Ecuador - Livestock Development Project

RESTRICTED FILE COPY Report No. P-544 This report wns 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 The report may not be published nor may it be quoted as representing their views.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 REPUBLIC OF ECUADOR FOR A LIVESTOCK DEVELOPMENT PROJECT April 27, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPM1ET REPORT AND RECOPNMDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ECUADOR FOR A LIVESTOCK DEVELOPrMEMT PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$4.o million to the Republic of Ecuador. PART I - IISTOIRICAL 2. In August 1965, the Government of Ecuador requested assistance of the Bank in preparing a livestock project for a possible Bank financing. The Bank subsequently sent missions to Ecuador during 1965-66 to help the Government prepare such a project, which was completed and submitted to the Bank in June 1966 with a request for Bank financing. A Bank mission appraised the project in September 1966 and recommended that the Bank make a loan of us$4.o million. 3. Negotiations for the proposed loan began in Washington on iMarch 10, 1967. The Government of Ecuador was represented by Mr. Gustavo Larrea, Ecuadorian Ambassador to the United States; Mr. Raul Paez, Technical Direc- tor of the National Planning Board; and Dr. G. Muirragui, Legal Adviser to the National Planning Board. The Central Bank was represented by Mr. R. Campos, Deputy Director of the Research Department of the Central Bank. 4. The following is a summary statement of Bank loans and IDA credits to Ecuador as at March 31, 1967: Loan/ Amount (USs Million) Credit No. Year Borrower Purpose Bank IDA Undisbursed 94 EC 1954 Comite Ejecutivo de Roads 7.5 - - Vialidad del Guayas 137 EC 1956 Empresa Electrica Quito Power 5.0 - - 177 EC 1957 Empresa Electrica Quito Power 5.0 - - 176 EC 1957 Republic of Ecuador Roads 14.5 - - 212 EC 1958 Port Authority of Guayaquil Port 13.0 - -  - 2- 379 EC 1964 Republic of Ecuador ) 9.0 - 4.5 ) Roads 51 EC 1964 Republic of Ecuador ) - 8.0 7.9 Total (less cancellations) 54.0 8.0 of which has been repaid 15.9 Total now outstanding 38.1 Amount sold: 1.4 of which has been repaid 1.0 0.4 Total now held by Bank and IDA 37.7 8.0 Total undisbursed 4.5 7.9 5. The Consortium Highway Project (Loan 379/Credit 51) is a two- stage project, which is financed jointly by the Bank/IDA, AID and IDB under the chairmanship of the Bank. Disbursement has been delayed owing to a time lag in the Loan/Credit becoming effective, adverse weather experienced during 1965-1966, lack of local contractors qualified to undertake civil works and lack of interest among qualified foreign contrac- tors in submitting bids for civil works. Disbursement of the IDA Credit commenced only recently as this Credit is confined to financing Stage II of the Project. While the Project is progressing reasonably well and there are no major problems at present, it is being kept under close review. 6. IFC has one investment, made in 1965, of approximately 1;2 million equivalent in equity and debt of La Internacional, a major Ecuadorian tex- tile firm. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: Republic of Ecuador. Amount: The equivalent in various currencies of US$4.0 million. Purpose: To assist in financing the first stage of a livestock development program which aims initially at the improvement of the beef cattle in- dustry. Amortization: 18 years including a grace period of 6 years; principal repayments semi-  -3- annually from April 15, 1973 through April 15, 1985. Interest Rate: 6 percent per annum. Commitment Charge: 3/8 of one percent per annum. PART III - THE PROJECT 8. An appraisal report entitled "Livestock Development Project" (TO-582a) is attached. 9. Ecuador is predominantly an agricultural country and approxi- mately 65 percent of the present population of 5.2 million is rural. Agri- culture, including forestry and fishing, now contributes 34 percenat of the Gross Domestic Product and livestock accounts for about one-fourth of total agricultural production. 10. Principal commercial crcps of Ecuador are bananas, coffee, and cocoa. They account for about 80 percent of total exports. In the face of unstable world markets for these commodities, there is a vital need for diversification in agriculture. One way of diversifying is to expand pro- duction of beef, demand for which at home and for export is increasing. 11. The Coastal Area in which the proposed project will be carried out represents about one-fourth of the land area of Ecuador. It has about 3.3 million hectares suitable for agriculture, 65 percent of which are in production, with about one million hectares in improved and na- tural pastures. At least 500,000 hectares of the unused land could be utilized for improved pastures in a beef cattle development program. Beef production is the major animal industry in this area and lends itself to further expansion. 12. The project is directed mainly at on-farm improvements such as land clearance, pasture renovation, fencing, water supplies, yards and dips, machinery and improved breeding stock. These improvements are ex- pected to result in an increase in total cattle numbers and herd producti- vity. It is expected that about 240 beef cattle farms would participate in the project. Long-term credit to farmers of eight to twelve years is envisaged. 13. The coordination and supervision of the project would be carried out by a Project Commission composed of representatives from the National Planning Board, the Central Bank, the Ministry of Agriculture, participa- ting banks, and the Coastal Cattlements association. A Project Director satisfactory to the Banlc, who would be appointed by and responsible to the Project Commission, would have technical responsibility for implementation  of the project. Technical assistance to farmers would be provided by qualified livestock technicians under the supervision of the Project Director. This group would also be responsible for assisting farmels to prepare farm development plans, for recommending these to the participating banks as basis for lending, and for supervising the execution of the work for which loans are made. 14. Goods required for the project would be obtained through existing commercial channels. There are several retail sources for these goods, both imported and local, and sufficient competition is assured in securing supplies. Since individual items would not be of substantial value, inter- national competitive bidding would not be appropriate. All purchases of livestock required for the project would be subject to the approval of the Project Director with respect to the quality and suitability of such stock. 15. The foreign exchange component of the project represents 22 per- cent of the estimated project cost of $6.8 million. To carry out farm de- velopment, participating banks would make loans to farmers up to 80 percent of the cost of farm improvements: some "J0 percent would be provided by participating banks out of the proposed Bank loan and some 20 percent out of their own resources. In addition, participating banks would make short- terrm loans to farmers for working capital. About $150,000 of the Bank loan would be used for various technical services including seed multiplication and related research. PART IV - LEGAL INSTRUTMENTS AND AUTIXRITY 16. The Draft Loan Agreement between the Republic of Ecuador, Banco Central of Ecuador and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Ececutive Directors separately. 17. The Draft Loan Agreement follows the usual pattern of loan agree- ments for livestock development projects. However, instead of having a se- parate Project Agreement between Banco Central and the Bank, Banco Central is to be a party to the Loan Agreement itself. Attention is drawn to the following provisions: (a) Ecuador will enter into arrangements satisfactory to the Bank with Banco Central for the management, adrministration and disbursement, by Banco Central, of the proceeds of the loan (Section 5.01(b) ). (b) Ecuador and Banco Central will enter into Subsidiary Loan Agreements with the participating banks, on terms and conditions satisfactory to the Bank, providing for the reimbursement to such banks of a percentage of loans dis-  - 5 - bursed to cattle farmers under the Lending Program, and prescribing the responsibilities of the participating banks under the project (Section 1.02(a) and Section 5.02). (c) Payments by farmers in respect of moneys derived from the Bank loan not currently required for servicing of the Bank loan would be used by participating banks for livestock development (Section 5.12(i) ). PART V - THE ECONOIY 18. A review of the recent economic developments and data is con- tained in the attached economic memorandum. As stated in paragraph 11 of that memorandum, Ecuador is creditwJorthy for the proposed livestock loan. PART VI - COMPLIANCE IITH ARTICLES OF AGREEMIaT 19. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOISENDATION 20. I recommend that the E~cecutive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to the Republic of Ecuador in an amount equivalent to US$4,000,000. RESOLVED: THAT the Bank shall grant a loan to the Republic of Ecuador in an amount in various currencies equivalent to four million United States dollars (uS$4,OOO,ooo), to mature on and prior to April 15, 1985, to bear interest at the rate of six percent (&%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Live- stock Development Project) between the Republic of Ecuador, Banco Central of Ecuador and the Bank, which has been presented to this meeting. Attachments George D. Woods President Washington, D. C. by J. Burke Knapp April 27, 1967