Guatemala - Livestock Development Project

, RETURN TO \ RESTR I CTED REPORTS F-ILE (IflcOPY Report No. PA-39a WITHIN *IL UrX ONE WEIW ( 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION LIVESTOCK DEVELOPMENT PROJECT GUATEMALA December 16, 1970 Projects Department  CURE1NCY ECIIVALENrS US$ 1 - Quetzal 1 WEIGHTS AND IMEASUES 1 kilogram (kg) - 2.20 pounds 1,000 (kg) = 1 metric ton (m ton) - 2,200 pounds 1 meter (m) = 1.09 yards 1 kilometer (km) - 0.62 mile 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 square kilometer (km2) = 100 ha 0.39 square mdle 1 liter (1) = 0.26 gallon 1,000 millimeters (mm) * 39.37 inches GIDSSARY OF ABBREVIATIONS AU Animal Unit CACM = Central American Coino Market 1DB Inter-American Development Bank GDP = Gross Domestic Product GNP = Gross National Product TSU Technical Services Unit Q Quetzal  GUATEMALA LIVESTOCK DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .................................... i I. INTRODUCTION. 1 II. BACKGROUND. 1 A. General. 1 B. Agriculture. 2 C. Animal Health .................. , ., 4 D. Agricultural Services. 4 E. Agricultural Credit Services . 5 F. Government Policies. 6 III. THE PROJECT. 8 A. Description. 8 B. Project Area. 8 C. Cost Estimates. 9 D. Proposed Financing .10 E. Organization and Management .12 F. Lending Operations .14 G. Disbursements .15 H. Auditing .16 I. Procurement ................. 16 IV. MARKETS, PRICES AND PRODUCER BENEFITS .17 A. Markets and Prices .17 B. Producer Benefits and Revenue Generation 19 V. ECONOMIC BENEFITS AND JUSTIFICATIONS . .19 VI. RECOMMENDATIONS .20 All the mission members contributed to this report. Mr. F. Van Gigch was primarily responsible for its preparation.   ANNEXES 1. Banking System and Credit. 2. Development of a 350 ha Beef Breeding/Fattening Ranch Table 1 - Investment Cost Projection Table 2 - Herd Development Projections Table 3 - Projection of Sales and Operating Expenses Table 4 - Financial Projections Table 5 - Financial Rate of Return on Incremental Investment 3. Technical Services Budget 4. Project Organization Chart 5. Duties and Responsibilities of the Project Director 6. Project Fund Income and Expenditure, and Cash Flow Statement 7. Economic Rate of Return 8. Disbursements MMAP - Project Area   GUATEMALA LIVESTOCK DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. The Livestock Development Project in Guatemala for which a Bank Loan of US$4.0 million equivalent is proposed would be the first agricultural operation of the Bank Group in that country. The Project would provide finan- cial and technical assistance to about 300 beef breeding/fattening ranchers on the Pacific Coastal Plains to raise Guatemala's current low levels of pro- ductivity to modern standards. Despite great livestock potential, Guatemala's beef supply has lagged behind demand, particularly since 1960 when an export market for Central American beef developed in the United States. Since then, Guatemala's beef exports jumped from nil to about 21 million lb. This has resulted from an apparent decline in domestic per capita consumption from about 9 kg to 6 kg and an increased import of weaner cattle for fattening. Population and income growth are causing rapid increases in domestic demand and unless all aspects of beef production improve and local production of weaners promptly expands, either domestic consumption will decrease further or beef exports will have to be curtailed. The objective of the Project is to help Guatemala retain its share of the beef export market without further sacrifice of domestic consumption. ii. Project funds would be channeled to ranchers through public and private banks by a Livestock Development Fund (Fund) at the Bank of Guate- mala. A rediscount mechanism would be used. On-ranch development sub-loans would be extended to ranchers for a term of 12 years, including a 4-year grace period, at not more than 10% per annum. These sub-loans would finance pasture establishment and consolidation, fencing, watering points, farm structures, machinery, and breeding cattle. Participating credit institu- tions would complement development sub-loans with short-term loans, entirely from their own resources, to finance the incremental working capital during ranch development. iii. A Technical Services Unit would be established within the Ministry of Agriculture, responsible directly to the Vice-Minister of Agriculture. It would be headed by an experienced Project Director, internationally recruited, who would be assisted by a local staff. Development plans pre- pared by the technical staff and approved by the Project Director would be the basis for loan approvals by the Project Credit Committee. A Project Commission would coordinate Project activities. iv. The Project cost including incremental working capital, is esti- mated at about US$7.8 million equivalent. The proposed Bank Loan of US$4.0 million would finance the foreign exchange component of about US$2.6 million and US$1.4 million of local costs. A smaller loan, limited to the foreign exchange requirements of the Project, would fail to secure the active parti- cipation of Government and local credit institutions. This would not only  - ii - prevent the Bank from making an immediate contribution to Guatemala's econo- mic development through this high priority Project but, in addition, would jeopardize the opportunity of influencing the institutional reforms that would be necessary in later stages of Guatemala's Livestock Development Program. The contributions of the Bank, Government, participating credit institutions and ranchers would be 52%, 20%, 8% and 20%, respectively. v. Goods required for the Project would be procured through existing commercial channels. These channels are adequate, since there are several sufficiently competitive retail outlets for supplying and servicing most required goods, both local and imported. No discriminatory duties or quotas affect imported goods required for the Project. Disbursement of the loan would be for 75% of ranch development sub-loans approved by the Project Director and 100% of approved foreign exchange expenditures by the Technical Services Unit. vi. Expected benefits to participants and to the overall economy are adequate. The economic rate of return of the Project and the financial rate of return to ranchers on incremental investment are estimated at 20% each. Ranchers' cash balances after debt service, at full development, would be adequate to encourage their participation. After 10 years the Project would generate annually about 18 million lb of additional beef, equivalent to 24% of current national production. vii. The Project is suitable for a Bank Loan of US$4.0 million for a term of 16 years, including a 5-year grace period. The Borrower would be the Government which would carry the foreign exchange risk.  GUATEMALA LIVESTOCK DEVELOPMENT PROJECT I. INTRODUCTION 1.01 The Government of Guatemala has applied for a Bank Loan to provide long-term funds for livestock development on the Pacific Coast. It would be the first Bank Group operation in Guatemala for agricultural purposes. The Project would provide financial and technical assistance to ranchers in modernizing their livestock production techniques in order to realize the under-developed livestock potential of that area. The origin of the Project is the "Beef Cattle Program for the South Coast," prepared by the staff of the Bank of Guatemala. This Program contemplates financing about 1,000 ranchers on the Pacific Coast at a total project cost of about US$28 million including about US$15 million in external assistance. This Project is the first phase of that Program and would consist of financing the de- velopment of 300 ranches. It was prepared by an FAO/IBRD Cooperative Program mission that visited Guatemala in March 1969. 1.02 This report is based on the findings of a Bank mission that visited Guatemala in October-November 1969 and a follow-up mission in January 1970. The first mission, composed of Messrs. J. Gerring, J. Gregor, F. van Gigch (Bank) and J. Moffat (Consultant), was able to ascertain the technical and economic feasibility of the Project, but could not make a final judgement on Project lending channels. The follow-up mission, com- posed of Messrs. F. van Gigch and J. Gregor completed the appraisal. II. BACKGROUND A. General 2.01 Guatemala, the northernmost Central American country (see map), has a land area of about 109,000 km2 (42,000 sq mi). It is bound on the North by British Honduras and Mexico and on the South by Honduras and El Salvador. It has shores on both the Atlantic and Pacific oceans. Popu- lation, growing at an annual rate of about 3.2%, was estimated at about 5 million in 1969. About 50% are Indians, many of whom do not speak Spanish and are illiterate. 2.02 Real Gross National Product (GNP) has been rising during the 1960's at an average rate of about 4.0% annually and in 1969 was equivalent to about US$300 per capita. Agriculture and commerce contribute 28% each of Gross Domestic Product (GDP) and industry 15%. The development of the Central American Common Market (CACM) during the 1960's was a great stimulus to Guatemala's economy, particularly to industry and commerce which became its most dynamic sectors, growing at rates of about 7.5% and 6.2% per year, respectively. The decade was also characterized by remarkable price stabil- ity.  -2- 2.03 Export performance, which is essential to Guatemala, was good during the past decade. The volume of coffee and cotton exports, which together represent two-thirds of the value of all exports, expanded at an annual rate of 2.8% and 20%, respectively, between 1960 and 1967. However, the future of Guatemala's traditional exports is fraught with both market and technological uncertainties. Despite current high coffee prices caused by frosts in Brazil, future expansion of Guatemala's coffee exports is some- what limited by the International Coffee Agreement. Increases in the cost of cotton production, especially with respect to insect control, have slowed down growth rates which were spectacular in the past. It is therefore im- portant that non-traditional export avenues be fully exploited. An objec- tive of the proposed Project would be to enable Guatemala to take further advantage of its newly developed beef export market without sacrificing domestic consumption. This market was wholly developed after 1960 and in 1969 absorbed over 21 million pounds. B. Agriculture General 2.04 Agriculture's annual rate of growth was 3.9% over the period 1950/68. Export crops led by cotton grew fastest during this time, while growth in livestock production was the slowest, (less than 2% per annum) and was generated principally by the rapid development of poultry produc- tion. The production of "basic crops" for domestic consumption (corn, beans, wheat, sorghum, etc.) stagnated during the 1950's but grew vigorously thereafter, mainly because of increases in commercial production on the Pacific Coast. Despite encouraging growth in other sectors (para 2.02), agriculture continues to be the largest sector in absolute terms. It generates over 80% of exports and employs about 65% of the labor force. 2.05 Guatemala can be divided in three agricultural regions (see map): the Central Highlands; the Coastal Region, a discontinuous region compris- ing four states on the Pacific shores and the State of Izabal on the Atlantic; and the rain forest region of the Peten. The Central Highlands is the most populated region, containing more than 80% of all farm units that have an average size of about 6 ha (15 ac). The Coastal Region, which developed during the 1950's after the construction of the Pan-American High- way, is less densely populated than the Highlands and contains the largest proportion of commercial farms. The Peten is the least explored region of Guatemala and would require much improved physical infrastructure to ful- fill its economic potential. 2.06 The census of 1964 reported a total of about 417,000 farm units occupying almost 3 million ha (7.5 million ac). Land in farms represents about one-third of the country's total area. Although part of the remaining two-thirds is known to be unsuitable for farming, a considerable amount is still unexplored and is believed to include some areas that could be used  - 3 - for agriculture. Farming in Guatemala is performed by both subsistence and commercial farmers. Subsistence farming takes place on numerous small hold- ings, located mostlv in the highlands and operated by Indian families. It produces less than 20% of the value of agricultural output, the crops being mainly those for domestic consumption such as corn, wheat and beans. Be- cause land resources available to these farmers are generally insufficient for their support and employment, they are a source of seasonal migratory labor for commercial production of coffee and cotton. The subsistence sub- sector employs a primitive technology that is difficult to modify because of the problems of communicating with the numerous, dispersed and generally illiterate producers. As a result, its direct contribution to economic growth is small. Only 50,000 farmers out of more than 400,000 are commer- cial operators, and onlv about 10,000 operate holdings larger than 45 ha (110 ac). Export crops such as coffee, cotton and essential oils originate almost totally from commercial farms, which also produce wheat, corn, sorghum, fruits and vegetables, poultry, beef and dairy products for do- mestic consumption and for the CACM. Although a part of the commercial sub-sector, such as cotton farming, utilizes the most modern technology and is very productive, productivity is generally low measured by modern standards and is capable of vast improvement. Commercial farmers, however, control about 80, of the land and generate the bulk of agricultural pro- duction. They are at present the main source of agricultural growth. The Livestock Sub-sector 2.07 Livestock accounts for about one-fifth of total agricultural pro- duction. It has been, however, the slowest growing component of the agri- cultural sector (para 2.04). In particular, beef production is virtually at a standstill. The national herd, estimated at about 1.4 million head, has increased by only 1.7% annually over the last decade. The total number of cattle slaughtered increased from 185,500 in 1961 to 210,000 in 1967, the extraction rate 1/ decreased from 14% to 12%, and the average carcass weight of cattle went from 174 kg to 164 kg. Imports of feeder steers from Honduras and Nicaragua, via El Salvador, increased from 20,500 to 37,000. The boned-out meat production resulting from 37,000 imported feeder steers is equal to about 50% of the quantity of beef exported by Guatemala during 1969. Thus current levels of production are dependent upon imports of feeder cat- tle from neighboring countries; such imports, however, may become progres- sively more scarce as domestic demand expands in these countries and as they continue to develop their own meat export processing industries. 2.08 Cattle development is centered on the Pacific Coast, which con- tains more than half of the national herd. Land values are high but soils are fertile, climate is favorable and there is great potential for pasture development. Lack of infrastructure has limited attempts to expand cattle production in other regions. 1/ Total number of national cattle slaughtered annually expressed as a percentage of the national herd.  - 4 - 2.09 While levels of nutrition from pastures are generally adequate at current stocking levels during the rainy season, weight losses and mortality from nutritional stress often result in poorly managed herds during the 2-to-4-month dry season (para 3.04). Average weaning rates 1/ are about 50%. Although silage is known and some hay is made, forage conservation is not widely practiced, and fertilizers are seldom used on pastures. Private cattle farmers have made considerable investments in importing purebred livestock for upgrading native beef cattle. Normally, management rather than inherent potential of existing stock is the major factor limiting increased beef production in Guatemala. C. Animal Health 2.10 The main animal health problem is inadequate nutrition for the calves due to the "esquilmo" system of milking, whereby the calf is allowed to suckle only about 25% of the cow's milk (the rest is milked for the market), without receiving any suplementary feeding. This, together with poor pasture management, lack of legumes in the pastures and little or no forage conservation to cover dry months, results in high calf mortality, slow growth, poor reproductive performance and susceptibility to disease. Other major animal health hazards include internal and external parasites, anthrax, blackleg, hemorrhagic septicaemia, and malignant oedema. However, as a result of active promotional work by manufacturers and distributors of veterinary products, most ranchers have learned to control these diseases by using vaccines and parasiticides. The warble and horn flies which may cause physical and economic losses, can be checked by dipping or spray- ing. There is no foot and mouth disease in Guatemala and neighboring coun- tries, thanks to effective Government quarantine services. D. Agricultural Services 2.11 Livestock research is principally the responsibility of the Ministry of Agriculture, although the School of Veterinary Medicine of San Carlos University also runs some field experiments with grasses. Only a nominal amount of actual research is done, however, because of the scarcity of financial and experienced human resources. The budgetary allocation for 1969 allowed for only 18 technical and professional positionis for livestock research in the Ministry of Agriculture. The few experiments actually run consist of implantation of grasses and measurement of yields, but do not include evaluation of performance under commercial conditions. 1/ Weaning rate is the number of calves alive at weaning expressed as an annual percentage of the female breeding herd. Under modern management methods this rate often reaches 85% to 90%.  A real lack of technology and inadequate information on how to adapt tech- niques developed elsewhere, are serious limitations to improving livestock production in Guatemala. 2.12 The Ministry of Agriculture's Extension Service and about 12 other public agencies provide some sort of extension activity. The Livestock Division of the Ministry of Agriculture's Agricultural Development Service, for instance, provides artificial insemination services, sells low-cost pedigree cattle and pasture seed to producers and organizes occasional short courses for farmers. The scarce resources available to the Extension Service are spread thinly through 39 agencies, which are generally staffed with only one technician of high school vocational training level, and are geared principally to help the small farmer, emphasizing crop rather than livestock production. Thus, no extension is available to the commercial livestock producer other than that provided by manufacturers and distri- butors of veterinary products. A few large and dynamic livestock pro- ducers have developed their own sources of technological information and practice fairly modern and productive methods of animal husbandry. The majority, however, has no access to such information and operates very inefficiently. The lack of an adequate flow of information to ranchers explains the virtual stagnation of cattle production in Guate- mala despite exceptional natural conditions, good prices (para 4.01) and increasing credit (para 2.15). It also emphasizes the importance of com- plementing any livestock credit in Guatemala with agressive technical services as provided under the Project (para 3.13). 2.13 Adequate agricultural intermediate training, including specializa- tion in animal production, is supplied by the National School of Agriculture, administered by the Ministry of Agriculture. College agricultural education is provided in San Carlos University's Schools of Agronomy and of Veterinary Medicine and Animal Husbandry, which were created in 1950 and 1957, respec- tively. Up to the present, they have awarded about 100 degrees in agronomy and veterinary medicine. The curriculum for Animal Husbandry was started in 1968 and the first graduates are expected in 1971. The School of Vete- rinary Medicine has a good reputation in Central America, but the annual graduating class of about 8 to 10 veterinarians is insufficient to cover the needs of the livestock industry. However, there would not be any problem in securing the assistance of suitable local technicians for the Project, providing they are offered sufficiently attractive working conditions (para 3.15). Furthermore, Government is negotiating with UNDP to send two local technicians to Australia immediately to study tropical pasture management in view of forming, at an early date, the nucleus of the Project's local staff. E. Agricultural Credit Services 2.14 Agricultural and, in particular, livestock credit is provided by both public and private credit institutions. The banking system in Guate- mala is well developed and generally well represented by branches and  agencies throughout the country and in the Project Area. Annex 1 pro- vides details on the banking system and credit in Guatemala. 2.15 Aggregate credit to all sectors doubled between 1961 and 1968 to reach Q 138.1 million. While credit for livestock operations increased from Q 2.6 million in 1961 to Q 11.1 million in 1968, crop production credit stabilized at around Q 40.0 million and has decreased as a share of total lending (Annex 1). Practically all of the funds available to livestock producers are short term and almost invariably are used for cattle purchases, mostly weaners for fattening. If drawn from local resources, the cost of credit is 8% annually, plus another 4% to 5% for stamp duty, registration charges and legal fees, payable on annual renewal. This results in an ultimate annual cost to the producer of 12% to 13%. Banks also borrow ex- ternally, mostly from the United States. External lines from commercial banks are short-term and currently cost slightly over 9%. Local bankers may add a 2% spread over the external cost of borrowing. 2.16 Lines of credit granted by the Inter-American Development Bank (IDB) in 1966, for a total of US$6.0 million equivalent, represent virtually the only source of long-term loans available. These lines may be used for agricultural, livestock and industrial development for terms of up to 18 years. The yearly rate of interest to the producer is 8% if the loan is handled by state banks; however, loans handled in this way are limited to amounts under Q 15,000 (except in cases of cooperatives). All other loans from this source are channeled to the producer through the rest of the banking system at 9-1/4%. For loans of Q 30,000 and above the borrower also must pay consultant's fees for the preparation of a detailed investment plan and financial projections. These lines of credit include both a foreign exchange component that can be used only to finance imports, and a local currency component. The latter is practically exhausted at present. The current undisbursed balance is about US$2.1 million, most of which is eligible only for imports and which is, therefore, better suited to finance activities other than livestock production since comprehensive on-ranch development re- quires a high proportion of locally produced goods and services. 2.17 Slowly maturing investments, requiring long-term financing, in- cluding necessary grace periods, are the basis of lending for livestock development. Despite progress (para 2.15), financial support to livestock production has been inadequate to support vigorous growth. Furthermore, Guatemalan producers have lacked technical support in the planning and im- plementation of investment in livestock production. F. Government Policies 2.18 Agricultural programs in Guatemala fall into two categories: (a) traditional and (b) development. The first includes most of the services normally provided to agriculture by the public sector such as  extension, research, and education. The second consists of a series of agricultural diversification projects to encourage production of specific crops. 1/ To date, Government has been virtually passive in regard to livestock development (paras 2.11 to 2.13). Public action has been limited to making credit, mostly short-term for fattening (para 2.15), available through the Bank of Guatemala. However, the Government is becomimg more interested in developing the livestock industry in order to retain its beef export market without further sacrifice of the internal market (para 4.01). Accordingly, Government is anxious to start the proposed Project, which it regards as a first stage of a more ambitious beef development program. In addition, it expressed intentions of encouraging dairy production in the temperate western foothills and swine and sheep production in the Central Plateau. Preliminary estimates of the Agricultural Development Plan 1971/75, currently under preparation, show agricultural expenditures of about US$143 million, requiring about US$81 million in foreign assist- ance over the five-year period. About 13% would be for livestock development. 2.19 In compliance with its agreement to voluntarily restrain beef ex- ports to the United States, the Government established during 1969 a beef export quota of 21.4 million lb, which is allocated between the two Gua- temalan beef export concerns (para 4.02). Beef export quotas are not new in Guatemala. ro protect supply to the domestic market, the Government imposed them regularly prior to the agreement with the United States. Export quotas, however, were not set at levels sufficient to prevent ex- ports from growing faster than domestic production, with the result that, during the last 10 years, domestic prices have tended to go up (para 4.01). To further protect the domestic consumer, government has attempted to en- force beef price ceilings on all but superior cuts. Price controls, how- ever, are mostly nominal since actual prices are above ceilings. Periodical- ly, ceilings are adjusted to the level of existing prices. Government be- lieves that these ceilings, even though not enforced, serve as a restraint against unreasonable increases; it is satisfied with attaining this limited objective. Furthermore, there is general agreement that it would be politic- ally difficult to eliminate beef price controls altogether. Similar attempts in the past, in the case of milk, created such public reactions that Govern- ment had to withdraw its proposals. Although better market efficiency could be attained with free prices, the actual policy has not kept the producer from getting verv attractive prices (para 4.01). 2.20 The principal taxes affecting livestock producers are on property, sales and income. Property taxes have recently been doubled, as an emergencv measure, to 0.6% on the assessed value of the properties. Moreover, the assessed value of properties is generally well below market prices, although there is a reassessment whenever the property is sold. There is a 1-1/2% sales tax on any transaction. All producers achieving a gross income from agriculture of Q 15,000 or more are required to file an income tax. During 1968 about 1,300 farmers filed income tax returns, about 850 of whom had to pay taxes. 1/ On-going projects include bananas, plantain, avocado, citrus and deciduous fruits, flowers and vegetables.  - 8 - III. THE PROJECT A. Description 3.01 This Project is designed to increase beef production in Guatemala through better utilization of the livestock resources of the Pacific Coast. It is expected to be the first stage of a long term livestock development program (para. 1.01). The Project would provide about 300 beef breeding/ fattening ranchers with credit and technical services to introduce more productive pastures and superior herd management methods, including pro- gressive elimination of the "esquilmo" system of production (para 2.10) in order to raise calving percentages, reduce mortality and increase sub- stantially the number of slaughter stock available for sale. Credit would be channeled by the banking system (para 3.12) utilizing the rediscount facilities of a Livestock Development Fund at the Bank of Guatemala (para 3.11), while the required technical services would be provided by a Techni- cal Services Unit (para 3.13) established in the Ministry of Agriculture. A Project Commission, at ministerial level, would coordinate Project activi- ty (para 3.17). It is expected that 120 ranchers would join the Project during the first year and 180 during the second. Investment in each parti- cipating ranch would be phased over 3 years (Annex 2, Table 1) and total disbursement is expected to take 4 years. 3.02 Under the Project, commercial ranches (350-ha modal size), would receive long-term sub-loans, phased over 3 years, to finance fencing, pas- ture establishment and consolidation, watering points, ranch structures, selected farm machinery and breeding cattle (Annex 2, Table 1). In addi- tion, short-term financing would be provided to participating ranchers during the first years of ranch development to cover incremental operating expenditures, and the purchase of fattening steers to utilize surplus feed during the herd build-up. The proceeds of the proposed IBRD Loan would be applied to finance long-term sub-loans and Project related technical ser- vices while short-term financing would be completely supplied by partici- pating banks from their own resources. 3.03 The Project would also provide for training local technicians outside of Guatemala and conducting pasture management and utilization field trials in the Project Area (Annex 3). B. Project Area 3.04 The Project Area would be the Pacific Coastal Plains, which stretch from Mexico to El Salvador over approximately 11,000 km2 (4,500 sq mi) 250km long by 30 to 50km wide (map). The Area is tropical, but with variable rainfall. The southern tier receives between 1,700 mm and 2,500 mm rainfall and has a marked dry season that runs from November to  - 9 - March. The rest of the Coastal Plains have annual rainfalls of 3,000 to 4,000 mm, with only 3 dry months (November to January). Soils are gen- erally fertile and adequately drained, except those nearest the coast where seasonal inundations often occur. Throughout the Project Area, the original tropical forest has been largely cleared. The vegetation now consists mostly of crops and pastures. The principal crops are cotton, maize, citronella grass and sugarcane. The most common cultivated grasses are pangola, guinea, jaragua, African star, para, and signal. 3.05 There are some 2,200 farms of 45 ha (110 ac) and larger in the Project Area; 1,500 are livestock breeders. Normally, livestock breeders run a dairy/breeding operation ("esquilmo"), selling off the young steers no older than 18 months. Under the Project, breeders would be encouraged to fatten their own steers and gradually phase out milking. A Government sur- vey indicates that there would be no problem in securing 300 eligible ap- plicants during the first two years of the Project. This was later con- firmed by bankers and field visits. 3.06 The Project Area has good access to markets via a good road network based on the Pan-American highway. Project technicians would find adequate living conditions and easy access to any participating ranch from the Project Area's towns of Escuintla, Retalhuleu and Chiqui- mulilla. C. Cost Estimates 3.07 The estimated Project cost, including incremental working capital, is US$7.75 million. For the purpose of this Project, incremental working capital is defined as the amount of money required by a typical participat- ing rancher (Annex 2) to achieve an annual cash balance after debt service no smaller than that before development. Thus it is computed as a residual from the ranch development model's financial projections (Annex 2, Table 4). It is estimated that, on the aggregate, participating ranchers would require an average annual incremental working capital of about US$0.9 million equi- valent over the 4-year disbursement period. The Project's estimated direct foreign exchange component is about US$2.6 million. This is equal to about 33% of Project cost including working capital, although an additional US$0.6 million would be required during the disbursement phase to cover interest and commitment fees on the IBRD Loan. Cost estimates are based on prevailing local prices and include a contingency allowance of about 10%. The following table summarizes the estimates of the Project costs by major investment cate- gories:  - 10 - US$'000 V/ Z/ % Foreign Item Local Foreign Total Exchange On-Ranch Development Costs Pasture Establishment 650 820 1,470 Pasture Consolidation 170 250 420 Fencing 290 160 450 Watering Points 110 130 240 Farm Structures 350 213 563 Machinery 280 560 840 Cattle 1,800 - 1,800 Contingency - 360 217 577 Sub-total 4,010 2,350 6,360 37 Technical Services 310 180 490 37 Project Cost 4,320 2,530 6,850 37 Working Capital - 900 - 900 - Total Requirements 5,220 2,530 7,750 33 1/ Figures are rounded and do not include commitment fees and interest on the IBRD Loan during the development period. 2/ The Quetzal, Guatemala's currency, is at par with the US dollar. 3/ The foreign exchange content of the contingency allowance is propor- tional to the average foreign exchange content of overall on-ranch investment. 4/ Average annual incremental working capital requirement of the Project during the disbursement period. D. Proposed Financing 3.08 The estimated Project cost and incremental working capital of US$7.75 million would be financed as follows:  - 11 - Participating Category IBUJ Banks Ranchers Government Total