Colombia - Atlantico - Number Three - Irrigation Project

RESTRICTED FtILE C0Oy Report No. P-552 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INSTITUTO COLOMBIANO DE LA-REFORMA AGRARIA COLOMBIA FOR THE ATLANTICO NO. 3 IRRIGATION PROJECT June 15, 1967  INrERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 'REPORT AID RYCO?MIENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INSTTTUTO COLOMBIANO DE IS RF2ORMA AGRARIA FOR THE ATLANTICO NO. 3 IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$9 million to the Instituto Colombiano de la Reforma Agraria (INCORA). PART I: HISTORICAL 2. At the end of 1965, INCORA presented to the Bank a study entitled "Report on Atlantico Project No. 3, Irrigated Agricultural Development" and requested financing for the foreign exchange cost of irrigating an area of about 35,500 hectares. Appraisal missions visited Colombia in June and September 1966. Given the technical problems of placing sp large an area under intensive cultivation at one time, agreement was reached to formulate a smaller project for approximately 10,000 hectares of land in the southern sector of the Atlantico zone. 3. Negotiations on the proposed loan began in lWashington on May 26, 1967. IMCORA was represented by Dr. Enrique Penalosa, General Manager of ITCORA, Mr. Carlos Villamil and Mr. Hernan Ramirez of the INCORA staff; the Government was represented by Ambassador Hernan Echavarria. The proposed Bank Loan would be for US$9 million. This would bring the Bank's total lending to Colombia to US$455 million, in addition to an IDA Credit of $19.5 million made in 1961. The status of previous Bank loans and of the single IDA Credit, as of May 31', 1967, is surnmarized below: Loan Credit (US$ Million) Year No. Borrower Purpose Bank IDA No. Undisbursed 1949-60 Loans fully disbursed 178.6 1961 295 Republic of Colombia Roads 19.5 3.0 1961 Republic of Colombia Roads 19.5 5 5.0 1961 282 Emp. de Medellin Power 22.0 0.5 1962 313 Emp. Electrica de Bogota Power 50.0 1.4 1963 339 CVC and CHIDRAL Power 8.8 1963 347 Electribol Power 5.0 0.5 1963 343 Ferrocarriles Nacionales Railways 30.0 2.0 1963 345 Paz del Rio Steel 30.0 12.0  -2 - Amount Loan Credit (US$ Million) Year No. Borrower Purpose Bank IDA No. Undisbursed 1964 369 Emp. de Medellin Power 45.0 3h.7 1966 451 Banco de la Republica Industry 25.0 23.9 1966 h48 Rep. of Colombia Agricul- ture 16.7 16.6 Total (less cancellations) [30.6 19.5 of which has been repaid 88.h Total now outstanding 3L2.2 Amount sold 16.3 of which has been repaid 13.6 2.7 Total now held by Bank and IDA 339.5 19.5 Total undisbursed 94.6 5.0 99.6 In addition, a loan to Empresa Nacional de Telecomunicaciones (TELECOM) equivalent to US$16.0 million, was signed on June 15. 5. Delays in disbursements have been experienced with Loan/Credit 295-CO/5-CO for highways which resulted in the Closing Date being twice extended. The final Closing Date of the loan is June 30, 1967. It is expected that an amount of up to $3.0 million will be cancelled from the loan and credit, about two-thirds of which will be from the credit account. The delays have largely been due to poor organization and to cumbersome legal and administrative procedures in the awarding and paying of contracts. The project was also adversely affected by delays in the provision of adequate local funds. However, in the past few monthis certain steps have been taken which are resulting in an improved administration and execution of the project. The Ministry of Public Works is undergoing reorganization and new senior personnel have been appointed; management consultants are being contracted to advise on organizational matters; a semi-autonomous National Highway Fund has also been established which has made possible the reduction in administrative delays, and which assures availability of local funds for highway construction and maintenance. 6. It is expected that in the near future a proposed loan of US$1.h million to the Republic of Colombia for highway studies will be presented to the Executive Directors for approval. 7. IFC has made 18 investments and underwriting commitments in Colombia totalling US$15.3 million.  - 3 - PART II: DESCRIPTION OF THF PROPOSED LOAN 8. Borrower: Instituto Colombiano de la Reforma Agraria (INCORA). Guarantor: Republic of Colombia. Amount: The equivalent in various currencies of US$9 million. Purpose: To assist in financing the settlement and development of 9,900 hectares of land in the Department of Atlantico in northern Colombia. Amortization: 25 years (including 6 years of grace); 39 semi-annual repayments beginning on October 15, 1973 and ending on October 15, 1992. Interest Rate: 6 percent. Commitment Charge: 3/8 of 1 percent. PART III: THE PROJECT 9. An Appraisal of the project (No. TO-589) is attached. 10. Colombia's population of about 18.7 million is growing at the rate of some 3.2 percent per annum. Half of Colombia's population lives in rural areas and depends almost entirely on agriculture for its l-veli- hood. Agriculture (excluding forestry and fishing) accounts for almost 30 percent of GNP and produces 73 percent of exports. Yet, the growth rate in the output of Colombia's basic food crops - maize, wheat, rice, beans, potatoes, fresh vegetables and fresh fruits - has been unsatis- factory. The cultivated area has just been keeping pace with the increase in population. Improved agricultural practices have not been introduced on a scale wide enough to bring about a general improvement in yields. 11. INCORA is a public agency writh administrative autonomy established in 1961 to implement the agrarian reform law enacted that year. It has become a major Government agency for agricultural development. Besides its mandate with respect to land distribution, it has complementary objec- tives such as developing unused and underutilized land and increasing agricultural production and productivity. INCORA has a number of other irrigation projects under investigation or under construction. INCORA would have overall responsibility for the project. Since the project is technically complicated and requires a high degree of experience and skill, and recognizing the limited technical resources available in Colombia, INCORA would engage consultants in the planning, operation and management of the project until and for at least five years beyond the completion of construction.  12. The project is the first stage of intensive agricultural development in the southern part of the Department of Atlantico near the Caribbean Coast. It would comprise two parts: Part I - the development of 3,900 hectares for irrigation; and Part II - flood protection works for an area of 6,000 hectares. The irrigated area would grow primarily high value crops for export. 13. Part I would include a complete irrigation and drainage system and the on-farm works needed for intensive cropping; purchasing agricultural equipment; establishing perennial crops; setting up marketing facilities, including an orange packing plant; creating field trial farms; providing agricultural management, including technical assistance to farmers accom- panied by credit facilities; preparing feasibility studies for future stages of the project; and training personnel abroad. 14. Part II would consist of the construction of an interceptor channel to protect from flooding an area of 6,000 hectares of cultivable land, of which 3,200 hectares are presently under traditional cultivation; auxiliary civil works and the introduction of improved cropping practices under rain-fed agriculture. 15. INCORA would acquire most of the land in the project area and settle farmers on it in small holdings. 16. The proposed Bank loan of US$9 million would provide 57 percent of the estimated investment cost of the project. The remainder, totalling about US$6.7 million, would be met by Government budgetary contributions to INCORA. 17. The proposed loan includes the fees of foreign consultants, the foreign cost of training Colombian technicians abroad, the presently estimated foreign exchange cost of the civil works and the cost of ma- chinery, equipment and materials. The machinery, equipment and materials would be procured on the basis of international competitive bidding with Colombian suppliers participating with a preference of 15 percent in lieu of customs duties. Colombian civil workcs contractors will be permitted to submit bids for civil works construction and installation without preference. Disbursements for civil works will be on a percentage basis. Because of the extensive studies required to prepare the loan and the importance of cormencing experimentation on the types of crops to be grown in the project area, some financing of past expenditures would be permitted for part of the studies and for the Santa Lucia pilot farm. Reimburse- ments for these purposes would be limited to payments made after June 30, 1966. It is not expected that such reimbursements would exceed US$200,000. 18. Crops grown would be primarily of high value, and would be largely for export. Some low value crops would be produced as inter-crops during the development period of perennial crops or as rotation crops. Marketing and processing arrangements would be provided. At full pro- duction, the aggregate net increased return resulting from expanded agri- cultural production in the irrigation part of the project is estimated at  about US$2 million annually, yielding a rate of return of about 11 percent to the economy. The flood protection investment would yield a rate of return to the economy of over 25 percent. There would be a gross contri- bution to foreign exchange earnings of about US$3 million per annum at full development in 1982. Diversification of agriculture, to increase export earnings and decrease the high degree of dependence upon coffee, is a primary goal of Colombian economic policy. 19. Farmers would be able to pay for annual farm operations (in- cluding charges for machinery services and other farm inputs), and for project operation and maintenance and replacement costs. So as not to reduce the farmers' incentives, however, it is proposed that the recovery of the investment cost be collected only to the extent practicab].e. INCORA would have a study completed in two years from the date of a loan to assess the capacity of farmers to repay investment costs and establish criteria for such repayments in consultation with the Bank. 20. The Government has assured INCORA of a certain stable basic income in several ways. One is a legal requirement that the budget committee of the lower house of Congress cannot accept a national budget bill unless such bill contains an appropriation request for INCORA of not less than 100 million pesos. In addition, INCORA receives the income from a series of Government bonds issued to it as basic capital. INCORA is attempting to increase its funds, and if current proposals are adopted, its stabilized income would reach the equivalent of about US$39 million a year. INCORA has received two loans from U.S. Government funds for its supervised credit program, together with a loan for irrigation and farm settlement from the Inter-American Development Bank. These projects have been implemented satisfactorily. Besides being Guarantor of the proposed loan, the Government has undertaken to provide INCORA with funds sufficient to carry out the project. PART IV: LEGAL INSTRUMENTS AND AUTHORITY 21. The draft Loan and Guarantee Agreements, as well as the report of the Committee Drovided for in Article III, Section b(iii), of the Articles of Agreement of the Bank, are being distributed to the Executive Directors separately. 22. These draft Agreements conform to the general pattern of recent agreements for irrigation projects. PART V: THE ECONOMY 23. An economic report entitled "Current Economic Position and Prospects of Colombia" (WH-172a) was circulated to the Executive Directors on May 29, 1967.  24. The report notes that since September 1965, and particularly since the assumption of office by the new Government in August 1966, economic policy improved appreciably. Persistent fiscal deficits were changed to surpluses in 1966, and the rate of expansion of money supply in 1966 was reduced considerably in comparison to that of the two previous years. After a long period in which the Government had been slow to adjust public utility tariffs, a more flexible policy in this respect was adopted in 1966. In the coffee sector, where the Government had previously been reluctant to reduce the domestic support price for coffee in line with the declining international price, a more realistic price policy was initiated in 1966. The new Government has given clear evidence of its intention to continue these policies and also to establish the sector policies required for the successful execution of the development program and the realization of its econcmic benefits. Noteworthy in this respect are the incentives for the production of basic foodstuffs already in operation; the eight-fold increase in the gasoline tax, which will, in addition to its fiscal impact, have the effect of permitting a more rational distribution of traffic among different modes of transportation; and the taking of the initial steps towards the interconnection of the major power producers. 25. The financial policies outlined above provide a basis for im- proving the management of the balance of payments, and in addition the Government has recently adopted measures of exchange rate and import policy directed towards this objective. Colombia's most critical eco- nomic problem has been and still is to reconcile her aspirations for accelerated economic development with the existence of a structural dis- equilibrium in the balance of payments, arising from a large dependence upon coffee exports. In the past, with the international price of coffee declining, export earnings could not finance the imports required to sus- tain a satisfactory rate of growth. Difficulties in managing the balance of payments have been chronic because of a tendency to maintain exchange rates that were overvalued in relation to the need to provide incentives for non-coffee exports, for petroleum investment, and to restrain the demand for imports. On March 22, 1967, the new Government has undertaken a reorientation of its balance of payments policy by means of Decree- Law )44. This Decree-Law created two principal exchange markets; one of them, the certificate market, has a fluctuating exchange rate to be deter- mined by market forces with only limited intervention by the authorities. Although in the first weeks of operation of the new system, exchange rate flexibility has been less than expected, a flexible exchange rate policy is something new in Colombia, and if managed properly, would for the first time provide a basis for encouraging the development of non-coffee sources of foreign exchange. 26. The service ratio on existing debt is estimated at 17 percent in 1967. If, as is now expected, the new balance of payments policies are successful in stimulating the development of non-coffee exports and taking account of the new borrowing planned for the 1967-70 period, this ratio would remain at about 17 percent through 1970.  - 7 - 27. The Government has submitted to the Bank for distribution to the Consultative Group a project list requiring from US$300 to 350 mil- lion of new external commitments from the Bank and other members of the Group during the period from July 1967 to June 1968. The projects in- cluded in the list will become the heart of the development program that the Government is preparing. On the basis of the policy measures which have already been taken and in the expectation that the new exchange system will be managed so as to achieve the objective of making the ex- ternal sector's prospects consistent with the development effort, Colombia merits full support in its external financing plans. Both external lenders and the Government will, however, wish to observe closely the degree of success in the critical effort to enlarge and diversify Colombia's sources of exchange earnings on which her long-term growth prospects rest. PART VI: COMPLIANCE WITH THE ARTICLES OF AGREEIVENT 28. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII: RECOMMENDATION 29. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to the Colombian Institute for Agrarian Reform, in the amount of the equivalent of US$9,000,000 to be guaranteed by the Republic of Colombia. RESOLVEE: THAT the Bank shall grant a loan to the Colombian Institute for Agrarian Reform, to be guaranteed by the Republic of Colombia, in an amount in various currencies equivalent to nine million United States dollars (US$9,000,000), to mature on and prior to October 15, 1992, to bear interest at the rate of six percent ( 6%) per annum, and to be upon such other terms and conditions as shall be substentially in accordance with the terms and conditions set forth in the form of Loan Agreement (Atlantico No. 3 Irri- gation Project) between the Bank and the Colombian Institute for Agrarian Reform and the form of Guarantee Agreement (Atlantico No. 3 Irrigation Project) between the Republic of Colombia and the Bank, which have been presented to this meeting. George D. Wloods President Attachments Washington, D. C. Date: June 15, 1967