Uruguay - Fourth Livestock Development Project

CIRCULATING COPY R ESTRICTED TO BE RETURNED TO REPORTS DESKRport No. P-6 FILL uury This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or complcteness of the report. INTBRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC ORIENTAL DEL URUGUAY FOR THE FOURTH LIVESTOCK PROJECT April 12, 1972   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICA ORIENTAL DEL URUGUAY FOR A FOURTH LIVESTOCK PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republica Oriental del Uruguay for the equivalent of US$11.2 million to help finance the first stage of the Fourth Livestock Project. The loan would have a term of fourteen years, including four years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMIC AND POLITICAL SITUATION 2. During the past decade Uruguay has experienced virtual economic stagnation. This was largely the result of a lack of consensus regarding national objectives, in particular in relation to the emphasis to be given to economic growth versus income distribution. In the latter part of the period, the authorities failed in mobilizing political support for a pro- gram capable of reconciling these objectives. As a consequence, policies were followed which were detrimental to production, investment and exports and there was no progress towards a better distribution of incomes either. Uruguay's history of the 1960's, therefore, is one of declining per capita income, high rates of inflation, serious fiscal problems and numerous balance of payments crises. For some time daring that period, government policies transferred resources from the key agricultural sector to the urban population of Montevideo. Economic growth policies received too little attention as witnessed by inadequate production incentives, a tax- ation structure detrimental to production and investment increases, and a low level of public savings leading to an inadequate level of public investment. 3. The present Government, which came to power in March of this year, intends to implement a development strategy which is growth-oriented and would consist of stimulating the private sector (principally the agricultural and manufacturing sectors) through measures designed to provide incentives for production and export. The new Government under President Juan Maria Bordaberry inherited a difficult internal and external financial situation as evidenced by accelerating inflation, a large balance of payments deficit and a heavy burden of short-term debt. It has formulated and is trying to  -2- implement a program to reverse financial deterioration, stimulate investment and restore economic growth capacity. Through proper incentives, including a realistic exchange rate policy and the removal of distortion in internal prices, and the provision of essential infrastructure facilities, there is no reason why Uruguay's impressive production and export potential could not be developed rapidly. To carry through this program, however, continued political support is essential. 4. The elections held in November 1971 brought to power in early March President Bordaberry of the Colorado Party who was the former Agriculture Minister under outgoing President Pacheco Areco. The new Government was elected with only a small plurality, and the Colorados do not command a majority in parliament. The Government, however, includes representation from the opposition Blanco Party, indicating a degree of unity and cooperation of the two traditional, moderate parties with respect to issues of national policy. The radical left coalition which had been formed about a year and a half ago from previously splintered leftist parties, was expected to pose a considerable threat to the dominance of the two traditional parties. How- ever, the coalition, organized as the Frente Amplio (Broad Front), obtained only about 18 percent of the vote, failing to win the important urban vote and the mayoralty of Montevideo. Nevertheless, the Frente Amplio does hold the balance of power in parliament, and by allying with certain Blanco elements could be significant in defeating some of the Government's par- liamentary initiatives. At this moment, however, when it comes to issues of national economic policy, the Government may be expected to gather suf- ficient votes in parliament, including some support from the Blancos. Only time will tell how long the present Government will be able to retain the initiative in matters of economic and financial policy. 5. Uruguay, at the present time, is clearly at a crossroad, but the outlook is for a set of policies and programs which would emphasize economic growth. This is so because the Government realizes that without achieving substantial growth over the medium-term it has little chance of resolving the long standing conflicting claims for the use of resources and of stemming the outflow from Uruguay of its young and qualified citizens. This turn- around in policies deserves support. 6. The most recent Economic Report (WH-205a) was distributed to the Executive Directors on February 18, 1971. In March of this year a small economic mission visited Uruguay to update the information contained in that report. Country data and a note on recent developments in Uruguay, the external debt problem and the Government's economic program for 1972 are attached as Annex II.  -3- PART II - THE BANK'S PEE IN URUGUAY Introduction 7. Bank lending to Uruguay has had as its overall objective the support of government policies aimed at stimulating economic growth by providing financial assistance to export-oriented livestock production, and to essential infrastructural investments. However, during extended periods in the 1960's, as mentioned before, goverments pursued unsound economic and financial policies. As a consequence, the Bank found itself unable to lend during the period 1965-69. With a reversal of these policies during the stabilization period of 1969-70, the Bank resumed operations and made three loans, two for livestock and one for power. Status of Bank Operations 8. A summary statement of the nine Bank loans made to date is attached as Annex I. While about 65 percent of our lending (US$82 million) has been for four projects in the power sector, and a loan of US$18.5 million (324) was made in 1962 to help finance a road construction project, in terms of its direct impact on the level of production and the introduction of new technology, Bank lending for livestock development has been the most impor- tant element in our lending program (cf. Section III). 9. The Bank's association with the development of the livestock sec- tor in Uruguay began more than twenty years ago when in 1950 a joint FAO/ Bank mission advised the Government on a pilot scheme for new pasture improvement techniques which laid the foundation for the subsequent lending program for livestock in Uruguay. In 1959, the BaRk made its first live- stock development loan of US$7.0 million (245). The project proved the feasibility of the new technology in Uruguay, demonstrating that ranchers were prepared to adopt modern techniques of pasture management. These encouraging results prompted the Bank to make a second livestock loan in the amount of US$12.7 million in March 1965 (407). &Sbsequently, however, the technical success achieved under these two loans was temporarily off- set by adverse government livestock sector policies. When these policies were revised the Bank granted its Third Livestock Loan for US$6.3 million in 1970 (698). Soon after, the Bank agreed, in 1971, to_make a supplemental loan of US$4.0 pillion (773) to meet the inoreased progrua requiremients. 10. The Closing Date for the Third Livestock Loan (698) was postponed for six months to June 30, 1972 to allow completion of disbursements under existing commitments for agricultural machinery and seed processing equip- ment.  11. The only lag in disbursements relates to the Power Generation and Distribution Project (712). An initial half-year delay in project execution was caused by slow administrative and management procedures and the cumbersome system of controls exercised by the Govemment over the operations of the Borrower - UTE (Administraci6n General de las Usinas Electricas y los Tel6fonos del Estado). This resulted in delays in procurement and in the awarding of the contract to consultants selected to recommend and help implement improvements in the organization pro- cedures and operating efficiency of UTE. These problems are being over- come. 12. The proposed loan would be the Bankts tenth operation in Uruguay and would bring the amount of Bank lending to US$141.7 million. External financing to Uruguay, other than by the Bank Group, is principally pro- vided by US AID and the Inter-American Development Bank (IDB). USAID has been active in transport, agriculture and industry. The IDB is financing mainly transport, industrial development, including the meat packing industry, and education. The past lending of the main official lending agencies is summarized below in US$ million. IERD USAID IDB Lending 1950 - 1965 102.2 81.1 38.0 Lending 1966 - 1971 28.3 35.6 78.6 Transport 1.2 28.1 Power 18.0 - - Education and Health - - 9.9 Agriculture and Livestock 10.3 19.4 - Industry - 15.0 38.7 Others - 1.9 Total 130.5 116.7 116.6 13. No investments have yet been made by the IFC in Uruguay.  Future Direction of Bank Lending 14. In view of the serious economic problems which the Government will have to deal with I considered the advisability of another pause in Bank lending. Given, however, the fact that the Bank is the major source of credit financing for the critical livestock sector, I have rejected this approach on the grounds of the widespread and detrimental effects which such a pause could have on the continued success of the livestock production program and the ultimate damaging effects it would have on the national economy which is so dependent on livestook. This decision was influenced by early indications from the new Government regarding its economic program for 1972 and its development strategy, and by the Government's desire to seek support for this program from the International Monetary Fund. Nevertheless, while I attach great importance to the Bank's efforts in continuing to support the Government's livestock development program, I consider it advisable to limit the Bank's initial loan commitment, particularly since I am not certain whether there exists in Uruguay a political consensus regarding the adjustments wht*ich the Government proposes to introduce in economic policy. Thus, although the Appraisal Report, (PA-lOb) dated February 17, 1972, has been prepared on the basis of a two-year project and finds that a Bank loan of US$25.6 million would be suitable, we are proceeding with a loan of US$11.2 million, sufficient to finance only the first year of the project. Depending on a clarification of the outlook for the economy, I may recommend for your consideration, probably toward the end of this year, a further loan of US$14.4 minion. 15. Later this year the Government will present a medium-term investment and external financing program to the external lending agencies and a Bank mission will be visiting Uruguay to discuss the Government's development strategy. The Bank's lending strategy will clearly have to depend both on an analysis of the Government's program and on the success of the Government in re-establishing sound financial and economic management. Subject to adequate progress we would expect to assist Uruguay in achieving its growth objective through maintaining and possibly increasing the present momentum of livestock lending. In the power sector we would expect to continue lending for the expansion of generation, transmission and distribution capacity. To this end, the Bank's recent loan provides assistance for the urgently required investment planning and organizational improvements in the power sector. Similarly, provision in the loan for a study of long-range generating plant needs will help chart the course of future Bank participation in Uruguay's power sector. 16. We intend to explore further new possibilities for agricultural diversification which would lay the foundation for growth in other sectors  -6- with the immediate aim of reducing the country's balance of payments deficit. To assist in this process, the proposed project contains ,a small amount for pre-investment studies which will identify new avenues for Bank assistance, particularly in agriculture and related activities. The new elements of dairy beef and pig production included in the pro- posed project will provide important information on the feasibility of mixed fanming in Uruguay, based on improved land use and management techniques. 17. In January 1972, the United Nations Development Programme agreed to participate in the financing of a pre-investment study for fishery research and development, which the Bank intends to follow very closely. The Bank shall examine the feasibility of participation in the agro-industrial sector, particularly the meat packing industry, which will require greater assistance as beef and lamb output continues to expand. In view of the traditional academic orientation of education the Bank will review the requirementsfor technical education in Uruguay with par- ticular reference to the needs of the growing livestock and industrial sec- tors. The Bank also intends to examine the need for investment to improve access to the major touristic areas of the country. Finally, the feasi- bility of a highway maintenance project is being considered. While Uru- guay is serwed by a fairly extensive and generally adequate road network, the need for further assistance in its improvement and in a more effective maintenance program is urgent. PART III - THE LIVESTOCK SECTOR 18. Agriculture provides, directly and indirectly, about 30 percent of Uruguay's GNP and employs about 20 percent of the labor force. Exports of livestock products, amounting to US$191.0 million in 1970, accounted for about 85 percent of export earnings. Crop production, contributing about 25 percent as much as livestock to GNP, is mainly geared to supplying local needs. Uruguay has a marked comparative advantage in the production of beef cattle, sheep and milk. The Government has concentrated on in- creasing meat production for export, since expansion of wool and dairy production is limited by the international demand for these products. About 15 million hectares of the 16.5 million hectares devoted to agriculture are pasture lands used for livestock. These pastures support about 8.5 million beef cattle, 600,000 dairy cattle, 19.8 million sheep and 380.000 pigs. Bank-sponsored projects have stimulated beef production so-that exports of beef increased by about one-third between 1968 and 197Q. Mean- while, the percentage of beef output domestically consumed has been only slowly decreasing. The proposed project would help to substitute pork and lamb for beef in the internal market, as well as stimulate production of existing and some new sources of beef (dairy beef). To direct the development of livestock, the Honorary Livestock Commission was established in 1959 as a semi-autonomous technical authority within the Ministry of Agriculture and Livestock.  -7- 19. Since there are no longer large areas of new land to bring into use, improved pasture management and greater use of inputs, such as fertilizer, must provide the principal means of increasing livestock production. A recent sample survey under the Third Livestock Project of 50 representative proper- ties indicates that output can be increased threefold from about 70 kilograms (beef liveweight) per hectare on unimproved natural pastures to an average of some 220 kilograms per hectare on improved pastures. Pasture improvements have now been made on 6,100 ranches in the country. Under the Bank's lending program, improved pastures increased ten times during the past decade, reaching over 1.2 million hectares which still, however, represents only 8 percent of total pasture land. During the Second Livestock Project, high export taxes and restrictive credit policies severely reduced the financial rate of return to the rancher to less than 8 percent in May 1969. This rate was substantially below the real cost of money (11 percent on loans, most of which have been indexed since late 1968 onwards) and the yields on alternative investments. The resulting reluctance on the part of ranchers to invest, except where non- indexed loans could be obtained, presented an obvious threat to the entire livestock program. 20. By the end of 1969, the Government agreed to introduce policy reforms and improve investment incentives, including a sharp reduction in wool export taxes, modification of beef export taxes to encourage quality and removal of import duties on agricultural machinery. Along with the sharp increase in international beef prices, these changes resulted in a substan- tial rise in farm gate prices and the effect was a rise in the financial rate of return to about 23 percent under the Third Livestock Loan. In the proposed project, the financial rate of return is estimated at 25 percent for beef and sheep ranches, 18 percent for pig farms, and 29 percent for dairy beef farms. Recent information indicates that these estimates are on the conservative side. 21. At present there are some 79,000 ranches in the country: 73 per- cent are under 100 hectares and account for about 6 percent of the land. At the other end of the scale some 2 percent of the ranches have above 2,500 hectares and represent 35 percent of the land. The first Bank loan supported a pilot project which demonstrated the advantages of modern tech- niques of pasture improvements and management to the nation's ranchers. After this initial success, Bank lending was channeled mainly to larger and medium-sized ranches in order to obtain an increase in production as soon as possible. Of the 3,600 ranches and farms eligible to receive credit under the Fourth Livestock Project, around 2,000 units would be medium-sized ranches of around 500 hectares but, for the first time, some 600 smaller units of below 100 hectares will be developed, mainly for dairy beef and pig farms.  - 8 - 22. Some 17 meat packing and processing plants operate in Uruguay. Since 1969, the private sector has invested over US$8.0 million to meet international sanitary requirements, expand production of special products and improve operating efficiency. Other investments have also been made in plant and the industry, mainly privately owned, had shown definite signs of becoming a viable and healthy extension of a growing livestock sector. However, since September of last year, most plants have either not been producing or have operated at a fraction of their: capacity. The main reason was the inability of the packing plants to purchase cattle for slaughter at prices low enough to permit profitable export. As a result of the Government's exchange rate policy, which led to an official exchange rate which greatly overvalued the peso, a black market for exchange developed. Ranchers and farmers either' retained their animals or sold them directly to Brazilian buyers, who had purchased pesos at the black market rate and who then smuggled the cattle across the border. Since March 2 of this year, the new Government has established a more realistic exchange rate which w'1l permit meat packing plants to pay a higher peso price for cattle. We are confident that these new exchange rate measures will soon permit the meat packing industry to operate at full capacity and take full advantage of the Government's efforts to build up an efficient mept packing industry. In this connection, the proposed loan would prpvide funds for technical assistance to the industry. PART IV - TfHE PROJECT 23. A report entitled "Appraisal of the Fourth Livestock rDevelopment Project, Uruguay" (No. PA-llOb) dated February 17, 1972 is being circulated separately. A loan and project summary is attached as annex III The Fourth Livestock Project was appraised in May and June 1971 and negotiations were held in Washington from January 24 - February 1, 1972. The Gorernment of Uruguay was represented at these negotiations by Dr. Hector Luisi, Uruguayan Ambassador; Dr. Benito Medero, Vice-President of the Honorary Livestock Commission; Dr. Luis 0. Coirolo of the Honorary Livestock Cammission; Dr. Jorge Sambarino, Manager of the Bank of the Republic; and Dr. Rodolfo Olivet, Deputy Manager of the Bank of the Republic. 24. The proposed loan would provide financial and technical assist- ance to continue the livestock development program begun under the three previous Bank projects. On-ranch development loans for about 3,400 ranches and farms will be made. Three new elements are now included in  - 9 - the proposed project: the financing of investments in dairy beef pro- duction; pig raising; and loans to farmers to permit retention or purchase of heifers for breeding purposes. The project, covering all areas of the country, would also provide funds for the importation of contractors' equipment. Credits to seed processors and fanmers for the expansion of pasture seed production and processing facilities and funds for technical services will also be provided. 25. The Honorary Livestock Commission (Comision Honoraria del Plan Agropecuario) will continue to be responsible for the supervision and co- ordination of the livestock development program. The Comission will have primary responsibility for the preparation, appraisal, approval and supervision of the ranch development plans, the import plans for seeds and fertilizers, the contractors' investments plans, and the technical and financial plans of the seed producers and processors. The Goverment will continue providing the necessary funds for the administrative costs of the Commission. The project will continue to be assisted by an inter- nationally recruited Technical Director and a Senior Agricultural Economist. 26. Specifically, the proposed project would consist of the following components: (a) Cattle and Sheep Ranch Development. The financing, through long-temu on-ranch development loans, of development plans for about 3,050 ranches and farma, to improve cattle and sheep production and to shift emphasis from wool to mutton and lamb production. Investments would be in pasture improvement, breeding stock, fencing, machinery, water supplies and other ranchT infrastructure. Bank funds will finance about 51 percent of each on-ranch investment. The average ranch size would be about 700 hectares. Also included in the project are medium-term incremental working capital loans eaII .or by rancX jlans t-o t finance retention 6f brdiiigheifers otherwise destined for slaughter. Bank funds would constitute 37 percent of such loans, with participating banks providing the balance. (b) Dairy Beef. The objective of the new dairy beef program is the raising of about 20,000 male calves, currently killed at birth, to 14-18 months of age for slaughter and export as baby beef. Some 450 farmers operating dairy farms of about 100 hectares each will receive financial and technical support for pasture improvement, fencing, machinery and ranch infrastructure.  - 10 - (c) Pig Production. The primary goal is the increase in pork production as a substitute for beef in the domestic market. To this end the project would support about 100 new and existing farm units each year, averaging some 30 hectares. Development plans would cover invest- ments for initial feed costs on new farms and for ' farrowing and finishing pens, breeding pens, feed-mixing machinery, fencing and other improvements on all farms. (d) Contractors' Machinery. Loans will be made for the importation of machinery to be purchased by contraptors for the construction of on-ranch water storage facilities and pasture improvement of participating ranches and farms. About 50 contractor loans are expected to be made for ranch and farm machinery and dam construction equipment. Loans to contractors will represent about 70 percent of the total investment cost. (e) Seed Production and Processing. Loans to eligible, farmers and seed processors will be made to purchase special types of imported seed producing, harvesting, cleaning, processing and certification machinery and. ;equipment. (f) Technical.Services and Training. Many of these services will be provided by the staff of the Honorary Commission. In addition:to supervision, technical services will con- tinue to_be used for introducing new technology in, livestock production and pasture management. Other programs will include the demonstration of pasture and forage conservation techniques, technical advice fo meat and dairy processing plants on various subjects, including marketing and hygiene. Related goods and equipment to assure the effective execution of these services would also be provided. The project will also finance -local and overseas training of livestock and credit technicians. In addition, a small amount has been included for the financing of pre-investment studies with a view to strengthening the government's capa.bilities in identifying and preparing investment projects in agriculture. 27. Heifer financing was excluded under previous Bank projects. It was assumed that most ranchers were unlikely to have more than;10 percent of their ranches developed with improved pasture, an area, sufficient to meet the requirements of existing breeding herds. However,  it appears that ranch development has proceeded more rapidly over the last two and a;half years than was originally contemplated and that on many ranches much more than 10 percent of the pasture has now been improved. In these circumstances an increase in the size of breeding herds beyond that provided by normal biological growth is required to fully utilize the pasture improvements and maximize the increase in production and exports over the longer run. For this reason, the new project includes loans to enable project ranchers to retain and/or purchase breeding heifers that would otherwise be slaughtered. Financing 28. The total cost of the first stage of the project is estimated at US$24.3 million equivalent and the proposed loan would cover the foreign exchange component, estimated at US$11.2 million, accounting for 46 percent of the total project costs. The cost-sharing arrangements follow the same principle applied under the previous loans, and the balance of 54 percent of project costs will be provided as follows: Government, 7 percent of total cost; Central Bank, 13 percent; participating banks, 18 percent; and sub-borrowers, 16 percent. 29. The Livestock Fund of the Central Bank, established under the Third Livestock Project, would continue acting as the channel for project funds to be provided by the Govenment, the Central Bank and the proposed Bank loan. The system of separate accounts for on-ranch investments and technical services would remain in effect. 30. On-ranch development loans will be extended on tenms ranging between 7-10 years, including a grace period of 2-4 years. In the now project, ranchers will be able to purchase additional breeding heifers under the ranch development loans* The loans to eligible participating ranchers and farmers for incremental working capital for heifer retention and initial pig feed costs will be on teoms ranging from 3-7 years, including not less than one year nor more than three years period of grace. Loans to contractors will be for 5-7 years with one year of grace and loans to seed processors will be for 10 years. As in previous projects, the rate of interest charged to ranchers, farmers and contractors for all loans and incremental working capital will be 11 percent. 31. Under the Third Livestock Project relending for on-ranch development was through the state-owned Bank of the Republic, a commercial bank. Although it was open to other commercial banks to participate, none of them,in fact,did so. The new loan includes measures to make commercial bank participation in the on-ranch development loan program more attractive by refinancing a higher proportion of their sub-loans  - 12 - and offering a wider spread on the relending. Further, to encourage the maximum use of the commercial banks'own funds, the spread on loans to participating banks would increase as the proportion of the banks' own funds increases. To illustrate, when the bank puts up 10 psrcent of the amount of a sub-loan, the livestock fund would charge 9 percent, giving the bank a spread of only 2 percent. Hovever, when the bank puts up 20 percent of the amount of a sub-loan, the interest rate charged to the bank would be only 5 percent, thus allowing a 6 percent spread. The graduated scale of interest rates charged to participating banks would only apply to on-ranch development loans. Loans for , incremental working capital and to contractors and seed processors, would bear a fixed interest rate of 7.5 percent. Participating banks will, of course, take full risk on all subloans. Banks wishing to, participate in the program would have to meet eligibility criteria established by the Central Bank. 32. While the project provides medium-term incremental working capital, additional short-term credit in the fonr of seasonal finaiicing will also be required by participating farmers and ranchers. These requirements will be determined by the Commission at the time the ranch development plans are drawn up. Participating banks are to provide from their own resources short-term working capital to ranchers and farmers who obtain ranch development and incremental working capital loans. Indexing 33. As in the previous two loans, the principal of all long and medium-tenm sub-loans will be in pesos but will be adjusted in accordance with an index based on the average increase in the ranch-gate price of beef and wool, but not to exceed the amount that would have resulted from basing the adjustment on the increase in the cost of living index. For on-ranch development loans, adjustment will be 100 percent for loans to borrowers with ranches in excess of 400 hectares. Loans to borrowers width less than 400 hectares will be adjusted by 50 percent. Since the smaller ranchers and farmers account for only a minor portion of the total volume of lending under the project, it is estimated that on about 90 percent of the total amount of on-ranch loans a real rate of interest of 1 percent will be charged. The Governent wnll ensure compensation of the participating banks for any loss of incpme resulting from partially-indexed sub-loans. The repayment record pf sub-borrowers of indexed loans under the previous Bank-sponsored projects has been good. As of June 1971, only about 3 percent of the amounts due were six months behind and 2 percent were overdue beyond one year.,  - 13 - Procurement 34. International competitive bidding procedures will be used for the bulk procurement of pasture seeds and fertilizers (US$3.0 million),and machinery for seed producers and contractors (US$0.22 million). Wible under previous projects only two foreign producers could provide rock phos- phate (for local grinding and direct application) suitable for Uruguayan conditions, other potential suppliers are being invited to submit samples for testing in Uruguay. Bidding for all other types of rook phosphate will be open to all suppliers. Goods and equipment related to technical services will also be subject to international competitive bidding. Purchases of fencing, materials for handling yards, farm machinery, water puwps, piping, feed and building materials will be made looally by individual participating ranchers and farmers. An adequate selection of international suppliers i8 represented in the local market. The procedures outlined above are the same as those followed succeassfuly under the Third and Supplementary Third Live- stock loans. Disbursement 35. As in the previous projects, the Bank will disburse directly to suppliers of the imported seeds and fertilizers to be used by participating ranchers under the on-ranch development credit program. The equivalent amount of pesos will then be deposited by the Borrower in the Livestock Fund of the Central Bank for making on-ranch development loans. Since these funds would cover only part of foreign exchange costs of on-ranch development loans, the Bank would also reimburse the Livestock Fund for the equivalent of 46 percent of on-ranch development loans. In addition, the Bank would also dis- burse against the full foreign exchange costs of contractors' machinery, seed processing equipment, the technical services and related equipment. 36. Since the early 1960's, the Government has maintained a policy of subsidizing phosphate fertilizer costs from proceeds of beef and wool export taxes, thus reducing farm gate costs to levels equal to Uruguay's major com- petitors in New Zealand and Australia. The Bank has agreed that the subsidy should continue in order to encourage wider and more regular use of phosphate fertilizer, at least until 20 peroent of Uruguay's pasture area is improved. At this i vel of usage, the value of routine application of phosphate in atimulating pasture production will have been amply demonstrated and the sub- sidy could be phased out. Therefore, the Government will submit a plan to the Bank by June 1, 1973 for phasing out the fertilizer subsidy in Uruguay once that level of usage has been achieved. Economic Rate of deturn 37. The economic rate of return of the project is estimated to be 31 percent, assuming an average long-term world beef price of US$700.0 per metric ton, which is below present world prices. Even if world beef prices  - 14 - were to average 10 percent less than the long-term price now projected, the rate of return would still be 19 percent. Financial rates of return were discussed in paragraph 20. 38. At full development, after seven years, the investments under this project are likely to result in an incremental beef production of 49,OOO metric tons, valued at US$34.3 million equivalent. This should make possible additional exports of an equivalent amount given current production and con- sumption trends. An incremental 8,000 metric tons of mutton and lamb, plus an additional 6,000 metric tons of pork, are expected to be produced as a result of this project and would be worth about US$5.6 million equivalent. PART LEGAL INSTRUKTS AND AUTHORITY 39. The draft Loan Agreement between the Bank and Republica Oriental del Uruguay, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agreement conforms to the normal pattern for agri- cultural projects. 40. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI -h RECOMMENDATION 41. I recommend that the Executive Directors approve the proposed loan. Attachments Robert S. McNamara President April 12, 1972  ANNEX I URUGUAY SUMKARY STATEMENT OF LOANS As of March 31, 1972 Loan Amount Less No. Year Borrower Purpose Cancellations Undisbursed (US* ma