Colombia - Integrated Rural Development Project

Document of RETURN TO The World Bank REPORTS DESK FOR OFFICIAL USE ONLY ONE WEEK Report No. P-1899-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBI FOR AN INTEGRATED RURAL DEVELOPMENT PROJECT December 9, 1976 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (at the time of appraisal and used in this report) Currency Unit = Colombian Peso (Col$) Col$l = US$0.0303 Col$1,000 = US$30.30 Col$1,000,000 = US$30,303 US$1 = Col$33.003 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS Caja Agraria -Caja de Credito Agrario, Agricultural, Industrial Industrial y Minero and Mining Credit Bank DNP -Departamento Nacional de Planeacion National Department of Planning ICA -Instituto Colombiano Agropecuario Colombian Agricultural Institute INDERENA -Instituto de los Recursos Naturales National Institute for Renovables y del Medio Ambiente Renewable Natural Resources and the Environment CECORA -Central de Cooperativas de la Union of Agrarian Reform Reforma Agraria Ltda. Cooperatives Ltd. IDEMA -Instituto de Mercadeo Agropecuario Institute of Agricultural Marketing SENA -Servicio Nacional de Aprendizaje National Apprenticeship Service Government of Colombia Fiscal Year January 1 to December 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR AN INTEGRATED RURAL DEVELOPMENT PROJECT 1.. I submit the following report and recommendation on a proposed loan to the Republic of Colombia for the equivalent of US$52 million to assist the financing of an integrated rural development project. The loan would have a term of 17 years, including a grace period of 3 1/2 years, with interest at 8.7% per annum. A US$26.8 million portion of the loan would be transferred to the Caja de Credito Agrario, Industrial y Minero (Caja Agraria) for on- lending to farmers and marketing groups. PART I: THE ECONOMY 2. The latest economic report on Colombia (1190-CO) was distributed to the Executive Directors in August 1976. It was designed to assess current developments and provide a medium-term prospective of the Colombian economy. Country data sheets are provided in Annex 1. Background / 3. During the past two decades substantial structural transformation has taken place in the Colombian economy and the country is now well advanced in the transition from a predominantly rural, agricultural, and largely self-contained economy to an urban industrial economy, more oriented toward international trade. Broadening of the country's productive base has been accompanied by rapid growth of nontraditional exports (those other than coffee) and development of a modern sector which relies to a considerable extent on imported inputs. From 1967 to 1975 GDP increased by an average 6.0% per annum in real terms, well above the historical average of less than 5% (1950-67), and real per capita income increased by an average annual 3.6%. Two mutually dependent phenomena, increased investment and relaxation of the foreign exchange constraint, have been major factors in bringing about this acceleration. Merchandise exports have expanded more than three-fold since 1967 and, most significantly, nontraditional exports have become an increas- ingly important source of foreign exchange earnings, growing from 27% of merchandise exports to about 50% at present. Much of this increase was the result of both product and market diversification, especially of manufactured exports, as the share of total exports shipped to Latin American countries more than doubled. Despite the rapid development which has taken place in recent years, however, Colombia remains essentially an underdeveloped country with a still limited modern sector superimposed on a large, traditional, and poor base. 4. When the present Government took office in August 1974, the country was faced with several adverse developments -- weakening balance of payments This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Dank authorization.  - 2 - situation, impending loss of self-sufficiency in petroleum production, infla- tion, deterioration of public finances, and reduction in public investment -- which threatened to interrupt the high growth rate achieved by Colombia in recent years. The new administration embarked upon an economic stabilization program with the aim of restoring the basis for sustained economic growth. In line with this, it implemented basic reforms of the fiscal, monetary and price systems. 5. To help strengthen public finances, the new Government implemented a tax reform which covered almost every important component of the tax system and represented a significant improvement in terms of the progressivity and elasticity. The Government also made certain changes in the financial system with the purpose of stimulating private savings and improving the allocational efficiency of the financial system. The action included a restructuring of interest rates, simplication of the complex reserve system, and elimination of many of the more rigid and cumbersome controls. 6. The Government also took steps to correct major distortions which existed in the price system. Price controls on a number of important agricul- tural products were removed. In mid-May of this year, the Government intro- duced far-reaching modifications in its petroleum pricing policy which aim at regaining self-sufficiency in production of crude petroleum by improving incentives for exploration and exploitation. Under the new policy, foreign oil companies will be paid the international price of crude CIF Cartagena for new petroleum produced in association with the government petroleum cor- poration. (Previously the foreign oil companies received less than US$7 per barrel for new crude). The Government is also encouraging incremental produc- tion from existing fields and, in this connection, eliminated the special petroleum exchange rate, effectively increasing the price of crude oil by about 20%. Furthermore, retail prices of gasoline have been raised in successive steps from US$0.11/gallon in August 1975 to US$0.24/gallon in August 1976, or by 118%. The Government proposes to continue this policy until the prices of gasoline and other petroleum derivatives approach inter- national prices. 7. As expected, economic growth slowed in 1975 (from 6% in 1974 to about 4%) and unemployment increased, reflecting both the impact of the stabilization measures adopted at the end of 1974 and the effects of the world recession. Towards the end of the year the economy began to recover, stimulated by increased exports, larger agricultural output and heightened industrial activity. Government revenues rose by an unprecedented 50% com- pared to 1974; savings deposits and bonds outstanding, reflecting higher interest rates, increased from 23% of GDP in 1974 to 25% in 1975. Further- more, inflation was reduced from 27% in 1974 to 18% in 1975, i.e., below the Government's target of 20%. Moreover, the balance of payments turned favorable as a result of the sharp increase in world coffee prices, expansion of non-coffee agricultural exports and reduced imports stemming from the Government's stabilization effort. By the end of 1975 Colombia's official foreign exchange reserves had recovered to about US$550 million, sufficient to cover almost four months' imports. With increased export earnings the public  - 3 - debt-service ratio declined from 16.7% in 1974 to 12.7% in 1975. Thus Colombia, through a combination of fiscal, monetary and trade policies and fortuitous external developments, was able to avoid any severe, prolonged economic slowdown and to improve its external liquidity position in an envi- ronment of worldwide recession. Performance in 1976 8. The economic forces have continued to be favorable during 1976. Coffee prices are high and the balance of payments remains strong; foreign exchange reserves reached nearly US$900 million at the end of the third quarter of the year, the highest level in Colombia's history. The increased demand generated by the higher incomes of the coffee producers has been a powerful stimulus to the economy which is staging a sharp recovery. Real GDP growth is projected at 6%, a growth rate approaching that achieved during the 1968-74 period (6.7% per annum). As a result, the urban unemployment has declined to about 10% in mid-1976 compared to 13% a year earlier. 9. The inflow of foreign exchange from coffee sales has, however, led to a resurgence of inflation during the first half of 1976 and this has prompted the Government to continue to give priority to short-term manage- ment of demand. In this context, it has taken several measures. Legal reserve requirements have been increased and limitations on private external borrowing have been established. Import duties have been drastically reduced to shift part of the inflationary pressures to the external sector. Fiscal management is quite restrictive as the Treasury accounts have been kept in balance in the first half of the year even after repayment of the Government's short-term domestic debt. Almost two-thirds of coffee earnings are being kept from increasing the monetary base by measures adopted recently. 1/ The Govern- ment expects that a bumper harvest and the liberalized import policy will (although with a lag) increase the supply of goods, thus dampening pressure on domestic prices. Nevertheless, inflationary pressures are likely to persist, since foreign exchange reserves are projected to continue increasing. This would, even after the sterilization measures taken, add to the monetary expan- sion. Furthermore, current price and cost trends (the Government is attempting to hold wage increases in the public sector to 10%, but private sector wages will probably increase substantially more) as well as "corrective" adjustments in public-service prices make deceleration of price increases unlikely during the remainder of 1976. However, the Government remains strongly committed to reducing inflation; the tightening of monetary and fiscal policies, accompanied by the liberalization of imports and the stabilization of world coffee prices, should enable the Government to control the rate of inflation. 1/ The measures are: 15% of payments to coffee producers to be made in three-year compulsory savings certificates; an increase in the coffee retention tax from 23% to 46%, and investment of a substantial portion of this tax, including the four percentage points received by the Coffee Federation, in Government bonds.  - 4- Development Strategy and Prospects 10. The Government's development strategy is embodied in the 1975-78 development plan. The plan aims at creating the conditions necessary for substantially reducing unemployment through increased capital accumulation in the private sector, improvement in the efficiency of the price system in order to encourage more labor intensive production techniques and expansion of public investment. The main focus of the public sector investment plan is on Colombia's poorest regions -- Choco, Narino, Boyaca, and the North Coast -- and the rural and urban poor. Special priority has been assigned to agricul- ture because it is in the rural areas where the greatest concentration of poverty exists and in agricultural activities where the highest employment impact can be achieved. Commercial agriculture is also to receive support due to its strong contribution to export and employment growth. A substantial portion of public expenditures is being reoriented toward nutrition and primary education programs which affect the productivity of the poorest 50% of the population. Policies for promoting decentralization of industry away from the largest cities in the country have been adopted to accelerate inte- gration of more backward areas into the modern sector of the economy. 11. Colombia's strong balance of payments prospects for the immediate future should make it possible in 1977 for the country to resume the high rate of growth of GDP (6-7%) achieved in the early 1970s. Maintenance of 7% growth in the late 1970s and beyond will require imports to increase at a rapid pace (about 10% per annum in real terms). Export prospects for the next several years, however, are excellent, as world coffee prices remain strong and economic growth is resuming in the industrialized countries. With the contin- uation of appropriate incentives, minor exports should grow very rapidly once again. Manufactured exports -- textiles, chemicals, pharmaceuticals, mechanical and electrical equipment, and paper products -- are over the long-term expected to lead this recuperation, along with non-coffee agricul- tural exports. Given the improved outlook for coffee, the deficit in the resource balance is projected to remain low throughout the late 1970s. Balance of payments prospects beyond 1980 will depend to a significant extent on the results of petroleum exploration and on progress made in implementation of several resource-based export projects currently under preparation. 12. Colombia is expected to require gross capital inflows of US$2.8 billion during the five-year period 1976-80, of which almost US$600 million will be disbursed from commitments made through the end of 1975. To attain this level, annual gross capital inflow will have to increase from US$435 million in 1976 to US$760 million in 1980. Direct foreign investment is expected to provide only a small part (5%) of the required capital inflow, with approximately 50% being provided by official multilateral and bilateral sources and the remainder by suppliers', financial and other private credits. Local-cost financing by the Bank is considered justified by Colombia's pro- gressive development policies and programs and domestic resource mobilization efforts, in those cases where such financing is required to give the Bank a meaningful role in high priority projects.  13. Colombia's public external debt repayable in foreign currency amounted to US$2.9 billion at the end of 1975, or US$2.3 billion excluding undisbursed commitments. The Bank Group's share of this external debt (dis- bursed only) as of the end of 1975 was about 28% and is expected to remain at this level through 1980. Service on this debt was about 12.7% of exports goods and non-factor services in 1975. Assuming recovery of minor exports and the favorable outlook for coffee, the debt service ratio is projected to decline to approximately 12% in 1980. The Bank's share of total debt service is about 30% at present but is expected to decline to 20% by 1980. With the maintenance of sound economic and financial policies, Colombia should have no difficulty securing or servicing the amounts of external capital it needs. PART II: BANK GROUP OPERATIONS IN COLOMBIA 14. The proposed loan, the 64th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$1,298.2 million (net of cancella- tions). Of the foregoing amount, US$945.9 million is now held by the Bank. IDA has made one credit of US$19.5 million for highways in Colombia in 1961. 15. Disbursements have been completed on 39 loans and the one IDA credit. IFC has made effective investments and underwriting commitments in 22 enter- prises in Colombia, totalling about US$36.2 million of which IFC now holds US$21.2 million. Annex II contains a summary statement of Bank loans, the IDA credit, and IFC investments as of June 30, 1976. The Annex also contains notes on the execution of the 24 on-going projects. 16. Since FY68, Bank lending in Colombia has become more diversified than in earlier years. All three loans in the education sector have been made since then, as were six of the ten agricultural loans and six of the nine loans for industry. This compares with seven loans since FY68 in the sectors where the Bank has been traditionally active, i.e., power and trans- port. Bank efforts have been focused on production oriented activities and activities which carry social as well as economic benefits. 17. Bank lending to Colombia in FY76 consisted of one loan for develop- ment finance companies totalling US$80 million. The FY77 program includes the proposed integrated rural development project and proposed projects for agricultural credit and road rehabilitation. In addition, work is under way on nutrition and health, small-scale industry, slum improvement, power, telecommunications, water supply and sewerage, tourism, mining, and cooper- ative development and agricultural marketing for possible consideration by the Executive Directors during the next two years. 1.8. In lending to Colombia, the Bank tries to assist the Government in achieving four major objectives. These objectives are interdependent and complementary. One objective is to spread the benefits of growth more widely than before and, more particularly, to attach directly the problem of rural  - 6 - poverty. A second objective is to help Colombia expand output, including exports, by supporting projects that directly or indirectly make large con- tributions to production and employment. A third objective is to support programs that will bring about improvements in the management of the economy and, particularly, that will help to strengthen public institutions and financial intermediaries. A fourth objective is to transfer sufficient external resources to complement Colombia's domestic savings and provide the necessary funds for maintaining an adequate level of economic and social investments in a framework of sound domestic finances and a viable balance of payments. 19. The operations of external lenders in Colombia are shown in Annex 1. While IBRD, IDB and AID provided about 75% of total external financing to Colombia in the 1961-72 period, their share has decreased since then to approxi- mately 40%. The IDB has assisted projects in low cost housing, university education, agrarian reform, ports, electric power, water supply, transportation, and industry. Between 1968 and 1972 AID shifted the emphasis of its lending from program to sector loans, particularly for education, urban development and agriculture. More recently, it has moved in the direction of small project loans aimed chiefly at the improvement of income distribution. It is ex- pected to phase out its aid program in Colombia over the next year. PART III: THE RURAL SECTOR AND PROJECT AREAS A. The Rural Sector 20. The agricultural sector accounts for 37% of employment, 27% of GDP and 59% of the value of all exports. The rural population, defined as the people living outside centers with more than 2,500 inhabitants, is about 9 million, or 37% of the population of Colombia, which, in 1976, totalled about 24.5 million. The growth of agricultural output was on average 4.6% per annum from 1971 to 1975. Colombia is self-sufficient for most of its food requirements, but continues to require imports of wheat, cocoa, oilseeds, pulses, corn and barley. 21. The wide range of climatic conditions and the various forms of land tenure in Colombia have led to the development of several distinct types of farming. Cattle ranching predominates in the lowlands along the Caribbean coast, the lower part of the inter-Andean valleys and, increasingly, in the Orinoco and Amazon river basins to the East. Fairly intensive, modernized farms of medium and large size predominate in the upper reaches of the inter- Andean valleys. On the steep slopes rising from these main valleys, small and medium-sized farms produce a diversity of crop and livestock, but, with few exceptions, coffee is of overwhelming importance, and it has provided the resources which have financed the considerable development of the social ser- vices and infrastructure in this zone. Above the coffee zone, conditions are less favorable and these areas have not shared in the generally impressive development of the agricultural sector.  - 7 - 22. The unevenness in the distribution of 1and is an important charac- teristic of the rural sector. However, aggregated national statistics do not take into account differential land productivity; for example, they do not distinguish between the economic value of extensive ranch land and intensive coffee land. In 1973, farmers with less than 20 ha (small farms) accounted for 83% of the number but only 13% of the area of farmland, while farms of over 50 ha (large farms) occupied 80% of the area, but represented only 8% of the number of farm units. Half the rural income is retained by 10% of the rural population, of which in 1975 63% had annual incomes below the relative poverty income level, as defined by the Bank (US$148 per capita in 1975). 23. Some 47% of the children of school age in rural areas do not attend school. Schools exist throughout most inhabited parts of the country but there are serious deficiencies in the number and training of teachers, the number of classrooms and their equipment. Adult literacy is about 65% in rural areas since there have been some fairly successful out-of-school literacy programs. 24. Health services in rural areas are generally very poor and in towns the local hospitals are often poorly equipped and not fully utilized. Health statistics are particularly deficient; however, it is clear that in rural areas infant mortality is generally higher than the urban rate of 9.4 per thousand live births. Water-borne infections lead to a high propor- tion of illness and death in rural areas. 25. The country is fairly well served with main roads between Depart- ment (Provincial) capitals, but only 60% of the rural communities are linked by all-weather roads. About 35% of the rural population is linked to public electricity systems. About 4 million of the rural population live in hamlets or villages of between 50 and 2,500 inhabitants; of this group, 42% is linked to a potable water supply and 10% to a sewerage system. 26. Caja Agraria is the principal agricultural credit bank in Colombia and would have responsibility for administration of the project. It was initiated in 1931 as a part of a state-owned bank. In 1971, it was trans- formed into a mixed enterprise although the Government still retains an 89% shareholding. Caja Agraria has had considerable experience with lending to small-scale farmers and has participated successfully in two previous projects partially financed by the Bank. It has 25 regional and 805 branch offices, many of which also have outlets for seeds, fertilizers, and other farm require- ments. Sales of farm inputs by Caja Agraria currently account for about half of all national sales of these products. At the end of 1974, loans to small- scale farmers accounted for about 60% of its loan portfolio or the equivalent of US$318 million. B. The Project Areas 27. The Bank project would cover three out of five geographic areas which have been identified for the initial phase of a national rural develop- ment program (Map IBRD 12202). The Canadian International Development Agency  - 8 - (CIDA) and the Inter-American Development Bank (IDB) have already approved loans to assist in the financing of the program in Areas 4 and 5, respectively. 28. The project areas (Areas 1, 2 and 3) include districts in which there is a high proportion of small-scale (under 20 ha) farmers and poverty. In the areas selected, the current level of farm productivity is low, but there are good potentialities for major increases using existing technology which is being adapted to local conditions by the Colombian Agricultural Institute and incorporating improved varieties developed in collaboration with the International Center of Tropical Agriculture. In none of the Bank project areas is the redistribution of land a prerequisite for project execution (see para. 29), although it would be necessary in time to attempt to achieve a more equitable distribution. 29. All three project areas are located in the Andean highlands. Area I covers part of the Departments of Narino and Cauca adjoining the frontier with Ecuador; Area 2 includes much of the Department of Cundinamarca and a small part of Tolima in the center of the country close to Bogota; and Area 3 is part of the Department of Antioquia, north and east of Medellin. In 1973, the total population of these three areas was 2.6 million, of whom 1.8 million (69%) lived in rural areas on 204,000 farms covering 2.3 million ha of agricultural land. The project would be focused on the requirements of farmers with less than 20 ha, who number some 175,000 -- 86% of the total number -- and occupy 0.7 million ha of agricultural land -- 31% of all agri- cultural land. These farmers produce primarily cereals, pulses, potatoes and other starch crops and also maintain small numbers of livestock of various species. The target population would include about 1.1 million on farms and also poor, landless residents, giving a total of some 1.5 million persons with an average annual per capita income equivalent to about US$100. 30. A large number of official agencies is active in the rural areas. Generally, they are technically competent and well staffed. Nevertheless, the development of the rural areas of greatest poverty has been very slow. Contributory factors have been the attention previously devoted to assisting medium- and large-scale farmers, or producers of export crops; the strong vertical structure of each official entity with little authority delegated to the regions; budgetary uncertainties; and a lack of coordination between entities and between the national and local government authorities. In the past there has been little attempt by official agencies to discover the priorities perceived by the local communities, who therefore have not become involved in the process of development. However, there has been a growing official awareness of the needs of the poor in rural areas and a realization that their conditions of life could be improved. 31. In the project area, the average adult literacy rate is quite high (76%), although only 40% of children aged 7 to 14 years attend school. The number of schools in relation to the population is close to the national average of 7:10,000 population. The education standards are generally low and this contributes to the continuing migration to the towns of people ill prepared for urban life, and also holds back development in the rural areas.  - 9 - 32. The project areas lack an effective health service and there is widespread occurrence of avoidable or readily controllable diseases associated with impure water and unhygienic conditions. As the areas are generally at high altitudes, tropical diseases are not important. 35% of the rural com- munities are inaccessible by road and 57% of the rural population living in groups of 50 to 2,500 persons has no piped water and 78% has no sewerage system. 33. Agencies of Caja Agraria are located throughout the project area and agricultural supplies are generally available at the market towns. At present, the majority of small farmers dispose of their produce through intermediary traders who also provide extra-bank credit. There is wide- spread interest among farmers in obtaining more direct outlets to the final consumers but considerable skepticism concerning the formation of cooperative societies because of generally unsuccessful past experience. PART IV: THE PROJECT A. Prolect Concept 34. The objective of the project would be to raise living standards in selected rural areas by increasing the productivity, output and incomes of farm families and by improving social services and facilities available to rural communities. Through the project, it would be intended to reduce disparities between rural and urban amenities while facilitating the transi- tion of some of the rural population to industrial and commercial activities. This would require not only raising formal educational standards of the rural population but also increasing its familiarity with marketing, credit, techni- cal and management skills which are required both for more intensive farm management and to obtain regular urban employment, above the level of un- skilled labor. The main emphasis of the project would be on providing super- vised credit to promote farm investments and thereby to raise farm production. Rural roads would be provided to areas with the highest agricultural potential while investments in education, health, water and electricity would be designed to spread these services more uniformly, while giving priority to communities showing greatest interest in farm development. 35. The project would be a component of the Integrated Rural Development Program, which forms part of the National Food and Nutrition Plan. The Program would assist families with less than 20 ha to increase their farm productivity by providing supervised credit for development, operational expenses and the improvement of marketing. With few exceptions, this category is composed of families among the poorest 50% of the population. Priority would be given to increasing the production of crop and livestock products of high nutritive value and to promoting better family health, nutrition and living conditions. 36. The other part of the National Food and Nutrition Plan would be the Nutrition Program for which Bank financing is being considered. This would consist of the provision of subsidized food of high nutritive value to pregnant  - 10 - and lactating women, and children under five years, and supporting investments in food processing and quality control, health and water supply services and education in nutrition. The proposed Second Agricultural Credit Project could contribute to financing the production and processing of the foods of high nutritive value required for the Nutrition Program. Detailed Features a. Supervised Credit 37. Over a period of five years Caja Agraria would provide sub-loans to some 40,000 borrowers -- 23% of the target group -- on the basis of integrated farm plans incorporating crops (other than coffee), livestock, minor farm structures and tree planting; from the third year of participation in the project, credit would also be made available to farmers for minor home improve- ments related to hygiene. Caja Agraria would also provide incremental working capital and medium- and long-term sub-loans to associations of producers for marketing. Sub-loans would be financed through a credit fund to be established within Caja Agraria. In total, over the whole of the project period, Caja Agraria would be required to provide the equivalent of US$23 million from its own funds for eligible sub-projects (Section 2.11 of draft Project Agreement). Because of its central role in the project, it would be important that the financial stability of Caja Agraria be assured. With this in mind, the Govern- ment has added US$36 million to the resources of Caja Agraria during 1976 and has relieved the institution of all debt servicing responsibility for the whole Integrated Rural Development Program (equivalent to a capital contribution of approximately US$70 million over five years). In addition, assurances were obtained at negotiations that Caja Agraria would maintain at all times a liquidity ratio equal to or greater than unity (Section 4.03 Draft Project Agreement). b. Production Support 38. The project would finance part of the cost of a Program Management Unit in the National Department of Planning and an administration unit in Caja Agraria, and new facilities and increased service capabilities for the follow- ing entities: (a) Instituto Colombiano (crop and livestock adaptation Agropecuario: - (and demonstration; preparation (and supervision of farm plans (b) Instituto de los Recursos (tree nurseries; advice on tree Naturales Renovables y (planting and soil conservation del Medio Ambiente: - (and minor soil conservation (works, including protection of (water sources (c) Central de Cooperativas de la - (Market Intelligence Unit; Reforma Agraria Ltda.: (marketing advisory service  - 11 - (d) Servicio Nacional de Aprendizaje: (staff training; publicity for - (the project; training farmers (and staff of marketing groups c. Social Services 39. The project would promote more effective use of existing rural primary school facilities by providing classroom furniture -- 2,300 sets -- and 3,800 kits consisting of 'teaching aids and manuals. This component would be the responsibility of the Instituto Colombiano de Construcciones Escolares. 40. Rural Health Service teams would be formed over five years to pro- vide about 80% coverage of the rural population in the project areas. This would require the construction and equipping of 75 new health posts and im- provements to 26 existing facilities, 8 health centers and 17 local hospitals. Health staff would be trained and provided with medical aid kits and nutrition education kits. The construction of latrines in public places would also be financed under this component of the project, which would be executed by Ministerio de Salud Publica. 41. The Instituto Nacional de Salud would supervise the construction, expansion or improvement and operation of 248 new piped water systems with individual house connections; 36 existing schemes would be extended and five old schemes provided with chlorination facilities. A total of 147,000 people would benefit from these works. d. Infrastructure 42. The Fondo Nacional de Caminos Vecinales would supervise the construc- tion of 313-km of new rural roads and the improvement of 647 km of existing rural roads throughout the project areas. 43. In Area 1, the Instituto Colombiano de Energia Electrica would supervise 22 sub-projects to provide electric power to 14,335 families -- about 90,000 persons. No further 'electrification under the project is planned for Areas 2 and 3 since service levels there are already well above the national average for rural areas. B. Project Costs and Financial Arrangements Project Costs and Financing 44. Total project costs for a five-year period of investment are esti- mated to be US$131 million, including incremental seasonal credit and incre- mental working capital for produce marketing. It is estimated that the foreign exchange cost would be US$27.6 million, or 21% of the total. 45. A Bank loan of US$52 million is proposed to finance all foreign exchange costs and US$24.4 million of the local costs, and thus cover 40% of the total cost of the project. Project beneficiaries would be required to  - 12 - contribute US$11 million (19%) of farm and marketing development cost and US$2.1 million (4%) of the cost of other project components, while the remain- ing project cost of US$65.9 million (50%) would be shared by the National Apprenticeship Service -- US$3.1 million (2%), Caja Agraria -- US$23 million (18%) and the Government -- US$39.8 million (30%). Further details are given in Annex III. 46. Local currency financing is recommended because of the importance the project would have within the overall Government attempt to promote the economic development of the poorest of the rural population within the project areas and because of the relatively low foreign exchange content which is characteristic of rural development projects. The cost sharing proportion which is proposed is necessary to give the Bank a meaningful role in the project (see para. 12). 47. Of the total Bank loan of US$52 million, US$26.8 million (52%) would be used to assist in financing sub-loans to farmers and marketing groups, through a fund to be established in Caja Agraria. The relending interest rate, terms and grace periods are summarized in Annex III. To ensure that relending rates reflect current economic conditions, the Bank obtained assurances at negotiation that it would annually review with the Government and Caja Agraria the terms and conditions of subloans to be made under the project. (Section 3.07 of Loan Agreement and Schedule I to the Project Agreement). Procurement 48. International competitive bidding, in accordance with Bank Guidelines on Procurement, would be required for orders of an estimated value of more than US$100,000 for the purchase of vehicles, water pumps and piping. Caja Agraria would consolidate the requirements of the participating entities and issue the calls for tenders. Domestic manufacturers would be granted a preferential margin in bid evaluation equal to the prevailing tariff, or 15% of the c.i.f. cost of imports, whichever is the lower. All other purchases of goods and services would be made in accordance with local competitive procedures accept- able to the Bank, with the exception of individual purchases by farmers where competitive bidding would be impractical. Procurement in such cases would be through regular commercial channels. Further details are given in Annex III. Disbursement 49. The loan would be disbursed over a period of six years. (See Annex III). Disbursement would be made according to the following percentages of expenditures certified by Caja Agraria: (a) Sub-loans for farm and marketing 49% of amount disbursed operations and development (b) Vehicles and medical equipment 100% of foreign expenditures or 40% of ex-factory cost of locally manufactured goods  - 13 - (c) Cables and electrical equipment; 100% of foreign expenditures water pipes and pumps or 80% of ex-factory cost of locally manufactured goods (d) All other expenditures by Caja 36% Agraria and project entities Retroactive financing not exceeding US$500,000 is proposed for expenditures incurred from July 1, 1976 for initial staff training and orientation for project work, to initiate farming adaptation and demonstration units, the Natural Resources Advisory Service, the Marketing Advisory Service and engineering studies. C. Market and Production Aspects 50. The incremental farm production which may be generated through the implementation of the proposed project would be locally significant and could make a small but useful contribution to the national food requirements by 1985. It is projected that by then the incremental production from farms receiving sub-loans under the project could amount to the following proportions of the national demand: cereals and other starch crops, 5%; non-centrifuged sugar, 4%; pulses, 6%; vegetables, 1%; and meat and milk, 2%. 51. The project would set out to blend improved methods into existing farming systems and practices. The farmers in the project areas are already well established and the existing management systems have been evolved over many centuries in the light of experience and in order to minimize risks to the farmers. More intensive farming practices could increase the economic risks to producers; the project would seek to reduce this problem through placing great emphasis on improving marketing channels organized by associa- tions of producers, which may take various forms including cooperative societies. D. Implementation 52. The overall policy for the National Integrated Rural Development Program is determined and supervised by the National Council for Economic and Social Policy, a ministerial level body chaired by the President of the Republic. 53. Management and coordination would be carried out by a Program Manage- ment Unit, headed by a Director General in the National Department of Planning responsible for the whole Integrated Rural Development Program, of which the proposed Bank project would form about 45%. The administration of the program would be carried out by the Department of Rural Development of Caja Agraria.  - 14 - 54. Caja Agraria would enter into subsidiary project agreements with each entity responsible for implementing a component of the project. These agreements would define the responsibilities of the respective executing agencies to execute their components of the project and would recognize the responsiblity of Caja Agraria to monitor the physical and financial progress of each component and report to the National Department of Planning (Section 2.02 of draft Project Agreement). Caja Agraria would also consoli- date the issuing and awarding of international tenders required for the project and transmit reimbursement applications from the participating enti- ties through the Ministry of Finance and Public Credit to the Bank, which would disburse to the account of the Ministry in the Bank of the Republic. 55. A permanent Evaluation Group for the whole Integrated Rural Develop- ment Progam would be formed in the National Department of Planning but would be financed outside the project (Section 3.03(a) of draft Loan Agreement). 56. There would be four levels of committees of participating entities for the project: community, municipal, departmental and national. The target population would be included in the community and municipal committees and would constitute 50% of the membership and provide the chairman for both committees. E. Financial Analysis 57. The financial rates of return of representative farms range between 33% and 91% and income levels would be substantially improved by the project. However, at full development it is projected that for about half of the repre- sentative farms, incomes would still be below the poverty level in Colombia (US$148 per capita, 1975). This assessment indicates the continuing need for the promotion of employment opportunities in rural areas. The Small-Scale Industry Project (Loan No. 1070-CO) and the proposed Second Agricultural Credit Project were appraised with this problem in mind and they are expected to assist in the creation of employment opportunities in the project area. 58. Beneficiaries' contribution to total project costs would amount to 10% of total costs. Seasonal credit for farm operations would require a contribution of 5% from the sub-borrower in the first year, increasing to 15% for the fourth year. Farm investment and market operations and development would require at least 15% contribution by beneficiaries. Communities are required to contribute 15% of the cost of potable water sub-projects and 10% of total investment costs for rural health posts and centers and electrifica- tion subprojects. At negotiations, assurances were obtained from the Govern- ment that tariffs for electricity and potable water supplied under the project would be maintained at levels sufficient to recover operating and maintenance costs, including depreciation. (Section 4.03 of draft Loan Agreement). 59. Through the implementation of the proposed project, the Government would be committed annually to finance additional current costs, rising to US$10 million by year 5. About US$8 million per year would continue to be  - 15 - necessary after the end of the five-year investment period proposed for the project. The largest individual cost would be for the operation and mainte- nance of the health services to be established within the project areas. In addition, the Government would bear the entire responsibility for servicing the proposed Bank loan. F. Economic Analysis 60. At full development (Year 5), 23% of the small farmers in project areas are expected to have become incorporated into the supervised credit component of the project. At this stage it is anticipated that the incre- mental value (using 1975 international prices) of crops would be US$22.6 million and that of livestock, US$12.3 million. Increased production of various kinds of meat and non-centrifuged sugar should release additional amounts of beef and sugar for export and help the agricultural sector to continue to play a significant role in the growth of Colombia's foreign trade. At the same time, increased production of wheat and pulses would save foreign exchange by reducing the amount imported. The net annual foreign exchange savings of the project at full development would be US$15.4 million. The other commodities produced by the project are for domestic consumption only and would assist in meeting the increased demand resulting from higher per capita incomes and would contribute to improved nutritional standards. 61. The number of people benefitting directly and indirectly from the project would amount to approximately 1.5 million. Many of these would, for the first time, have access to advisory services, credit facilities, markets, training and education opportunities, health care and water and electricity delivery systems. 62. Given the emphasis of the project on providing credit and other services to farmers-with less than 20 ha of land, it is anticipated that the project would improve the living standards of the rural poor and improve income distribution in the project areas. It is projected that at full development, 32% of the additional income generated under the project would accrue to families currently receiving annual incomes of less than the equivalent of US$29 per capita and 74% would be received by families now earning annually less than the equivalent of US$98 per capita. 63. The project's contribution to employment would stem mainly from the regular work generated at the farm level at full development and also from the opportunities generated during the investment period. At the farm level, the project would require, annually, an additional 1.3 million man- days of labor at full development, equivalent to 6,500 full-time jobs. Some 0.25 million man-days, or 20% of this labor, would be provided by members of farm families while the rest would be provided by hired labor. In addition, 0.68 million man-days (3,400 full-time jobs) would be generated by the other components of the project during the investment period.  - 16 - 64. The economic rate of return is estimated at 22% for the productive components of the project (credit, technical assistance, rural road develop- ment and the project management unit), which account for 82% of total project costs. 65. The remaining components of the project -- education, health, potable water and electrification, which together account for 18% of total project costs -- were excluded from the economic analysis as no meaningful rate of return could be estimated. These components, though not contributing directly to the productive goals of the project, will help improve the living conditions of the low income stratum rural population. The project's activi- ties in these fields are designed to bring the level of these services in the rural areas closer to that prevailing in urban communities. G. Conclusions 66. The proposed project presents a coherent attack on the problem of rural poverty and deprivation in Colombia. The main emphasis would be on raising the level of farm productivity by combining the efforts of Government entities to this end, while providing adequate funds for credit. Most of the components of the project would intensify ongoing activities in a coordinated manner, but the natural resources and health service components would consti- tute innovative approaches in these fields. The project would provide exper- ience in concerted rural development activities within fairly limited but representative areas, which would be suitable for more widespread application. 67. The functioning of the market system and fluctuations in prices for farm products present the greatest uncertainties facing the project. The extent to which members of the target population will take part in the project will be strongly influenced by their assessment of the potential benefits and apparent risks of participation. These risks have been recognized during the preparation of the project, which consequently includes special emphasis on improving the competitive position of the target population. The market advisory service and market intelligence service would be particularly impor- tant since it is the Government's policy to limit its direct intervention in marketing and to encourage the interaction of demand and supply to determine prices. Finally, coordination and collaboration between executing agencies is expected to develop during the course of the project. To the extent that such integration among agencies fails to occur, project effectiveness would be dimi- nished, although the individual components of the project would still be of value to the communities. PART V: LEGAL INSTRUMENTS AND AUTHORITY 68. The draft Loan Agreement between the Republic of Colombia and the Bank, the draft Project Agreement between the Bank and Caja Agraria, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, and the text of the draft resolution approving the proposed loan are being distributed to the Executive Directors separately.  - 17 - 69. Special conditions of the loan are listed in Section III of Annex IV. Special conditions of effectiveness of the loan would be that: (a) the subsidiary agreements between the Government and Caja Agraria, and Caja Agraria and ICA, INDERENA, CECORA and SENA, have been duly executed (Section 6.01(b) and (c) of the draft Loan Agreement); and (b) a Program Evaluation Group has been formed. (Section 6.01(d) of the draft Loan Agreement). 70. In addition, a condition for disbursement for each loan category separately would be that the relevant subsidiary agreement between Caja Agraria and the participating entity (other than ICA, INDERENA, CECORA, and SENA) has been duly executed (paragraph 3 (b) of Schedule 1 to the draft Loan Agreement). 71. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RECOMMENDATION 72. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments December 9, 1976   ANNEX 1 eBge 1 of 4 COLOMBIA - SOCIAL ItOICATOSS DATA SHEUT LAND AREA ITHOU KM21 -- - ----------- COLON81A REFERENCE COUNTRIES t19701 TOTAL 1138.9 MOST RECENT AGRIC. 227.8 1960 1970 ESTIMATE TUJKEY BRAZIL MEXICO ____._________ - - ____________ ____________ ----