument Chaco Seco Critical area for in-situ Biodiversity Salta 400 Conservation (Quebracho) C. Component Activities, Costs and Implementation Activities 10. The main activities would include (i) applied adaptive research; (ii) extension/technology transfer; and (iii) public environmental/forestry education campaigns. To facilitate uptake of new technology, an agroforestry fund would be established. 11. Applied/Adaptive Research (US$0.7 million): The component would support applied research targeted towards developing conservation- oriented technologies and sustainable productive systems used by small farmers in the project areas. Key research topics would include: agrosylvopastoral systems, including understory pasture development, introduction of new genotypes, and the development/adaptation of techniques to improve soil fertility and moisture holding capacity in areas where the small farmer component is being implemented. This component would provide funding for the recruitment of international and national sustainable agriculture specialists as consultants to assist INTA and other participating research institutions in the adaptation and development of specific technologies, including those successfully implemented in analogous areas of the world. This applied/adaptive research activity would also support staff training, study tours, publications and some field equipment. 12. Extension/Technology Transfer (US$3.2 million): The component would build upon existing extension programs and methodologies which have proven their potential. This would be done by: (i) providing  - 79 - Annex D extension services for improved farming/management systems; (ii) promoting farmers' organizations; (iii) providing technical assistance for land-use planning; and (iv) testing ways to diversify agricultural production. 13. Environmental Education Campaigns (US$0.7 million): Forestry and environmental education campaigns, directed towards small farmers and their families, school teachers and the local population as a whole, would be supported to raise public awareness of environmental issues. Activities would be developed by the extensionist in charge of the extension/technology transfer sub-component, thereby ensuring uniformity in information delivered to the target population. Activities to be supported include school and community tree planting, production of environmental education videos, and training of primary school teachers. 14. Agroforestry Fund (US$2.3 million): To overcome one of the main obstacles faced by most small farmers in adopting new technology, i.e., access to capital, the project would establish an agroforestry fund with the twin objectives of: (i) increasing farmers' incomes; (ii) encouraging farmers to protect environmental values. 15. The proposed agroforestry fund would provide grants to about 3,000 small farmers. Activities to be financed by the fund would be of two main types: (i) those which are production-oriented; and (ii) those which do not produce direct and/or immediate benefit to the small farmers, but which have environmental benefits. Activities to be financed would be defined by extensionists working with participating farners in preparing projects to be submitted to the agroforestry fund. They could be group or individual farmer activities. In no instance would the cumulative amount of grants paid to any individual small farmer family over the five year life of the component, either as an individual farm family or as a member of a group of families, exceed a maximum of Arg$1,000. 16. Management at Local Level (US$0.3 million): The estimated fees which would be paid to local NGOs or governmental agencies to provide extension/technology transfer services and environmental education to beneficiaries, and monitor the use of the agroforestry fund have been estimated at about US$328,000, equivalent to about 5 percent of the total cost of these activities. Cost Estimates 17. Total base cost of the component is estimated at US$7.2 million. This would include: (a) applied/adaptive research fund (US$0.7 million): funding has been included for applied/adaptive research to address practical problems as they arise in the areas where the component would be implemented, and includes;  - 80 - Annex D (i) 3 p/m internationally recruited consultants to help design/adapt an appropriate research program, costing US$35,000; (ii) 3 p/m of nationally recruited high-level consultants to help design/adapt an appropriate research program, costing US$20,000; (iii) staff training and study tours, costing US$45,000; and (iv) funds to carry out research, including purchase of supplies and publication of results, ITS$600,000; and (b) extension/technology transfer (US$3.2 million): costs include funding for: (i) vehicles (12 4WD and 15 motorcycles), costing US$540,000; (ii) equipment (field and communication), costing US$100,000; (iii) 125 p/m of locally recruited subject matter specialists to train extensionists, costing US$263,000; (iv) 890 p/m of locally recruited consultants to implement extension activities, costing US$1,424,000; (v) 100 p/m of audio visual specialists to prepare material for and help implement the extension/technology transfer program, costing US$160,000; (vi) operating and maintenance of extension programs, including vehicles, costing US$435,000); (vii) staff training and study tours, costing US$100,000; and (viii) supplies and materials, costing US$150,000; and (c) Environmental Education Campaigns (US$0.7 million): costs include funding for: (i) equipment (field and communication), costing US$100,000; (ii) 45 p/m of locally recruited subject matter specialists to coordinate the environmental education program, costing US$95,000;  - 81 - Annex D (iii) 125 p/m of audio visual specialists to prepare material for and help implement the environmental education program, costing US$200,000; (iv) operating costs of environmental education/training program (US$185,000); and (v) supplies and materials, costing US$120,000; (d) agroforestry fund (US$2.3 million); and (e) Management at Local Level (Baseline Costs US$0.3 million): The estimated management fees have been estimated at about US$328,000, equivalent to about 5 percent of the total cost of these activities.  - 82 - Annex D Table D.3. Baseline Costs of Small Farmer Component Input Description US$'000 Vehicles and equipment 740 3 p/m internationally recruited consultants at US$10,000 per month, which includes all expenses except domestic travel and subsistence outside Buenos Aires 30 3 p/m locally recruited high-level consultants at US$5,000 per month, which includes all expenses except domestic travel and subsistence outside place of residence. 15 Domestic travel and subsistence outside Buenos Aires for internationally recruited consultants, and outside place of residence for locally recruited consultants, calculated at the rate of about US$1,500 per consultant month 10 125 p/m of locally recruited subject matter specialists to train extensionists, and 45 p/m of locally recruited subject matter specialists to coordinate the environmental education program, at US$2,000 per month, which includes all expenses except domestic travel and subsistence outside place of residence 340 890 p/m of locally recruited extension specialists, and 225 audio visual specialists, at US$1,500 per month, which includes all costs except subsistence outside place of residence 1,673 Subsistence outside place of residence for locally recruited subject matter specialists, extensionists, and audio visual specialists, calculated at the rate of about US$100 per consultant month 129 Training and study tours 145 Operating costs, maintenance, supplies and materials 890 Funds to carry out research, including purchase of supplies and publication of results 600 Agroforestry grants to each of the approximately 3,000 participating farmers, resulting in a grant per family of about US$767 2,300 Management fee 328 Total component cost 7,200  - 83 - Annex D Implementation 18. In implementing the Small Farmer Component, the Sub- Secretary would use: (a) the assistance of INTA to carry out applied research on small farmer issues; and (b) the institution with the best proven record in each of the approximately five areas selected (be it an NGO or local government) to monitor the use of the agroforestry fund, to provide technical assistance and other support to poor farmers, and to carry out the environmental education campaigns. Each collaborating agency would conduct a baseline study of the participating farmers in order to allow for the monitoring of project impact.  Annex E - 84 - ARGENTINA FORESTRY DEVELOPMENT PROJECT Project Costs (US$'000) Project Components by Year Project Components Project Year Total 1996 1997 1998 1999 2000 Institutional Strengthening 455 580 685 766 544 3030 Research & Information 1265 2270 3175 3770 2723 13203 Small Farmer 585 1320 1820 2035 1440 7200 ---------------------------------------------------------_- Total BASELINE (Dec.31,1994) 2305 4170 5680 6571 4707 23433 Physical Contingencies 57.5 85 106.5 88.25 48.9 386 Price Contingencies. 84 277 540 802 706 2409 Total PROJECT COSTS 2447 4532 6326 7461 5462 26228 Foreign Exchange 917 1462 2089 2346 1825 8639 Total foreign exchange as % of total project cost 33%  Annex E - 85 - ARGEiNTINA FORESTRY DEVELOPMENT PROJECT Project Costs (US$'000) Institutional Strengthening Component--Total Costs by Year Component Element Project Year Totali 1996 1997 1998 1999 2000 Goods Vehicles 40 20 20 0 0 80 Equipment 25 25 25 25 0 100 Consultancies Studies Foreign 35 50 65 86 40 276 Local 55 80 80 115 60 390 Training Foreign 15 15 30 30 30 120 Local s 10 15 20 10 60 Project Management Local 200 200 200 200 200 1000 Other PIU & other Operations 50 110 150 160 174 644 Workshops 10 20 40 50 0 120 Training programs 20 50 60 80 30 240 ----------------------------------------------------------- Total BASEUNE COSTS 455 580 685 766 544 3030 Physical Contigencies 6.5 4.5 4.5 2.5 0 18 Price Contigencies 17 39 65 93 82 297 --- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total COMPONENT COST 479 623 755 862 626 3345