Ecuador - Third Livestock Development Project

at7 2 R = RESTRICTED Report No. PA- 3 5a 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 The report may not be published nor may it be quoted as representing their views.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 THIRD LIVESTOCK DEVELOPMENT PROJECT ECUADOR November 10, 1970 Agriculture Projects Department  CURRENCY EQUIVALENTS After-Devaluation (August 17, 1970) US$1 -= Sucres 25.25 Sucres 1 - US$ 0.04s Sucres 1,000,000- US$39,60oo00 Before Devaluatioz US$1 - Sucres 18.18 Sucres 1 - US$ .05- Sucres 1,000,000 - US$55,0O.9,00 WEIGHTS AND MEASURES Metric System 1 kilogram (kg) - 2.20 poun4s- 1,000 kg - 1 metric ton 2,200 pounds 1 kilometer (km) o 0.62 dile. 1 hectare (ha) 2 -2.47 acies 1 square kilometer (km 100 ha - 0.39 square mile = 247.11 acres 1 liter (1) - 0.26 gallon 1,000 millimeters (mm) - 39.37 inches GLOSSARY OF ABBREVIATIONS AU - Animal Unit CB = Central Bank COFI3C - Development Finance Company (Ecuatoriana de Desarrollo, S.A. - Compania Financiera) FIMD - Foot-and-Mouth Disease GDP = Gross Domestic Product IDB - Inter-American Development Bank INIAP - National Institute of Agriculture Research TDB = National Development Bank (Banco Nacional de Fomento)  ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .................... ................ i I. INTRODUCTION .1 II. BACKGROUND .1 A. General. 1 B. Livestock Sub-Sector. 2 C. Animal Health ................., 3 D. Agricultural Services ................ q .......... 4 E. Agricultural Credit ................... . .......... 4 F. Government Policies for Livestock Development .. 5 G. Performance Under Loan 501-EC .... ............... 6 H. Interim Second Livestock Development Project Credit 173-EC ................................. 7 III. THE THIRD PROJECT ................................... 8 A. Project Description ............................. 8 B. Detailed Features ............................... 8 C. Cost Estimates .................................. 12 D. Proposed Financing .............................. 12 E. Procurement ..................................... 14 F. Disbursements from the Credit Account .... ....... 14 G. Auditing ........................................ 15 H. Organization and Management .... ................. 16 I. Lending Operations .............................. 17 IV. MARKETS, PRICES, TAXATION AND PRODUCER BENEFITS 19 V. BENEFITS AND JUSTIFICATION .......................... 21 VI. RECOMMENDATIONS .22 This report is based on the findings of a mission composed of Messrs. F. Knobel, D. Ritchie (IDA), R. Milford (Consultant) and C. Percival (Con- sultant), who all contributed to the report but with Mr. Knobel having primary responsibility.  -2- ANN IX i';s 1. Organization Chart - Ministry of Agriculture and Livestock 2. The Banking System Table 1 - Annual Volume of Credit Granted by Sector by Principal Cre(lit Institutions, 19614-1968 Table 2 - Condensed Balance Sheet of !flnvisaged Participating Banks, June 30, 1969 Table 3 - Consolidated Annual Profit and Loss Statement 1964-1969 Table 4 - NDB - Comparative Condensed Balance Sheetj 196L4 and l968 3. Tnvestments Financed and Sources of Finance, Loan 501-m:(1 4. Model 1 - Development of Beef Breeding/Fattening Ranch, 300 HTa Table 1 - On-ranch Investment Cost Projections Table 2 - Herd Dcvelopment Projections Table 3 - Projections of Sales and Operating Fwepnsos Table 4z - Financial Projoction 5. Capital tRequirements for Feeder Steers 6. fiodel 2 - Development of Dairy Farm, 600 Ha Table 1 - On-farm Investment Cost Projections Table 2 - Herd Development Projections Table 3 - Projections of Sales and Operating ibxpenses Table 4 - Financial Projection 7. Technical Services Budget - INIAP 8. Technical Services Budget - Department of Seed Certification 9. Technical Services Budget - National Development Bank 10. Technical Services Budget - Project Administration 11. Disbursements Table 1 - Phasing of Project Investments and IDA Disbursements Table 2 - Estimated Schedule of Quarterly Disbursements 12. Organization Chart for the Project 13. Duties, Responsibilities and Authorities of the Project Director l]h. Projected Sources and Application of Funds - Central Bank 15. Projected Sources and Application of Funds - Participating Banks 16. Major Processing Facilities: Pasteurizing Plants and Slaughter Houses 17. Basic Assumptions on the Effect of Devaluation 18. Financial Rate of Return of Ranch/Farm Models 19. Incremental Costs and Benefits MAP - Project Areas  ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT SUOMMARY AND CONCLUSIONS i. The Government of Ecuador has requested an IDA credit to continue its program of livestock development. The Project for which financing is sought would be the third livestock project supported by the Bank Group in Ecuador. The first two, Loan 501-EC approved in 1967 and an interim Cre- dit 173-EC, provide funds primarily for development loans to beef cattle ranches in the Coastal Region. ii. The Third Project would continue to finance beef cattle develop- ment in the tropical Coastal Region but would expand the lending program to include dairy farms in the temperate Sierra Region. Development loans would be made to approximately 350 beef cattle ranchers and 225 dairy farm- ers for on-ranch investments, including agricultural machinery and equip- ment, pasture improvements, fencing, water facilities, buildings, and live- stock. iii. In addition to the finance for beef ranch and dairy farm develop- ment, proceeds from the Credit would be used to help finance: (a) pasture and beef cattle research and a beef ranch management training center within the National Agriculture Research Institute (INIAP); (b) a seed multiplication and certification service in the Ministry of Agriculture and Livestock; (c) technical assistance to help modernize the business operations of the National Development Bank (NDB); and (d) technical services for Project administration and execution. iv. Total Project cost would be about US$19.7 million: US$16.5 mil- lion for beef/ranch dairy farm development, US$1.5 million for the INIAP and the seed and the NDB programs, and about US$1.7 million for other technical services. The IDA credit of US$10 million would finance 51% of total Project cost; participating banks would finance about 25% by provid- ing about US$5 million; ranchers and farmers would contribute about US$3.9 million (20%); and the Central Bank would provide US$0.8 million (4%). The foreign exchange component would be approximately US$5.8 mil- lion, or about 30% of total Project cost and about 58% of the Credit. Financing local costs of approximately US$4.2 million would assist Ecuador to bring about desirable improved production practices in the livestock industry and diversifications of marginal banana plantings.  - ii - v. Proceeds from the IDA credit for beef ranch and dairy farm devel- opment would be made available by Government to the Central Bank for on- lending to participating banks. The banks would pay 8% per annum on IDA funds on-lent by the Central Bank, and would grant loans to beef ranchers and dairy farmers at 12% interest, with repayment periods of 7 to 12 years, including grace periods of 2 to 5 years. IDA funds for the INIAP, seed multiplication, NDB and Project Director components of the Project would be interest-free grants by Government. vi. Authority for policy coordination and supervision of the Project would be vested in a National Project Commission representing tile various institutions concerned with livestck development in Ecuador. A Project Director, assisted by two Regional Technical Directors, would be responsibie for the management and execution of the Project. Under their supervision, technical assistance to beef ranchers and dairy farmers for the preparation and supervision of development plans would be provided by livestock techni- cians employed by participating banks and seconded to the Project Director. vii. Vehicles required for technical services would be procured through local competitive bidding. Goods required for ranch and farm development would be purchased by Project beneficiaries from local commercial sources. viii. The rate of return to the econiomy of the Project would be about 22%. The financial rate of return to the producer is estimated at about 21% for the beef model enterprise and 41% for the dairy model enterprise. In addition to substantial increases in net income expected to be realized by participating ranchers and farmers at full development, the Project would generate substantial increases in the supply of milk (an additional 40 million liters annually) and beef products (an additional 7,500 metric tons annually) for a population with one of tthe highest growth rates (3.4%) and lowest levels of per capita beef consumption (7 kg) in Latin America. ix. The Project is suitable for an IDA credit of US$10 million. The Borrower would be the Government of Ecuador and it would assume the foreign exchange risk.  ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT I. INTRODUCTION 1.01 The Government of Ecuador has requested an IDA credit to help finance the continuation of its program for livestock development. This was initially supported by a Bank loan of US$4 million (Loan 501-EC), approved in 1967, and an IDA credit of US$1.5 million (CR 173-EC) approved in September 1969. The objective of both projects is to assist in the dev- elopment of the beef cattle sub-sector in the Coastal Region, the principal beef producing area of Ecuador. Loan 501-EC was a first-stage project, designed to obtain experience in the development of the livestock sub-sector and also to provide a sample survey of the livestock industry to serve as the basis for further Bank Group financing. It was fully committed 6 months in advance of the 2-year forecast. The interim Credit was made to fulfill the strong demand for long-term development credit by beef cattle ranchers, pending the preparation by Government and consideration by IDA of a third livestock project (see PA-17a, July 19, 1969 for details of the Interim Second Livestock Project). 1.02 The First Project was prepared by the National Planning Board, assisted by two IBRD missions in 1966. Tle Second Project was prepared early in 1969 by the Project Director (Loan 501-EC) and an IBRD mission; and the Third Project was prepared by a Special Commission within the National Planning Board, assisted by the Project Director and an IBRD mis- sion. The Tlird Project would continue to assist the beef cattle program but in addition would include development of the dairy sub-sector, Sierra Region; the expansion of Project-oriented research and training in animal production; and the establishment of a seed multiplication and certification scheme. 1.03 This report is based on the findings of a mission led by F. Knobel (IDA) and composed of D. Ritchie (IDA), R. Milford (Consultant) and C. Per- cival (Consultant), which was in Ecuador in September/October 1969. Since completion of the appraisal. the sucre was devalued about 39%. The pro- jections made in this report have been tested against the possible impact of the devaluation. Based on the revised estimate the Project continues to show a strong economic and financial justification. II. BACKGROUND A. General 2.01 Ecuador, one of the smallest countries in South America, is bounded by Colombia, Peru and the Pacific Ocean. Its land area of about 275,000 km2 is divided into three natural regions: the western tropical lowlands, the Coastal Region; the central temperate highlands, the Sierra  - 2 - Region; and the eastern wet tropical lowLand, the Oriente Region (see Map). Land use -and populacion distribution are determined by altitude, rather than latitude (the Equator bisects the northern part of 1icuador). a<; well as topograr?hiv, climate and the influence of the flumboldt current. 2.02 Population, now estimated at close to 6 million, is increasing at about 3.4, .unually. Approximately two-thirds is rural., with about 557. of the labor fo-ce *engageu in agrlculture, including livestock, forestry and fisheries. While average population densitv is low, there are areas of over-population, especially in the Sierra Region, which contrast with extensive uninhabited areas in the Coastal and Oriente Regions. 2.03 Agriculture is tne most important factor in thek Ecuadorian ecrcn- omy. It generates about one-third of the! Gross Domestic Product (CDP), or roughly twice that produced by the industrial sec:tor aud it (ontributes nearly 90'%0 of foreign exchange earnings. bananas, cacao ancd coftee account for over 80% of total exports. Agricultural output, however, has increased at a rate of only 2.5% per year iii real terms from .1960-62 to 1966-68. Al- though the Gross National Prodluct grew at an annual rate of about 4.5% during the l9t9's, Ecuador remains one of the poorer coumtries of Latin America, with a per capit:a cU i f.f about irS$220. !I.- Lvestock Sub--Sector 2.04 While the livestock sector contributes only about 7% of GDP, it is expected to play an increasingly important role in the development strategy. Major objectives of thie new Development Plan include diversifi- fication of production, increased exports, higher agricultural incomes and improved levels of nutrition. The livestock sector is planned to grow at 8.7% per year, primarily through private investment supported by improve- ments in the availability of credit, technical services and research facil- ities. At this rate, the Plan estimates that beef consumption would in- crease 11% and milk consumption 17% by 1973. Beef Cattle 2.05 The national herd of about 1.8 million cattle, is approximately 65% beef cattle, most of which are in the Coastal Region. Only small numbers are found in the Sierra highlands and the Oriente Region. About 1.5 million ha of improved and natural pastures are devoted to beef produc- tion in the Coastal Region but this area can be expanded by developing 0.5 million ha of forest land and by converting about 0.1 million ha of margin- nl basnna land into pastures. 2.06 Native cattle breeds (Criollo) comprise about 657 of the animal population. These are being improved by the introduction of Brahrman and Santa Gertrudis bulls. Carrying capacity averages 1 animal umit (AU) 1/ per ha. 1/ 1 animal unit (AU) is equal to each animal in the herd except suckling calves.  - 3 - 2.07 Around 200,000 cattle are slaughtered anniually. An offtake of about 12% indicates the present low level of productivity. Withl better animal husbandry practices and basic capital investments, producers could readily attain offtakes of 20% or more. Out of a total meat consumption of 12 kg per capita, beef represents only 7 kg, one of the lowest levels in South America. 1/ Except for small quantities exported to Peru, Ecuador consumes all the beef it produces. Despite high consumer prices in relation to low average incomes, domestic demand is higlh, particularly in the two main cities of Quito and Guayaquil. Dairy Cattle 2.08 The dairy industry comprises some 600,OOU cattle. Practically all thie milk is produced in the Sierra Region, and levels of output vary widely. Cattle are predominantly liolstein/Friesian, either pure or up- graded Criollo, with a high production potential. Specialized dairy farm- ing is generally confined to the interandean valleys. 2.09 Total milk production is estimated at 600,000 liters per day, or about 3 liters per cow. About half is pasteurized and consumed mainly in Quito and Guayaquil, either as whole milk or milk products. The remainder is consumed in the smaller towns as raw milk or used for on-farm production of cheese and butter. 2.10 Substantial increases in dairy production are possible as there are no serious teclnical barriers. The main problem, however, is the poor quality of the pastures due to low grade seeds and need of fertilization. C. Animal Realth 2.11 Poor management associated with poor nutrition is reflected in low weaning rates of 50% to 60% (calves weaned per 100 cows) and retarded slaughter age (3 to 4 years) on Coastal beef ranches and high calf mortal- ity and low milk production on Sierra dairy farms. 2.12 rhe thlree major animal healtlh problems are: foot-and-mouth disease (FMD), tick infestation, and internal parasites. "ID is endemic in Ecuador and control through a national vaccination campaign is to be undertaken whien funds and technical assistance become available from the Inter-Ame ican Dev- elopment 13ank (IDB) and UNDP. Increased imports of vaccine are scheduled as an interim measure to supplement local production. Meanwhile, since it may be some time before a nationwide program would be fully operational, effec- tive control measures for Project ranches/farms would be obtained by a com- pulsory EMD vaccination program for all cattle on Project ranchies/farms. Assurances to this effect were obtained durina' negotiations. 1/ Bolivia, 8 kg; Colombia, 20 kg; Argentitia, 80 kg.  - 4 - 2.13 Tick infestation, particularly in the Coastal Region, can cause serious losses where frequent dipping is not practiced. Facilities are provided on Project-financed ranches. Improved grazing management and adoption of prophylactic measures to control internal parasites could con- tribute significantly to reducing the calf mortality rate. There is test- ing for eradication of tuberculosis in dairy cows, and heifers are vaccinated against brucellosis, using vaccine produced locally. D. Agricultural Services 2.14 Most agricultural services responsible for the development of the livestock sector are provided by specialized semni-autonomous agencies with- in the Ministry of Agriculture and Livestock, particularly The National Agri- cultural Research Institute (INIAP) and the Center of Animal Healthl. Bilat- eral and international agencies (Netherlands Government, FAO, UNDP, US-AID and Rockefeller Foundation) as well as the banking system and private specialists provide assistance in certain specialized fields, such as research and training. Agricultural services in the past have been inadequate, mainly because of the lack of financial and physical resources rather than shortage of staff. 2.15 The extension services of the Ministry of Agriculture and Live- stock, with provincial and sectional offices throughout Ecuador, provide livestock and veterinary services. A new Seeds Department within the Minis- try promotes the availability and use of good quality pasture and crop seeds through seed certification. Annex 1 shows the organization of the Ministry of Agriculture and Livestock. 2.16 Well organized national research services are provided by INIAP, which operates five research stations. It has an excellent dairy husbandry research and farmer training school at Santa Catalina Experiment Station, near Quito. This program, established in 1967 with Netherlands Government bilateral aid, is being phased out in 1970. A continuation of this desir- able program is included in the Project. An expanded tropical beef cattle husbandry research program and a new ranch management training center is planned at Pichilingue Experiment Station in Los Rios Province. It would also receive Project financial support and technical guidance. Two major and five smaller universities in Ecuador provide undergraduate training in agriculture and veterinary medicine. Twelve middle level institutions, under the control of the Ministry, offer diploma courses in agriculture. E. Agricultural Credit 2.17 Institutional credit for agriculture and livestock comes princi- pally from: private commercial banks, the Government National Development Bank (NDB) and the Central Bank. Although the private banks provide the greatest amount of annual credit, NDB, through its countrywide system, is  - 5 - the principal institution concerned with providing medium- and long-term credit for agricultural development. Traditionally, the bulk of credit granted by private banks goes into the intermediary trade channels of pro- cessing and marketing; only a small part goes to the producer. Generally, loan terms are under 1 year at 12% interest per annum. Maximum nominal interest rates are fixed by the Monetary Board, but when commissions of 1% to 2%, tax levies of 1.5% to 2% per transaction, and discount of these charges, plus interest for the entire term of the loan are all considered, the effective cost is around 18% per annum. 2.18 Total agricultural credit granted annually by the banking system about doubled between 1964 and 1968 from S 510 million (US$28 million) to S 1,070 million (US$59 million) (Annex 2, Table 1). However, the agricul- tural sector receives only about 15% of the total credit to all sectors. This is strikingly low when it is considered that the agricultural economy accounts for about one-third of GDP (para 2.03). More than one-half of all credit goes to the commercial sector and about one-fifth to the industrial sector. Agricultural suppliers' credit is slight, but borrowing from tradi- tional private lenders is common among low-income rural families. 2.19 Generally, private commercial banks have not granted medium- and long-term loans for development purposes. This is due, in part, to statu- tory restrictions. Article 172 of the General Banking Law for private com- mercial banks (Annex 2, pp. 14 to 21) sets a term tip to 5 years without a grace period. To enable conmercial banks to make Project loans of 7 to 12 years, including grace periods of 2 to 5 years, it would be necessary to amend this regulation. During negotiations, assurances were obtained that Government would amend Article 172 to enable privatr coimmercial banks to make long-term ranch/farm development loans in accordance with Project criteria. 2.20 NDB and Ecuatoriana de Desorrollo, S.A. (Compania Financiera), called COFIEC, are the only credit institutions participating in the First and Second Projects. Several private commercial banks expressed interest in participating in the Third Project. Private banks tend to concentrate their operation in the principal cities of Guayaquil, Quito, Cuenca - but they are opening branchies. It is anticipated that the private banks would make about 40% and COFIEC about 10% of the long-term development loans. The other 507 would be made by NDB. Tnis would give an adequate and com-- petitive coverage in Project areas. Annex 2 contains further information on the banking system in Ecuador. F. Government Policies for Livestock Development 2.21 Government realizes the necessity of increasing the food supply and also recognizes tthe importance of expanding the volume and variety of exports to reduce its dependence on bananas, coffee and cacao. The live- stock sub-sector is expected to play an increasingly important role in accomplishing these objectives.  - 6 - 2.22 The 1969-1973 National Development Plan (Plan), prepared by the National Planning Board, accords high priority to livestock development and sets these production targets for the beef and dairy cattle sub-sectors: value of livestock production is planned to increase 8.7% per annum com- pared with 5.47 for agriculture overall; and the area devoted to pastures is expected to increase at three times the rate of that used for annual and perennial crop production. The Plan sets an annual growth target for the national herd of from 1.8% in 1969 to 2.4% in 1973. It also projects a 2% annual increase in the output rate of beef cattle and a 14% annual increase in milk production per dairy animal by 1973. According to the Plan, achieving these production levels would result in increases in per capita consumption of beef from about 7 kg per year to 7.8 kg, and of milk and milk products from about 73 liters to 86 liters in 1973. 2.23 Central Government expenditure for agriculture is less than 11% of total spending, and tthe perceintage has been declining since 1965. Pub- lic spending for lixvestock is only about 1% of the total. oIn tle other hand, the Goverinmenit has taken measures to encourage private investment in livestock by eliminating import duties on agricultural machinery and breed- ing stock and providing liberal tax rates and exemptions for farm enter-- prises. Also, lt has required private lending institutions to make 15, of their deposits available as credit to agriculture, and has reorganized the Agrarian Reform Institute to expedite reglstration of land titles. 2.24 The Third Project would finance the entire investment program for beef and dairy development enivisaged in the Plan. Government's major contribution would be to improve the existing facilities for research and strengthen both animal Ihealth and extension services. C. Performance Under Loan 501--EC The Project 2.25 The First Project (Loan 501-ElC), confined to the Coastal Region, concentrated oni the improvement of established commercial beef cattle ranches. An additional objective was diversification from bananas. Loan funds for long-term ranch development were provided 75% by IBRD and 257. by NDB and COFIEC, which also provided shlort-term working capital. Technical services were also supplied to participating ranchers. The Project included a modest tropical grass research program and seed multiplication scheme and a countrywide livestock survey to provide information for a later, more comprehensive project. Performance 2.26 Within 18 months after the Loan became effective in December 1967, all funds allocated for ranch development (US$3.7 million) were committed for the furtlher development of 132 beef ranching enterprises. The total  value of new investments is US$6 million, including the contribution of NDB, COFIEC, and ranchers. Loans ranged from US$6,500 to US$100,000 in size and averaged about US$35,000. Annex 3 shows the categories of new ranch invest- ments and the sources of financing. 2.27 Whien the appraisal was made in 1966, it was forecast that about 240 loans would be granted. At that time there was little information to assess the scope and range of participation. Furthermore, since the ap- praisal, there was marked inflation in Ecuador and the costs for most input items substantially increased over the estimates. Prices for cattle in- creased about 30%. Also, per unit costs for pasture establishiment increased, brought about, in part, by a greater participation than anticipated by ranchers in the northern Santo Domingo/Esmeraldas area where most lands cleared had been heavily forested. Clearing costs in the southern Guayas area are much lower since the plant coverage is open to semi-brush. In- creased input costs have been largely compensated by a corresponding in- crease in output value. Beef prices have increased 30% since Project effec- tiveness. Evaluation of Impact of Project 2.28 Although the Project is too new to fully measure financial and economic gains, available information indicates that substantial benefits will accrue to the Project's beneficiaries and to the country's economy. Ranch development plans show a financial rate of return of 15% to 20% on new investments and Project administration and management are good. The Project has also been timely in two major respects. First, a severe drought in 1967/68 in two provinces made it necessary to move female breeding stock to other Project provinces where rainfall was normal; sonme 5,000 heifers, many of which would have heen slaughtered without the Project, were placed on Project ranches. Second, the Project assisted in diversifying the de- pressed banana economy. Several ranch development plans are being carried out to convert banana land to pasture. 2.29 The small Project component for the tropical grassland/beef cattle research program and seed multiplication scheme got underway at Pichilingue Experiment Station. I\wenty trial plots of 0.5 ha of grasses and legumes, established early in 1969, have given results that will be useful in expanding the scheme under the Third Project (para 3.08). 1t. Interim Second Livestock Development Project Credit 173-EC 2.30 Early in 1969, the Government requested additional funds to con- tinue the program initiated under the Loan. To prevent a gap in the Lend- ing Program between the First Project and the next, an interim 12-month project was prepared (Credit 173-EC). It covers the period between total commitment of Loan 501-EC and IDA consideration of the Third Project.  2.31 The Credit of US$15 million is to be used under the same criteria, conditions and areas as tihose applied to Loan 501-EC. There is a continuing strong demand for long-tern finance and over 50% of the Credit has been committed. III. THtE THtRD PROJECT A. Project lescription 3.01 The Third Project would consist of ttLt- following: (a) Development of about 35(0 beef raniches in the Coastal 'legion (Ainex 4); (b) Finance for purchase of feeder steers (Annex 5); (c) Development of about 225 dair-y farnu in the Sierra region (Annex 6); (d) Expansion of a tropical pasture/beet research unit and establishment of a beef cattle Vianagement training center within TN IAP (Annex 7): (e) Establishment of a scheme for seed multiplication, pro-- cessing and certiitcatiton servtccs withiin t!he Miiiiistry of Agriculture and Livestock (Annex 8); (f) Improvemetit of the husiness operations of WNVP (Annex 'i); and (g) Teclnical services for Project administration and execution (Annex 10). B. Detailed Features Beef Ranch Development - Coastal Region 3.02 This sub-project would continue the lending program for develop- ment of beef cattle production initiated under Loan 501-EC and supplemented with Credit 173-EC. A limited lending program outside of the Coastal Region (Sierra, Oriente) may be considered, provided that, within the judgment of the Project Director and with the approval of the Project Commission, such would be administratively, financially and technically feasible. The tro- pical Coastal area consists of about 60,000 km2, occupying most of the country to the west of the steep Ajndean slope (see Map). Tlere is a variable  -9- annual rainfall of 500 to 3,500 mn, resulting in zones that range from semi- arid to tropical rainforest. Most cattle are located in the wetter zones. Beef ranching could be expanded by developing unused forest lands and con- verting crop lands, e.g., bananas, where returns have become marginal. 3.03 Pasture species and productivity vary widely according to rain- fall, soils and management. The basis for cheap beef production is pasture, and more emphasis would be placed on the introduction of legumes and the sowing of pasture mixtures appropriate to the various environmental con- ditions. With existing pastures, present estimated stocking rates of 0.5 AU per ha for the dry zones and 2 AU per ha for the wet zones could be more than doubled. Most cattle are on ranches varying from 200 to 1,500 ha, depending on amount of rainfall. 3.04 Investments that have proved necessary and effective for the First Project would be continued. These include pasture establishment and renovation, purchase of cattle, fencing, water supply, stock handling facilities, dips, scales, machinery and functional buildings (Annex 4, Table 1). Pasture development would require the initial importation of quantities of tropical legume seeds. However, participating ranchers would sow areas specifically for seed production to ensure self-sufficiency at the ranch and national level. 3.05 Land possession is usually by title but in some areas (Esmeraldas), it is held by right of customary use. Titles are being legalized on a cadas- tral basis, and ranchers can obtain title acceptable for long-term loan collateral. Dairy Farm Development - Sierra Region 3.06 This new program would increase milk production on existing dairy farms located in the interandean valleys and associated slopes in the pro- vinces of Carchi, Imbabura, Pichincha, Cotapaxi and Tungurahua (see Map). Annual rainfall varies from 400 to 800 mm, according to area. Pastures consist of mixtures of temperate species and in dry areas production is maintained with irrigation. Present annual production from unimproved pasture of about 1,000 to 1,500 liters per ha could be increased two to four times by improving pasture and herd management. Initial heavy phosphate fertilizer application, along with the introduction of white clover and good quality perennial grasses, would increase carrying capacity from around 1 to 1.5 AU per ha to over 2 AU per ha. 3.07 Principal investment items would include reseeding, application of phosphate fertilizer, fencing, water supplies, machinery and equipment, farm buildings and local breeding stock (Annex 6, Table 1). While the pasture improvement program would require the initial importation of quanti- ties of temperature pasture seeds, particularly perennial rye grass and white clover, local production on Project farms would eventually meet needs. Adequate commercial channels exist to import and distribute seeds.  - 10 - Tropical Pasture/Beef Research Unit an4d Rauil Management Training Center 3.08 lhe tropical pasture/beef unit, administered by INIAP at Piclli- linque Fxperiment Station, would be expanded under the Tlird Project. Thle program would be production-oriented to help ranichers increase productivity throughl better management and better pastures. INIAP would establish a Researchli Planninig Coimittee witii the Project Director as one of the wembers. An internationial plant nutrition specialist would provide consultanit services equivalent to about 2 man-years. lie would conduct field research on pasturei establishment and maintenance, initially in the dairy areas of thle Sierra Rxegion but tie would also initiate investigations in the beef cattle areas of thle Coastal Region and in the Paromo Zones of the Sierra Region. Addition- ally, he would train station staff in researclh teclniques. Oine member of tiie unit's staff would be sent overseas for about 2 years trainiug in plant nutrition. 3.09 A ranch management training center would be established to offer short courses in all aspects of ranch management and production for Project technicians, administrators, ranchi owners and foreman. 1wo iLiternational experts would be employed, one a specialist in beef htusbandry training and the other in livestock production economiics and farm management. These specialists, who would be required for about 3 man-years, would assist in the planning and teaching of training courses, would train icuadorian coun- terparts and would evaluate the impact of the three projects on livestock development. Additionally, about four miiembers of thie Training Center would be sent overseas for 6 to 12 months' training. 3.10 Technical assistance would also be given to the dairy training center at Santa Catalina Experiment Station by an international expert in dairy husbandry management. He would train Ecuadorian counterparts to take over the full training program in about 3 years. This would be a continua- tion of the program started under bilateral aid in 1967 (para 2.16). Improved Seed Multiplication Scheme 3.11 The Project would provide funds for the Department of Seed Cer- tification, Ministry of Agriculture and Livestock, to establish facilities for seed production, processing, storage, testing and certification and for overseas training of local staff (Annex 8). Ecuador today lias no seed certification program, but such a program would ensure supplies of quality pasture seeds for the Project as well as better quality seeds for general agricultural crops. 3.12 Two seed testing laboratories would be established, the major one in Quito (Sierra Region) and a smaller unit in Quevedo (Coastal Region). A seed processing plant at each of these sites would also be constructed. A separate section would be set up within the De'artment to administer operation of the plants. When prbduction and trade becomes commercially viable, these plants would be taken over by- oumaefeial interests, permitting thle Department of Seed Certification to concentrate on regulation, supervision and extension. It is estimated that the transfer would be achieved within 5 to 7 years.  - 11 - 3.13 An internationally recruited technical expert would be employed to assist in planning the program, training the field staff and setting up the seed processing equipment. Several international sources 1/ may be drawn upon for this kind of expertise. To cover the possibility that funds would not be available from another source, provision is made in the Project for financing this technical service. NDB 3.14 Finance would be provided for (a) the short-term services of a management consultant to assist NDB in streamlining and modernizing its operations; (b) the installation of an automated accounting system on a phased approach if found feasible by the management consultant; and (c) the purchase of about 10 vehicles for project technicians (Annex 9). 3.15 With respect to the foregoing international expertise required for execution of the Project, it was agreed during negotiations that the terms of reference, qualifications and contractual arrangements for the following specialists would be subject to IDA approval: plant nutrition specialist (para 3.08); beef husbandry training specialist and livestock production economist (para 3.09); dairy husbandry training specialist (para 3.10); seed processing specialist (para 3.13) and management consultant (para 3.14). It was further agreed that these specialists would be employed within 1 year from the date of effectiveness. Project Administration 3.16 This would include a Project Director paid from IDA funds, two Regional Technical Directors, Deputy Project Director, an Administrative Assistant and possibly two farm management/economist specialists, all to be paid from the Technical Services Account from the 1.5% commission accruing to the Central Bank (para 3.38). About 18 livestock technicians would be employed and paid by participating banks and seconded to the Project Director. 1/ UNDP, FAO, USAID, Rockefeller Foundation.  - 12 - C. Cost Estimates 3.17 Cost estimates are based on prices prevailing in Ecuador. To allow increases in prices and to cover unforeseen costs, a contingency allowance of about 10% has been added. Project costs are summarized in the following table: % of Total % of Pro- Foreign S (million) US$ (million) ject Exchange Category Local Foreign Total Local Foreign Total Cost Component Development Beef Ranches 196.9 65.6 262.5 7.8 2.6 10.4 53 25 Dairy Farms 60.6 50.5 111.1 2.4 2.0 4.4 22 45 Technical Services INIAP - Research and Training 12.6 12.6 25.2 0.5 0.5 1.0 5 50 Seed Improvement Scheme 2.6 5.1 7.7 0.1 0.2 0.3 2 66 National Develop- ment Bank - 5.1 5.1 - 0.2 0.2 1 100 Project Adminis- tration 17.4 10.1 27.5 0.8 0.3 1.1 5 30 Participating Banks 15.3 - 15.3 0.6 - 0.6 3 - Subtotal 305.4 149.0 454.4 12.2 5.8 18.0 91 32 Feeder Steers (Working Capital) 43.2 - 43.2 1.7 - 1.7 9 _ Total 348.6 149.0 497.6 13.9 5.8 19.7 100 30 D. Proposed Financing 3.18 Since the estimated foreign exchange component of the Project amounts to US$5.8 million, US$4.2 million of the IDA credit of US$10 mil- lion would be used to finance local currency expenditures. Local currency financing is needed to encourage investments in simple agricultural inputs and to provide sufficient participation to bring about improved management and production practices in the livestock industry. The proposed sources of finance and percentage of participation are shown in the following table:  - 13 - Parti- IDA pating Ranchers/ Central Credit Banks Farmers Bank Total Category (US$M) % (US$M) . (US$M) % (US$M) % Development Beef Ranches 6.2 60 2.1 20 2.1 20 - - 10.4 Feeder Steers - - 1.4 80 0.4 20 - - 1.7 Dairy Farms 2.0 45 0.9 20 1.5 35 - - 4.4 Technical Services INIAP - Research and Training 1.0 100 - - - - - - 1.0 Seed Improvement Scheme 0.3 100 - - - - - 0.3 National Development Bank 0.2 100 - - - - - - 0.2 Project Administration 0.3 27 - - - - 0.8 73 1.1 Participating Banks _ 0.6 100 - _ - - 0.6 Total 10.0 51 5.0 25 3.9 20 0.8 4 19.7 3.19 Overall, IDA funds would finance about 51% of total Project cost. It is to be noted that a higher contribution would be expected from dairy farmers (35%) than from beef ranchers (20%). This would be reasonable in view of the higher profitability and stronger cash flow for dairy farmers as compared with beef ranchers (Annex 6, Table 4 and Annex 4, Table 4, respectively). 3.20 Participating banks would finance about 20% of the investments made for beef ranch development, as under the First and Second Project, and likewise for dairy farm development. In addition to providing about 80% of the finance for feeder steers, the banks would provide the short-term credit required for production expenses and would finance the cost of technicians employed by them and seconded to the Project. Thus, their overall contri- bution would be at least 25% of total Project cost. 3.21 Beef ranchers and dairy farmers would, on average, contribute 20% and 35%, respectively, of estimated development costs in the form of cash, labor and materials. Beef ranchers would in some instances make further contribution because their annual net income during the early stage of ranch development would be reduced by retention of breeding stock that otherwise would hIave been sold (Annex 4, Table 3). 3.22 Development costs of the INIAP and seed improvement sub-projects including employment of international specialists would be financed by rhe IDA credit. Annual operation costs would be provided largely by Government through budget support and a small amount received by the respective entities from sale of seed.  - 14 - 3.23 The detail of Project administration costs and the means of finan- cing are shown in Annex 10. E. Procurement 3.24 International competitive bidding would not be appropriate for the Project since there is no central purchasing entity and because ranchers and farmers should have freedom of choice in selection of goods. Furthermore, individual contracts are small and numerous, and the size and combination of farm investments would vary greatly. Therefore, goods required for ranch/ farm development, including fencing, agricultural machinery and equipment, materials for structures, fertilizers, pasture seeds and livestock, would be purchased by Project participants from local commercial sources. Similar procedures for Loan 501-EC and Credit 173-EC have proved satisfactory. With numerous agricultural suppliers for most items, both imported and local, sufficient competition in the supply of goods is assured and adequate facil- ities exist for servicing agricultural machinery and equipment. No import duties are levied on agricultural machinery and breeding stock. Fertilizer imports are subject to an ad valorem duty of 10% for raw components (mainly rock phosphate) and 15% on complete types. The one small fertilizer manu- facturing and mixing plant in Ecuador cannot supply the Project farms, and imports would, therefore, be required. Dealers' margins, averaging about 25% to 30% of CIF values, are within an acceptable range. 3.25 Local competitive bidding would be employed for the purchase of the farm vehicles required for Project administration. International bid- ding for goods required for the INIAP and seed improvement schemes would not be appropriate because of their specialized nature, availability of foundation seed only from environmental zones similar to Ecuadorean condi- tions and the small quantity of individual items needed. Such goods would be imported directly by the respective entities. Under the First Project there was some delay in the issuance of import permits. Agreement was ob- tained from Government during negotiations that import permits would be issued without delay. F. Disbursements from the Credit Account Beef Ranch/Dairy Farm Development Loans 3.26 Disbursements to the Central Bank would be as follows: - 75% of beef ranch development loans (60% of development cost) - 70% of dairy farm development loans (45% of development cost).  - 15 - Disbursements would be based upon appropriate documentation submitted by the banks to the Central Bank, including a statement of the categories of investments, country of origin of goods, certification by the participating bank and approval of the Project Director (except as this function may be delegated by the Project Director to the Regional Technical Directors) that the disbursements were for approved Project purposes. INIAP and Seed Improvement Scheme 3.27 Disbursements would be made to INIAP and the Ministry (Department of Seed Certification) for 100% of the CIF of goods imported and 100% of local capital costs based upon appropriate documentation, certification by INIAP and the Ministry and approval by the Project Director. NDB 3.28 Disbursements would be made to NDB for 100% of management con- sultant services, 100% of the CIF of imported vehicles, and 100% of goods and services related to programming an automated accounting system, based on appropriate documentation, certification by NDB and approval by the Project Director. Project Administration 3.29 Disbursements would be made for salary, emolument, international travel, housing and family allowances of the Project Director, based on a withdrawal schedule submitted by the Borrower to IDA. Disbursements for purchase of vehicles for the Project Director and technical staff not includ- ing livestock technicians employed by participating private banks and the equipment and furniture needed for two Project offices (Quito and Guayaquil) would be made against 100% of costs, supported by appropriate documentation and approval by the Project Director. 3.30 Disbursements for most ranch/farm development plans would be phased over 3 years. Full disbursement would be achieved within about 5 years, although about 80% would be disbursed by the end of the third year. Annual phasing of Project investments and forecast of quarterly IDA disbursements are shown in Annex 11. G. Auditing 3.31 Several independent auditing services acceptable to IDA are avail- able within Ecuador. These include both official Government auditing bodies, such as the Superintendent of Banks and the External Auditor, and at least two international auditing firms, Deloitte, Plender, Haskins & Sells (British) and Price Waterhouse and Company (USA). Assurances were obtained during nego- tiations that the Central Bank and each participating bank would maintain separate accounts for Project activities and that these accounts would be audited annually by an independent accounting service acceptable to IDA.  - 16 - Assurances were also obtained that tLhe audited reports would be submitted to IDA not later than 3 months after the close of the respective institution's fiscal year. H. Organization aLd Mmageient Administration 3.32 nTe Government would be the Uorrower and its official representa- tive would be the Ministry of Agricittiire and. Livestock. During the esti- mated 5-year period to carry outt the Project, coordination and supervisto: authority would be vested in a National Project Comnission. It would tormoj- late policies and procedures and would approve the Project Director. T'he Commission would be created l,y Presidential dfrree prior to effectiveness of the Credit. Composition of Khe Project C;ommis.Iion, shown in Annex 12, to- gether with its functions would be subject to IDA approval. Assurances to this effect were obtained duhing niegotiations. Technical Services for Project. Administratioa 3.33 The Project Director would have overaill responsibility for execu- tion of the Project and woul(i he particularly concerned with technical, fi- nancial and economic aspects of livestock development programs. He would approve or reject ranch/farm development plans and would subuit approved plans to participating banks as a basis for making loans to Project bene- ficiaries. This function would be delegated to the Regional Technical Directors as, within his judgment, they become 17uialified to assume such a responsibility. his duties and responsibilities are further detailed in Annex 13. Under Loan 501-EC and Credit 173-EC, the Project Director is an expatriate, employed by IBRD and seconded to Government. This arrangement is satisfactory. It is expected, however, that, during the Third Project, the post of Deputy Project Director would be created and a qualified Ecua- dorian would be selected by the end of Project year-2 who could eventually be promoted to Project Director. Several livestock technicians working under the First Project show potential for such a responsibility. The qualifications, duties, responsibilities and terms of employment would be approved by the Project Director after consultation with IDA. During negotiations, assurances were obtained that a Project Director would be employed for at least the disbursement period; that his qualifications, duties, responsibilities and terms of contract would be subject to IDA approval, and that his appointment would be a condition of effectiveness of the Credit Agreement. 3.34 A Regional Technical Director would be employed for both the Coastal Region and for the Sierra Region. Primarily, each would be respon- sible, under the direction of the Project Director, for execution of Project components related to hlis respective region. No difficulty is anticipated in recruiting qualified Regional Technical Directors in Ecuador.  - 17 - They would be employed by the Central Bank and seconded to the Project for at least the disbursement period. Assurance was obtained during negotiation that their qualifications, duties, responsibilities and terms of employment would be approved by the Project Director after consultation with IDA. 3.35 As under the First and Second Projects, qualified livestock tech- nicians would be employed and paid by participating banks and seconded to the Project Director. Their selection and appointment would be subject to the approval of the Project Director and Regional Technical Directors. They would have their headquarters in Project facilities while engaged in Project activities. No difficulty is expected in recruiting in Ecuador the 15 to 20 technicians that would be needed. During negotiations, assurances were obtained that such technicians would be employed. I. Lending Operations Policies 3.36 Applications and loans would be processed and serviced by the par- ticipating banks in the same manner as under the First and Second Projects. Loan applicants would meet the creditworthiness criteria of these institutions, which would bear the full credit risk. Security for loans would include real estate mortgage and, if needed, chattel mortgages on livestock and equipment. Increased real estate value, resulting from ranch/farm development improve- ments would be reflected in the values established for collateral purposes. Lending Program - Terms and Conditions 3.37 The following schedule shows the terms for IDA funds to be used for the Project Lending Program: Term of Grace Interest Loans Period (%) (Years) (Years) IDA funds to Government (usual IDA terms) Government to Central Bank 6.5 (keyed to the on-lending terms between Central Bank and participating banks) Central Bank to participating banks for: (a) beef ranch development 8 9-13 3-5 (b) dairy farm development 8 8-10 2-3 Partilcipating banks' loans to: (a) beef ranchers for development 12 8-12 3-5 (b) dairy farmers for development 12 7-9 2-3  - 18 - The repayment terms for IDA funds on-lent by the Central Bank to participating banks would be keyed to the terms given by them on the subloans plus 1 year for slippage. Repayments received from the participating banks would go to Government. Thus all IDA funds used for beef ranch and dairy farm develop- ment would be repaid to Government by the end of year-16 1/. The Central Bank would establish and maintain a Livestock Account for the IDA funds used for long-term beef ranch/dairy farm development loans. The flow of funds is shown in Annex 14). During negotiations, assurances were obtained with respect to the Lending Program and that at least one subsidiary Loan Agree- ment between the Central Bank and a participating bank would be executed prior to the effective date. 3.38 The Central Bank would earn a spread of 1.5% on the IDA funds on- lent to participating banks. Tnis spread would accrue to a Technical Services Account to be established and maintained by the Central Bank. It would be used to pay: (a) local and office costs of the Project Director; (b) salaries, local and office costs of the Deputy Project Director, the two Regional Tech- nical Directors and other technical staff; and (c) the costs of the Central Bank's services for handling Project accounts. Since there would be a sub- stantial gap between income and expenditures during the first years of the Project, it would be necessary for the Central Bank to make an interest-free advance to the Account (Annex 14). During negntiations. satisfactory assurances were obtained with respect to the employment of Project staff, fund- ing and operation of the Technical Services Account. 3.39 Participating banks would make subloans to beef ranchers and dairy farms based on development plans recommended by the Project Director or Re- gional Technical Director (para 3.33). In addition, they would provide from their own resources the short-term credit needed for production expenses and for purchase of feeder steers. The interest would be 12% per annum on the outstanding balances of the loans for development purposes and a nominal rate of 12% for short-term loans. This would be acceptable to the ranchers/ farmers and would be in line with the prevailing charges for rural credit (para 2.17). The banks would earn a spread of 4% between the cost of IDA funds borrowed from the Central Bank at 8% and on-lent at 12%. This would be adequate to cover the cost of livestock technicians employed for Pro- ject activities, loan risk, administrative costs and profits. Individual development loans above US$100,000 equivalent would require prior approval by IDA. As under the First Project, the amount of funds to be used for purchase of breeding cattle would not exceed 40% of the total loan except when, within the judgment of the Project Director, a higher investment of up to 50% of the loan would be warranted, reflecting above-norm coefficients of productivity and an advanced stage of ranch/farm development. The ap- plication of Project funds by participating banks is shown in Annex 15. Assurances were obtained during negotiations with respect to the lending terms and conditions. 1/ A 16-year period would cover 12-year subloans made in Project year-3 and 1 year additional for slippage of the amortization schedule.  - 19 - IV. MARKETS, PRICES, TAXATION AND PRODUCER BENEFITS Markets 4.01 Because of the high rate of population growth and the low level of per capita meat and milk consumption in Ecuador, production from the Project is intended primarily for the domestic market. Some marketing of cattle to Peru is done but the annual number fluctuates widely. 4.02 Live cattle, beef, milk and dairy products produced by Project beneficiaries would be marketed through existing commercial channels. Sufficient pasteurizing and slaughtering capacities exist to process the beef and dairy products generated by the Project. The nine major milk processing facilities are handling 360,000 liters per day, about 66% of their combined capacity. The major municipal abattoirs are operating near capacity, but new private facilities at Santo Domingo and Guayaquil are operating at only 50% and 15% of capacity, respectively. See Annex 16 for capacity and present production of major processing plants. 4.03 Demand for meat and dairy products is high. Despite recent in- creases in milk prices, total consumption in Quito and Guayaquil has con- tinued to rise and is now about 190,000 liters daily. Lack of milk for processing has restrained increases in consumption, and the Sierra milk producers' association believes that a market exists for an additional 2 to 300,000 liters per day. The growth in human population at about twice the expected increase in beef cattle numbers also indicates a continuing demand for beef products in the domestic market. Demand for breeding cattle is high and no difficulty is anticipated in marketing about 20.000 surplus heifers expected to be available from Project beef ranches and dairy farms at full development (beef, year-10; dairy, year-7). 4.04 Although the marketing system has deficiencies, such as no beef grading system, rudimentary municipal slaughtering facilities, and no pro- cessing of by-products, none are sufficiently critical to discourgage invest- ment in beef and dairy cattle production. Prices 4.05 The price to producers for whole milk is about US$0.10 per liter and about US$0.32 per kg liveweight for beef. Consumer prices vary, depending on location; in Quito, milk costs S 2.70 per liter (US$ 0.15) and supermarket beef prices range from about S 20 to S 44 per kg (US$1.10 to 2.40), depending on cuts. 4.06 Producer milk prices were increased 21% in July 1969 after remain- ing at S 1.40 (US$0.08) for several years. Meat prices in Quito have in- creased 40% since 1965, but have stabilized since mid-1968; Guayaquil meat prices have increased only slightly since 1967. Municipalities have the power to fix prices for staple foods, while Central Government sets minimum milk prices to producers. The increase in milk price to farmers was passed  - 20 - on entirely to the consumer in Quito and about 65% in Guayaquil. The present price level provides sufficient incentives to farmers to invest in beef and dairy production. Taxation 4.07 Although farmers are subject to both property and income taxes, liberal exemptions and deductions and low tax rates generally result in limited charges. Farmers may deduct 20% of the value of improved pastures from the value of their land subject to taxation; most fixed improvements and cattle used for commercial purposes may also be deducted, as can the balance of long-term loans secured by mortgages. On the remainder, taxa- tion amounts to only about 2% of assessed land value for property taxes and 3% of the assessed land value for income taxes. Under the Project, taxa- tion levels would decline initially because of the allowable deductions. At full development, however, property and income taxes paid annually by loan recipients would be about S 25 million (US$1 million) or about S 10 million (US$400,000) above the amount presently paid. This is equivalent to about 8% of gross income for the ranchers/farmers. Producer Benefits 4.08 Substantial increases in income would be derived from investments under the Project (Annexes 4 and 6, Table 4). Typical results based on projections for illustrative beef cattle and dairy cattle models are shown below: At Present After 5 After 10 Years Years