Honduras - Agricultural Credit Project

Report No. 1044z-HO ILE COPY Appraisal of an Agricultural Credit Project Honduras CIRCULATIG COPY IIQ BE REFURNED TO REPORTS DESK May 6,1976 Regional Projects Department RETURN TO Latin America and Caribbean Regional Office REPORTS DES7e FOR OFFICIAL USE ONLY WITHIN I ONE WEE_<_| Document of the World Bank 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 Banr authorization.  CURRENCY EQUIVALENTS US$1.00 = L 2.00 (Lempiras) L 1.00 = US$0.50 L 1,000,000 = US$500,000 WEIGHTS AND MEASURES Metric System ABBREVIATIONS CB = Central Bank of Honduras MRN = Ministry of Natural Resources PC = Project Commission PCU = Project Credit Unit NDB = National Development Bank BPs = Participating Banks/ Financial Institutions INA = National Agrarian Institute ISLETA = Associative Cooperative of Banana Producers, Isleta PAS = Pan American Agricultural School (Zamorano) CONSUPLAN = National Planning Council COHBANA Honduranean Banana Corporation GOVERNMENT OF HONDURAS Fiscal Year January 1 - December 31  FOR OFFICIAL USE ONLY HONDURAS AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .......... .................... i-iii I, INTRODUCTION ........................... 1 II. BACKGROUND ...........**.........*..****e**ee*e...... I A& General .......* ................................. 1 B. The Agricultural Sector ..... .................... 2 C. Banking and Agricultural Credit ................. 4 D. Performance under Previous Agricultural Projects. 7 1I. TLE PROJECT .................... 8 A. Brief Descriptian 8 B. Detailed Project Features 11 C. Cost Estimates 15 De Financing ....................................... 17 El Procurement ................................... 18 F. Disbursement ........ .......................... .. 18 G. Organization and Management ..................... 19 H. Lending Operations .. ........... ................. 20 I. Accounts and Auditing ........................... 22 IV. PRODUCTION, MARKETS AND MARKETING, PRICES AND PRODUCER BENEFITS ............. ................ .. 23 V. BENEFITS AND JUSTIFICATION ........................... 26 VI. AGREEMENTS REACHED AND RECOMMENDATION ................ 27 This appraisal report is based on the findings of a mission which visited Honduras in October/November 1975, composed of Messrs. Frank Thomas, Fabian Portilla (IBRD), Pedro Montorfano, German Rioseco, and Ian Wardrop (Consultants). 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.  TABLE OF CONTENTS (Continued) ANNEXES 1. The Agricultural Sector Table 1 - Domestic Product at Factor Cost, 1965-74 Table 2 - Commodity Exports, 1965-74 Table 3 - Merchandise Imports, 1965-74 Table 4 - Value Added in Agriculture, 1965-74 Table 5 - Population, 1970-75 Table 6 - Farm Size and Land Use Table 7 - Land Tenure and Land Use Table 8 - Agrarian Reform Law - Maximum Size of Holdings Table 9 - INA Agrarian Reform Settlements, 1975 Table 10 - INA Agrarian Reform Program, 1976-79 Table 11 - NDB Grain Storage Capacity Table 12 - NDB Support Prices for Basic Grains, 1970-75 Table 13 - NDB Market Operations in Basic Grains, 1971-75 Table 14 - Livestock, Total Production, Imports, Exports and Apparent Domestic Consumption Table 15 - Livestock Production Distribution by Departments, 1974 Table 16 - Central America, Prices Paid to Farmers, 1974-75 Table 17 - Average Price (F.O.B.) Received for Frozen Boneless Beef Exports, 1970-74 lable 18 - Selected Crops - Area Harvested, Total Production and Yields, 1965-74 Table 19 - Bananas and Rice Production, Trade and Apparent Domestic Consumption, 1969-74 Table 20 - Selected Export Commodities, F.O.B. Prices Received by Honduras 2. The Banking System and Agricultural Credit Table 1 - Loans and Discounts by Sector for the Banking System to the Private Sector, 1972-74 Chart 1 - Central Bank, Organization Chart Table 2 - Central Bank, Summary of Financial Accounts, 1972-74 Table 3 - Consolidated Balance Sheets of Principal Banking Institutions, December 31, 1974 Table 4 - Portfolio Loans of Banks, 1970-74 Table 5 - Localization of Private Banks and Number of Branclhes Chart 2 - National Development Bank, Organization Chart Table 6 - National Development Bank, Summarized Balance Sheets, 1972-74 Table 7 - National Development Bank - Summarized Profit and Loss Statements, 1972-74 Table 8 - First and Second Livestock Projects - Amount Approved by Banks, October 31, 1975 Table 9 - Profit and Loss Account of the Banking System, 1970-74 3. Performance Under Previous Agricultural Projects  TABLE OF CONTENTS - ANNEXES (Continued) 4. Livestock Models (a) Dairy/Beef Farm (40 ha) Tables 1-4 - Investment Costs; Herd Projections; Sales and Operating Costs and Cash Flow Projections (b) Beef Fattening Unit (50 ha) Tables 5-7 - Investment Costs; Sales and Operating Costs and Cash Flow Projections 5. Crop Models (a) Development of Banana Farm (40 ha) Tables 1-3 - Investment Costs; Sales and Operating Costs and Cash Flow Projections (b) Irrigated Rice Farm (50 ha) Tables 4-6 - Investment Costs; Sales and Operating Costs and Cash Flow Projections 6. Banana Plantation Rehabilitation - Isleta Tables 1-4 - Investment and Rehabilitation Costs; Rehabilitation Costs and Timing/Months; Costs of Production Projections; Production/Income Projections 7. Agro-Industry and Machinery Rice Mill Tables 1-4 - Investment Costs; Sales and Operating Costs; Cash Flow Projections 8. Technical Assistance Table 1 - Project Credit Unit - Cost of Administration and Training Table 2 - Research, Extension and Seed Production (MRN) - Cost of Technical Assistance and Training Table 3 - Isleta Banana Cooperative 2,000 ha - Cost of Technical Assistance Table 4 - Agrarian Reform Institute (INA) - Technical Assistance Costs Table 5 - Pan American Agricultural School Costs 9. Project Cash Flow - Central Bank 10. Project Cash Flow - Participating Banks 11. Estimated Disbursement of IDA Credit 12. Economic Rate of Return Table 1 - Economic Rate of Return Analysis MAP IBRD - No. 11910 - Project Area   HONDURAS AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSJIONS i. Honduras is one of the poorest countries in Latin America and heavily dependent on agriculture to sustain its economy. The population is largely rural and engaged in low-productivity, traditional agriculture. Poverty, unemployment and illiteracy are fundamental problems which have re- sulted in recent years in rural unrest in the forms of illegal land invasions and pressure on the Government to implement its agrarian reform program. While GDP per capita is about US$340, distribution is highly skewed, with 60% of the rural population receiving annual incomes of less than US$100. Since 1969, the economy has been in a state of recession, with agriculture growing slowly. Relative improvements during the 1969-75 period in banana, coffee, forestry and beef production were offset by unstable world prices for export- able products and then virtually nullified by natural disasters and world inflation. To reactivate growth of the sector and redress problems of skewed income, land distribution and unemployment, the Government has embarked on an active program of agrarian reform and institution building to carry it out. The program aims to increase the volume of agricultural credit to agriculture in general and land reform beneficiaries in particular, improve extension services, marketing facilities and develop rural infrastructure and social services. ii. The proposed project would assist the Government to achieve some of its objectives by financing the provision of medium- and long-term credit for the development of livestock, annual and perennial crop production, small- scale agro-industries, contractors' machinery for farm development and the de- velopment of institutions to improve technical, research and training services. The institutional and technical services aspect is important enough to involve about 30% of the total costs of the proposed project and would include the recruitment of specialists in all aspects of banana production; rice and oil crops research; seed production and certification, formation of campesino groups and their basic training; short-course instructors in agricultural production, agro-industries and farm management; and financing of consulting firms to conduct studies leading to further agrarian reform settlement and integrated rural development. The proposed project is in accordance with Government long-term plans for agricultural growth and income distribution. Apart from the financing by IDA of 70% (US$14 million) of the total project costs (US$20 million), the participating banks would finance US$3 million (15%); the Central bank, US$1 million (5%); and the sub-borrowers, US$2 mil- lion (10%) of the total. iii. The project would be administered by the Central Bank (CB) through a Project Credit Unit (PCU) acting under the overall policy guidance of a Project Commission (PC) representing the main participating institutions and farmer beneficiaries. Farm credit operations would be handled by participating banks through Project Administration Agreements with CB, which would stipulate  - ii - lending and rediscount terms and other operational norms. All subloans would be made on the basis of sound farm plans previously approved by the staff of the PCU. For non-lending (grant) components of the project such as for the provision of technical services, equipment for institutions, and studies, all proposals, including contracts, would be approved by the PC and submitted through the CB for IDA approval. iv. Previous agricultural projects financed by IDA were for livestock development only. Credit 197-HO for US$2.6 million became effective in January 1970 and was successfully completed in January 1975 about one year ahead of the closing date. IDA Credit 434-HO for US$6.6 million continued the development of the livestock industry, which commenced under the First Project. As of March 31, 1976, about 61% of the proceeds of the credit had been committed due to a slowdown in demand brought about by uncertainties over the implications of agrarian reform and land invasions. In order to meet an emergency situation that had developed in the banana producing sub-sector, the Government requested a reallocation of US$1 million out of the uncommitted proceeds to finance the rehabilitation of 2,000 ha of hurricane-damaged banana lands now settled by agrarian reform beneficiaries as an Associative Company called Isleta. This was approved by IDA on March 10, 1976. Once this subloan is effective commitments would amount to 75%. Apart from the slowdown in demand, performance under Credit 434-HO has been satisfactory and full commit- ment is now expected by the end of September 1976. Organization and manage- ment of both projects through the CB and PCU has been good and it is therefore proposed to maintain the structure, with appropriate strengthening for this project. The proposed project will ultimately benefit from and be complemented by the First Education Project of January 1974 for US$6.0 million of which US$1.5 was allocated for agricultural education. v. Interest rates to sub-borrowers would be 11% per annum and lending terms would vary from 7 to 12 years, including 2 to 5 years of grace. Inter- national competitive bidding (ICB) for on-farm investment items, machinery contractors and for the small-scale agro-industries would not be feasible. However, ICB would be appropriate for the purchase of vehicles, machinery and equipment to be financed under the project for CB, the Ministry of National Resources, the National Agrarian Institute and the Pan American Agricultural School. vi. The proposed project would make a significant contribution to agri- cultural production, small farmer incomes, and employment. Direct bene- ficiaries would be about 2,900 adults representing about 17,000 people. Off-farm activities in agro-industry and support services would directly employ an additional 100 adult persons representing 600 people. There would be considerable, but unquantifiable, benefits in professional employment, future agrarian reform land settlement and institutional strengthening. The project would help relieve the considerable social tensions that exist in Honduras. At full development, there would be an annual incremental produc- tion of about 83,000 m tons of bananas, 7,000 m tons of paddy rice, 700 m tons of beef and almost 8,000 m tons of milk, all of which would find ready export or domestic markets.  - iii - vii. Estimated internal financial returns range from 15% to 27% and the overall economic rate of return is estimated to be 41%. viii. During negotiations, appropriate assurances were obtained that provide a suitable basis for an IDA Credit of US$14 million for 50 years, including 10 years of grace. The borrower would be the Republic of Honduras and the Government would assume the foreign exchange risk.   HONDURAS AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1.01 The Government of Honduras has requested an IDA Credit of US$14 million to help finance a continuation of its livestock development program, initiated under the First and Second Livestock Development Projects, as well as to strengthen annual and perennial crop production, develop small agro- industrial enterprises and farm development contractor services, and improve technical services to land reform beneficiaries. 1.02 Bank Group lending to the agricultural production sector so far has been for livestock development only. The First Livestock Development Project (Credit) 179-HO) for US$2.6 million became effective in October 1970 and was completed in January 1975, while the Second Livestock Development Project (Credit 434-HO) for US$6.6 million became effective in January 1974, and as of March 31, 1976, was 61% committed. Full commitment is now expected by the end of September 1976. Performance under these projects has been generally satisfactory. 1.03 The proposed Agricultural Credit Project (Project) was prepared by the Project Credit Unit of the Central Bank (CB) which coordinated the work of technicians of the CB, the Ministry of Natural Resources (MRN), the National Agrarian Institute (INA), the National Development Bank (NDB) and the National Planning Council (CONSUPLAN). Assistance was also provided by the Bank. II. BACKGROUND A. General 2.01 Honduras, with an area of about 115,000 km2 (see Map IBRD 11910), has a population of about 2.9 million (July 1975) growing at the high annual rate of about 3.0%. Although there is an overall population-to-land ratio of only 24 persons per sq km, there is a marked concentration in the western half of the country. The present land resource base is narrow due to a lack of road communications and other infrastructure, especially in the eastern part of the country. Unemployment is about 10% overall an adult illiteracy about 50%. Per capita income was about US$340 in 1975. Income distribution is highly skewed, and it is estimated that about 60% of the rural population have annual incomes of less than US$100. For the 1971-72 period, about 45% of families in Honduras, mainly engaged in agricultural activities, received only 8.8% of the total incomes, with an annual average per capita of only about US$60, including the imputed value of farm produce consumed on the farm.  - 2 - 2.02 The economy of Honduras is heavily dependent on the export of agricultural products, especially bananas. Diversification of production has been only modest, and processing of primary commodities is limited. Known mineral deposits are on a small scale, but timber resources, includ- ing extensive natural pine forests, offer room for development and there is also considerable potential for agricultural settlement and develop- ment in areas not now served by basic infrastructure. 2.03 Since 1969, growth of the agricultural sector has been slow. Some of the main factors have been hurricane damage to banana plantations in 1969 and again in 1973 and 1974; droughts in 1972 and 1975; a war with El Salvador in 1969; virtual withdrawal from the Central American Common Market in 1971 causing a slump in trade; restrictions in beef exports to the USA and reduced world beef prices since 1973; and the sharp increase since 1973 of prices paid for oil and other imported goods on which Honduras relies to maintain even a basic modern economy. Foreign currency reserves are at a precarious level and preliminary estimates indicate that the GDP for 1975 will result in a negative growth of 3.5% per capita compared with 1974. B. The Agricultural Sector Performance 2.04 The agricultural sector contributed an average 37% of GDP forma- tion in the period 1970-74. In 1974 it accounted for 36% of GDP and almost 80% of total exports (Annex 1, Tables 1 and 2). Bananas are predominant. Historically, production and exports have been dominated by two foreign companies, one of whom (Standard Fruit) relinquished its holdings in the Aguan Valley in 1975 following severe damage from Hurricane Fifi. Bananas occupy about 0.3% of the land area, and of the total area of 38,000 ha, only 22,000 ha are plantations dedicated to production for export. In the period 1972-74, bananas provided about 35% of total export earnings and about 44% of exports of agricultural origin. However, production and exports of bananas fell by about 200,000 m tons between 1973 and 1974. Exports for 1975 were estimated to have dropped to about 480,000 m tons as compared with a 1970-72 average of about 925,000 m tons, because of hurricane damage. 2.05 Following bananas, coffee, timber and meat contributed about 16%, 14% and over 7% respectively, to total exports over the 1972-74 period. All other agricultural production, including sugar, cotton, grains and tobacco together represented about 7% of exports. Importantly, beef exports rose from about US$19 million in 1970 to a peak of about US$44 million in 1973 but declined to a little over US$33 million in 1974. Domestic milk pro- duction increased from about 150 million liters in 1970 to an estimated 196 million liters in 1974, and imports of milk and milk products declined commensurately, from 33 million liters to about 25 million liters  equivalent. There is good potential for even further expanding milk pro- duction, thereby lessening the drain on foreign exchange resources, and the same could be said for rice. To realize such increases however would require substantial credit and technical inputs. 2.06 Growth and performance of the agricultural sector apart from bananas have not been great, and the relative improvements which have taken place in coffee, forestry and beef production have been offset by unstable world prices for exportable products and virtually nullified by natural disasters and world inflation. In order to reactivate growth of the sector and also to redress problems of skewed income distribution, unemployment and lack of opportunities for the rural population to better its lot, the current Government has, by Decree No. 170 of December 30, 1974, actively initiated agrarian reform which previously had existed in name only. The Government also aims to increase the volume of agricultural credit, improve extension services to farmers and land reform beneficiaries, improve marketing facilities and generally develop rural infrastructure and social services for the rural population. Land Distribution, Farm Size and Agrarian Reform 2.07 Census figures for 1965 (now being updated) indicate that there are about 180,000 farmers occupying about 2.4 million ha, or a national average of about 13.5 ha per farm (Annex 1, Table 6). Land is very un- evenly distributed, with 68% of farms being below 7 ha (average 2.5 ha) and occupying only 12% of total farm land. Farms over 350 ha number about 7,000 (about 0.4% of total farms) but occupy about 28% of the farmed land. Many of the small crop farms are on marginal land or in marginal areas ill served by roads, markets or other facilities, while, conversely, many of the larger farms dedicated to livestock production are on land where intensive cropping could be practiced. With the promulgation and active implementa- tion of Agrarian Law No. 170, however, the census figures, whether those of 1965 or updated, will have less and less meaning as older forms of land owner- ship, occupancy and use, whether through title, lease, squatting, invasion or grant, are replaced by those envisaged under the Law. The system of land titles is disorderly, with a variety of tenure superimposed on the Spanish private (sitio) and public (ejido) land grant systems. Many titles are insecure and unsuitable as credit guarantee and in most cases properties are undervalued for minimization of tax payments. 2.08 Honduras had no effective policy of land tenure reform until Decree No. 8 of December 1972 and Law 170 were promulgated. Previous to, and even after, the passing of this legislation the rural climate was one of uneasy association between private landholders, small farmers and landless rural laborers, with widespread unrest, land seizure and outbreaks of violence. This unrest was mainly due to low rural living standards, a rapidly growing population and general land hunger, with great difficulties of access to land. The role of the National Agrarian Institute (INA), in implementing Law 170, is one of great importance, with the Chief of State presently acting as its Director. Agrarian reform now is an integral part of development strategy, and to fulfill its function, INA is strongly supported by USAID, FAO and IDB,  - 4 - for the purposes of strengthening its institutional and operating capacity. The general aim of INA is to develop group rather than individual farming, eliminating excessively small farms and regrouping them into viable units, but, at the same time, allowing efficiently run private, commercial size farms to operate. The view held by INA is that land is a common national resource which people must use and maintain in an efficient way. It is not to be a base for privilege or used as a freely marketable commodity. Annex 1 contains further details of Law 170, and Tables 9 and 10 provide data on progress achieved and future plans for settlement. While the agrarian reform movement in Honduras is now a serious attempt to implement distribution of land, INA will require a great deal of outside technical and financial assistance to meet its 1976-79 target of settling about 62,000 families on 310,360 ha of land in new settlements, even though it has settled 29,580 familes on about 123,600 ha during the past few years, mainly under Decree No. 8. Supporting Services 2.09 The departments in Government dealing with agriculture are not well developed and still suffer from a lack of professional staff, poor long-range planning and a shortage of funds. Salaries are poor, so that "moonlighting" and a high turnover of staff are permanent features. Extension services to farmers are provided by Desarrollo Rural (DESARRURAL), a semi-autonomous agency with MRN. The agency is short of staff, and is primarily committed to attempt to service the needs of small farmers and the reformed sector. It works in close cooperation with NDB and INA and is thus one of the most overworked public agencies. Agricultural research facilities are almost non-existent and require considerable strengthening. Government services are complemented by technical advice supplied by commercial suppliers (veterinary products, fertilizers, pesticides) and by some credit institutions, notably NDB and CB. The foreign banana companies conduct research but there is limited dissemina- tion of their results. Introduction of new seeds varieties and work on crops which could be introduced to Honduras is negligible. C. Banking and Agricultural Credit General 2.10 Honduras has a well developed banking system, consisting of a national Central Bank (CB), a Government-sponsored and owned National Devel- opment Bank (NDB) and 10 private commercial banks (Annex 2). The CB follows conservative monetary policies and operates effectively, with the result that no banks have failed even though NDB has sustained substantial losses. The commercial banks are soundly run. Several are wholly or in part owned by overseas interests. Bank loans are made predominantly from deposits, since rediscounting facilities and foreign commercial lines of credit are restricted by CB for reasons of inflation control. The great majority of loans made by commercial banks and nearly half of those made by NDB are short  term. The banks pay 5% to 6% interest on time deposits and the interest rate has recently been raised to 11% for agricultural, industrial, and export loans, except for special projects such as the IDA-financed First and Second Livestock Development Projects for which the interest rate is 9%. There is no long-term money market in Honduras. The Government and international finance institu- tions are practically the only sources of long-term loan funds, which are in short supply. Responses to inflation are not generally through manipulation of interest rates but rather through administrative measures such as modify- ing legal reserve requirements, limiting rediscount facilities and taxing the import of non-essential items. 2.11 Up to the end of 1973, most medium to large commercial farms ob- tained credit from overseas or from private banks or used their own resources, while smaller farmers were usually clients of the NDB. Agrarian Reform beneficiaries--cooperatives and associative enterprises--are almost entirely dependent on the NDB for both long- and short-term credit and they will re- ceive priority treatment. The agrarian program has and will continue to place great pressure on NDB and increase greatly the need of resources for financing the sector. The private producing sector will also require greater financing in order to develop its farm holdings of allowable size (Annex 1, Table 8) to the levels of efficiency Law 170 requires and thus avoid the risk of expro- priation. By policy definition, these producers will have recourse almost exclusively to the private banks for farm development. Such is the current uncertainty of private banks over guarantees, that they are reluctant to lend for long-term investment for farm development except against guarantees other than rural land. In the case of default of an existing client who has offered land as a guarantee, the banks are also concerned that INA would be the only purchaser and would pay in long-term, low-interest earning agrarian bonds, which would effectively reduce their liquidity. Additionally, in the case of farmers who have declared a low cadastral value for tax purposes (para 2.07), which would be the price paid by INA, banks are also concerned that even the nominal value of the bonds would not necessarily cover outstanding debts. The CB and the association of private banks are working together to try to find a solution to these and other problems. All banks would need to increase their staff for analyzing credit applications and providing technical assistance so that good farm plans can be carried out effectively. The increase in staff would be marginal and related to the expansion of portfolios under the project but this staff increase would constitute the best guarantee against risk by screening out bad prospects. 2.12 The main channels of institutional lending are the NDB and the commercial banks. At the end of 1974, total loans to the agricultural sector amounted to about US$88 million, or about 31% of all lending. Total credit volume increased by US$23 million between 1972 and 1974. During 1974, credit to the agricultural sector continued to grow, increasing in lending volume for cropping by 28.6% (US$9 million), as compared with the year before. Livestock credits grew at a lesser rate but were nevertheless about US$4 mil- lion greater than the volume for 1973. Many farmers take advantage of the  - 6 - considerable, but unquantified volume of noninstitutional credit available to them, usually from suppliers or money lenders, to avoid mortgaging land and to keep from having to submit to the procedures generally adopted by banks for the granting of credit. The National Development Bank (NDB) 2.13 The NDB was established in 1950 as an autonomous Government agency to finance a wide range of agricultural development schemes. In addition to agricultural lending, the bank is also engaged in lending to commerce, in- dustry and in a range of non-banking activities such as operating the Govern- ment's grain marketing program and running a number of farm supply stores. As of December 31, 1974, NDB loans to agriculture totalled about US$48 mil- lion, which represents about 55% of all lending to agriculture in Honduras (Annex 2, Table 1). 2.14 The NDB operated at a loss for the past six years, aggregate losses between 1972 and 1974 being US$4 million. When the First Livestock Development Project was appraised, it was decided that NDB should not parti- cipate, largely because its administration was weak, its technicians over- extended, and its debt collection poor. Since then, however, NDB's perform- ance has improved and detailed studies by both USAID and IDB have commented favorably on its revamped administration and supporting technical services. IDB uses NDB as the lending agency for an agricultural loan of US$9 million granted in 1972 of which US$6 million was to be devoted to livestock devel- opment and which also provides for organization and management assistance to NDB and imposes conditions of loan disbursement which require a financial restructuring of the bank. At the end of December 1974, NDB had a total portfolio of about US$57 million, of which US$13.2, or 23%, was in arrears. Of this amount, 64% involved NDB's own funds and 34% those of USAID and IDB loans. In addition to the overdue loans, others of about US$8 million were refinanced which would bring the value of actual overdues to about US$21.2 million, or 37% of total credit portfolio. This situation does not indicate sound management and it is evident that NDB must clean up its portfolio and replenish its capital to fulfill its role in agrarian reform. Under a recently appointed new president (January 1976), the NDB is seeking to improve its performance. 2.15 NDB was approved, in principle as a participating bank during nego- tiations of the Second Livestock Project, subject only to the signing of a standard Project Administration Agreement, approved by IDA and common to all participating banks. Decree No. 152 of November 11, 1974 modified long-term lending rules to allow NDB to participate. IDA did not undertake a specific review of organization and operations other than that undertaken at appraisal. After one year of project operations, NDB, as of December 31, 1975 had granted 15 sub-loans out of a total of 162 farm loans for a value of about US$350,000 or about 8% of the total lending volume. As a late starter, and being only one out of eight participating banks, the NDB has performed reasonably well, especially in recent months, during which loan processing has speeded up and prospects for further improvement are good. Five qualified technicians have  been recruited for farm plan analysis, supervision and debt recovery. T-L--der the proposed project, NDB technical staff would be increased to about 15 qualified people, all of whom would be assisted by the PCU/CB. With this increase in permanent staff and the support that would be provided by the PCU, we would expect NDB to perform adequately for the purposes of the pro- posed project. IDA efforts to improve performance of NDB through the project would help to reinforce USAID and IDB technical assistance grants to Honduras for the improvement of essential institutions, including IDB. D. Performance Under Previous Agricultural Projects First Livestock Development Project (197-HO) 2.16 IDA Credit 179-HO for US$2.6 million, which became effective in October 1970, was fully committed by April 1973 and was totally disbursed in January 1975, almost a year before the closing date of December 31, 1975. Medium- and long-term loans were made to farmers to develop beef and dairying, provide working capital for cattle fattening, and supply technical assistance. Implementation and execution of the Project were satisfactory and Project objectives were generally achieved (Annex 3). Second Livestock Development Project (434-HO) 2.17 The Second Livestock Development Project (IDA Credit of US$6.6 million) continued development of the livestock industry, which commenced under the First Project. This Project became effective in January 1974 and was successfully initiated, but, principally due to uncertainties resulting from the application of agrarian reform as well as a decline in market demand for beef, it is now running behind schedule. At March 31, 1976, 173 farm sub- loans had been made as compared with about 400 estimated at appraisal. At that date, about US$4.0 million, or 61% of the credit had been committed, with prospects of committing about 85% by June 30, 1976. About 40 sub-loan appli- cations were under study at the end of March, three of which were from land reform cooperatives. Commitments began to increase in late 1975 and early 1976, as by then, the law and most of the supporting decrees had been adopted, and the guidelines for implementing the land reform program had been issued. Also on March 10, 1976, IDA, at the request of the Government, approved the use of US$1 million of the uncommitted balance of the Second Livestock Project funds to finance the emergency rehabilitation of 2,000 ha of banana lands damaged by Hurricane Fifi in September 1974 and now settled by agrarian reform beneficiaries, organized into a campesinos associative enterprise known as Isleta (paras 3.01 and 3.12). With this reallocation, the contininuing approval of sub-loans and the approval of a sub-loan to build a new abattoir at Tegucigalpa, which is expected in May, there are now prospects of full com- mitment by the end of September 1976.  - 8 - 2.18 A contract has been signed with an international research and train- ing center (CATIE) to provide specialists to strengthen technical services to Project beneficiaries. This contract is aimed at assisting livestock pro- ducers to increase productivity and achieve standards set down by Agrarian Reform Law 170 (Annex 1, para 17). 2.19 It is now apparent that sectoral priorities have been revised, to emphasize agrarian reform, and while livestock production activities are still important to diversify exports and for import substitution, development of the sub-sector is not now so high a priority as was previously the case. Additionally, if the institutions such as MRN and INA are to contribute more to the success of future projects, they will need assistance to strengthen their technical capacity (Annex 8 and paras 3.18 and 3.19). The proposed Project has been diversified to include cropping activities and technical services to remedy basic institutional deficiencies under previous projects and to take into consideration the Government's new emphasis on agrarian reform. III. THE PROJECT A. Brief Description 3.01 The Project would help finance continuation of Honduras' livestock development program and in addition would provide funds for investments in annual and perennial crop production; development of small agro-industrial enterprises; provision of farm development contractor services; and improve- ment of technical services to land reform and other beneficiaries. It would finance the recruitment of specialists to assist in strengthening applied research and extension through the Ministry of Natural Resources (MRN), form- ing small farmers' group or cooperatives through INA, and performing studies for future agrarian reform projects by consulting firms acceptable to IDA. Additional temporary staff and equipment for the Pan-American Agricultural School (PAS) would be financed to provide training to beneficiaries, and Honduran technicians at an advanced level. Another important aspect of the Project would be the financing of the second stage of rehabilitation of the 2,000 ha of bananas devastated by Hurricane Fifi in 1974 and subsequently abandoned by a foreign-owned company and transferred to INA for agrarian reform settlement. Initial rehabilitation was financed with US$1 million from the proceeds of the Second Livestock Project (para 2.17). 3.02 The objectives of the Project are primarily to: (a) expand the area under food crops and livestock production to provide more adequate nutrition for the rapidly increasing domestic population; (b) increase production from grazing lands;  -9- (c) continue to improve the agricultural sector's contribution to export earnings and import substitution; (d) increase employment opportunities on farms and in industries associated with the transformation of agricultural products; (e) improve family incomes; and (f) support selected institutions for further planning and development of the sector and maintain the momentum of agrarian reform. 3.03 Since the passage of Law 170, banks are reluctant to accept rural land as collateral for long-term loans. In the case of default of an exist- ing client who has offered land as a guarantee, the banks are concerned that INA would be the only purchaser, and would pay in long-term, low-interest earning agrarian bonds which would effectively reduce their liquidity. In order to provide the guarantees necessary to protect PBs so that they will participate in the project, assurances were obtained during negotiations that the Government will maintain the liquidity of PBs which acquire agrarian reform bonds as a result of expropriation of a subborrower's land. Implemen- tation of such a guarantee system is a condition of effectiveness. The proj- ect would be administered and managed by the CB through its Project Credit Unit (PCU) already established to execute the First and Second Livestock Proj- ects. Sub-loans for farm production, agro-industries and contractors' equip- ment would be approved by PCU on the basis of technically and financially sound investment plans submitted to it by participating banks or other finan- cial institutions working under its direction. A Project Commission (PC), established under Decree No. 865 of December 18, 1969 would continue to hold supervisory and policy-making authority for Project operations. The borrower would be the Republic of Honduras. 3.04 The main components of the proposed lending program and technical services would be as follows:  - 10 - Investment _ _ Category Estimated No. of Loans Average per Baseline Year 1 Year 2 Year 3 Total Sub-prZoject Total Costs (US$'000) Livestock a. Beef/Dairy 50 100 65 215 17.3 3,720 23 b. Fattening 10 15 15 40 7.0 280 2 Sub-total 60 115 80 255 15.7 4,000 25 Crops a. Bananas 5 10 5 20 48.0 960 6 b. Rice 5 10 5 20 67.5 1,350 8 c. Other 4 4 4 12 49.2 590 4 Sub-total 14 24 14 52 55.8 2,900 18 Banana Rehabilita- tion (partial) 0.3 0.3 0.3 1 700.0 700 9 Agro-industries a. Rice mills - 1 1 2 80.0 160 1 b. Other - 2 2 4 140.0 560 3 Sub-total - 3 3 6 120.0 720 4 Heavy Machinery a. Well drilling 1 1 - 2 220.0 440 2 b. Earth moving 1 2 1 4 110.0 440 3 Sub-total 2 3 1 6 146.7 880 5 Contingencies (Physical) 800 Sub-total Lending Program 76.3 145.3 98.3 320 10,000 61 ------------ Year ------------ Technical Services 1 2 3 4 5 - Total (US$'000) a. CB 260 230 230 260 220 - 1,200 7 b. MRN 680 860 450 11o loo - 2,200 10 c. Isleta 54 54 154 154 154 - 570 5 d. INA 1,115 665 50 50 50 - 1,930 14 e. PAS 191 68 73 81 87 - 500 3 Sub-total 2,300 1,877 957 655 611 - 6,400 39 Project Costs 4,840 6,364 3,930 655 611 - 16,400 100 Contingencies (Price) 3,600 22 Total Project Cost 20,000 122  - 11 - B. Detailed Project Features 3.05 The Project would be country-wide (Map IBRD 11910). Cropping would tend to be concentrated in the Atlantic (northern) zone of Honduras and in the Pacific (southern) zone where there are possibilities of irrigation, while livestock activities would generally be developed or shifted to the more mar- ginal Central (mountainous) zone of the country except where they are asso- ciated with cropping activities for utilizing by-products or for intensive fattening or milk production operations to serve dense populated areas. Infra- structural constraints such as lack of roads, housing, and schools would limit the impact of the Project to those areas that are already reasonably serviced with such facilities. 3.06 Among other things, the Project proposes to finance on-farm invest- ment on about 215 beef/dairy farm units of about 40 ha; 40 beef fattening units of about 50 ha; 20 individual banana farm units of about 40 ha; 20 irri- gated rice farm units of about 50 ha each and also combinations of the above and other crops, such corn and beans, based on actual demand and supported by farm plan analysis, supervised by the Project Credit Unit (PCU) of the Central Bank (CB). The number of units for different products represent the best estimate of the likely distribution of credit; however, because the agrarian reform has been so recently initiated, it is difficult to predict the specific type or source of demand for farm credit that may develop. Under these circumstances, the project has been designed to be flexible enough to respond to demand for financing for different products and combinations of products from both agrarian reform settlements and private farmers investing to improve their incomes and also to comply with the efficiency requirements of the agrarian reform law. It is expected that the addition of financing for crops, which was not included in the earlier livestock credits will enable this project to meet some of the needs of the expanding agrarian reform sector for mixed livestock/crop development. The size of the units for each product was selected for modeling purposes only; they are not intended to restrict the size of the farm operations financed, which may range from a 50 ha or larger private livestock or crop farm to agrarian reform settlements of any size or multiples of units. Livestock Farm Development 3.07 Dairy/Beef Farms (Annex 4, Tables 1 to 4). Subloans would finance about 215 farm units of an average size of about 40 ha each on which beef and milk production are combined. To meet certain efficiency standards as required under Law 170 (Annex 1), farm plans would concentrate on pasture development (12% of sub-project cost), perimeter and internal fencing (15%), stock watering facilities (10%), buildings and equipment (8%), and breeding cattle purchase (55%). Average on-farm investments, including the purchase of cattle, would be about US$17,000. The program for this development activity would require the purchase of about 6,500 breeding females, which are readily available. Up to about 400 families, or 2,400 people, would be involved.  - 12 - 3.08 Beef Fattening Unit (Annex 4, Tables 5 to 7). About 40 small, specialized fattening operations of 50 ha each would receive subloans under the Project. Fattening would be based on improved pasture for grazing; permanent greed forage crops; supplements of minerals, urea and molasses; and crop residues when available. The beef fattening operation would com- plement farm cropping activities and would provide about 160 families with additional employment. Long-term investments per farm would amount to about US$7,000, of which 44% would be for improved pasture development, 16% for fencing, 32% for cattle water supplies and about 8% for yards and spraying equipment. All cattle for fattening would be purchased with working capital supplied by participating banks. Average fattening period would be less than one year and the availability of steers would not be a constraint. Crop Farm Development 3.09 Banana Farms (Annex 5, Tables I to 3). The project would include about 20 units of 40 ha each, developed on already existing farm lands or cooperatives in the Atlantic Zone. Average long-term investment costs would be about US$48,000 per farm, with about 52% going for tractors, trailers and irrigation equipment; 19% for land clearing, roads, bridges and canal con- struction and rehabilitation; 15% for planting material and about 14% for building and miscellaneous items such as tools. Each unit would support about 10 families, comprising about 1,200 persons for the 20 farms. 3.10 Rice Farms (Annex 5, Tables 4 to 6). About 20 irrigated rice farms of 50 ha each would be developed. Since double cropping is necessary, mech- anization would be required to ensure quality and timeliness of cultivation and to overcome seasonal labor constraints. Average on-farm investment would be about US$67,500 of which about 43% would be for tractors and culti- vation, seeding, and irrigation equipment. About 45% would be invested in design, land clearing and leveling, and in the provision of an appropriate irrigation supply point. The remaining 12% of investment would be in basic buildings for storage of rice, equipment, seed and fertilizers. In total about 200 families would benefit. 3.11 Other Crop Farms. Farms growing a wide variety of other crops, both annual and perennial, and horticultural farms would also be eligible for financing under the Project. Individual sub-projects would be subject to feasibility studies approved by the PCU. 3.12 Isleta Banana Plantation (Annex 6, Tables 1 to 4). Of the US$2.3 million cost of rehabilitating the 2,000 ha now being farmed and also to pro- vide the necessary technical assistance, US$1.0 million is being made avail- able from the Second Livestock Credit (434-HO) as approved by the Executive Directors on March 10, 1976. The balance of US$1.3 million (US$0.7 million for investment and US$0.6 million for technical assistance), would be financed under this Credit. As in the case of the financing under the 434-HO, 100 per- cent of the cost, net of local taxes, of irrigation system rehabilitation and expansion, farm and transport equipment, a packing shed, other equipment and facilities would be covered, as well as the balance of the technical assistance. The undertaking requires the recruiLment by COHBANA, of specialists in banana production management; irrigation rehabilitation, maintenance and water control;  - 13 - and pest and disease control. COHBANA would supervise the subproject and would submit, on behalf of Isleta, detailed work plans for each stage of rehabilitation, including evidence of availability of labor, capital equip- ment and supplies of planting material, fertilizers and pesticides to CB. Initially, 684 families (or 4,000 individuals) would be involved and benefit from the sub-project but the rehabilitation and operation of the entire 2,000 ha of the plantation would require more labor. The number of Isleta families would therefore be increased to about 1,400, for an overall population of about 8,400 persons. Agro-industries 3.13 The Project would finance the construction of two rice mills (Annex 7, Tables 1 to 3), one in the Pacific zone (Choluteca/Valle) and the other in the Atlantic zone (Cortes, Yoro, Atlantida) where most rice is grown. Each mill, with a capacity of about 3,200 m tons, would cost about US$80,000, of which about 50% would be in machinery, 30% in buildings/storage, 8% in vehicles and the balance in miscellaneous items such as office equipment. Working capi- tal would initially amount to about US$70,000 a year, including the purchase of paddy rice, and would be provided by the participating banks. About 12 people would be employed at each of the two mills, representing an additional 24 jobs, and supporting about 145 family members. These enterprises would be run either privately or on a cooperative basis. 3.14 The Project would finance other agro-industrial enterprises subject to demand and appropriate feasibility studies which would include ecological considerations. Many areas have an unrealized dairy production potential because of poor infrastructure for marketing of fresh milk. This situation could be remedied by the construction of relatively small processing plants for the production of cheese and possibly butter. The total investment cost of a plant with, say, a daily capacity of 5,000 liters would be about US$140,000. Each plant would employ about eight adults and, while this is not high, the plants would assist regional livestock development in areas not suitable for more intensive agricultural activities. 3.15 Similarly, the Project could finance agro-industrial plants for the processing of bacon, hams, sausages, broiler slaughter and packaging, and egg packing plants. Feed mills of small capacity could also be financed in con- junction with grain and livestock production, thus integrating on-farm with off-farm activities and providing more employment as well as strengthening the financial base of producer cooperatives. Capital investment per plant would be about US$140,000 per operation. Heavy Machinery 3.16 The Project would provide credit to two contractors for the purchase of one well drilling rig each, together with ancillary equipment, and to four contractors for the purchase of heavy equipment for land clearing and develop- ment to support Project on-farm activities. Drilling rigs, each costing about US$220,000, would be self-contained mobile units, one for the Atlantic zone  - 14 - and another for the Pacific. Sub-borrowers would be selected on the basis of their previous experience in operating this type of equipment. Short-term working capital would be provided by the participating banks. Each rig would employ about five persons, supporting families totaling about 30 people. Contractors purchasing heavy equipment could be either individuals or coop- eratives. The units would consist of crawler type or heavy (75 hp and above) tractors, blades, scoops, ploughs, trucks, welding equipment and spares, amounting to about US$110,000 per unit. Short-term working capital would be provided by PBs for the first year of operation. Each unit would employ about four persons. Technical Services, Training and Studies 3.17 The Project would continue to partially finance the PCU in CB, the total cost of which during the five-year investment phase would amount to about US$1.2 million (Annex 8, Table 1). About 75% of this would be for salaries and wages, to be financed by CB. About 2% for vehicles and Project equipment, and the balance for PCU overseas training and travel would be financed by the Credit. Internationally recruited specialists to assist the PCU in the execution of specific aspects of the Project such as monitoring and evaluation would also be financed if such expertise were determined necessary by CB in consultation with IDA. 3.18 To strengthen the activities and staffing of the MRN (Annex 8, Table 2), the Project would finance the services for three years of five in- ternationally recruited specialists--two in the fields of applied research in rice and annual oil crops, two in production extension techniques and training, and one in crop seeds production, certification and multiplication. The Proj- ect would also finance a supplement to the local salaries of two counterparts for each specialist. The Government has agreed during negotiations, to gradually assume this supplement over five years as part of its normal budget and thereafter maintain the salary levels. Total cost is estimated to be about US$1.6 million, which includes vehicles, overseas training of local counterparts, equipment and material for field work and on-farm training activities and supplementary salaries. Additionally, the Project would finance through COHBANA, the provision of technical specialists in banana plantation management, production, disease and pest control, and irrigation and flood control for the Isleta banana plantation (Annex 8, Table 3). Total cost would be about US$770,000 over a five-year period, including salaries, internal travel and the purchase of vehicles, of which about US$570,000 would be financed under the Project. The Project would also provide US$600,000 to finance qualified consulting firms to undertake regional studies leading to future integrated rural development/settlement projects. The Government has already identified 5 such priority areas (Annex 8, para 10). During nego- tiations, the Government agreed that final selection of the areas, consul- tants, together with terms of reference would be approved by IDA prior to the awarding of contracts.  - 15 - 3.19 As USAID, FAO and IDB are deeply committed to the institutional strengthening and provision of technical assistance to INA, the Project pro- poses to strengthen INA especially in relation to Project activities (Annex 8, Table 4). About US$1.9 million over five years would be provided. This would finance visual aid teaching equipment--US$50,000; a central and mobile repairshop for the Aguan Valley and other agrarian reform areas-- US$400,000; pick-ups for field workers and heavy equipment, including dump trucks, excavators and crawler tractors for infrastructural and development work involved in the extension of new settlements--US$1.2 million. Also, US$250,000 would finance internationally recruited specialists in rural ad- ministration, campesino training, business organization and project management. 3.20 The Project would provide about US$500,000 to strengthen the teach- ing staff of the PAS at Zamorano (Annex 8, Table 5) over the five years of implementation in entomology, soil science, production coordination on small farms, food processing, tropical rural development, agri-business, animal husbandry and agricultural economics. About US$310,000 would be used for staff salaries at PAS normal rates; US$160,000 for equipment and expansion of short-course facilities; and about US$30,000 for staff post-graduate training in aspects directly related to the development of their training functions for Project purposes. The average cost per man-year of all consultants to be employed in connection with the Project is about US$30,000 for management and technical assistance to the Isleta subproject and about US$50,000 to support the applied research and extension project of MRN. C. Cost Estimates 3.21 The total cost of the Project is estimated to be US$20 million, of which about US$12 million, or 60% represents foreign exchange requirements. Costs were estimated at end of year 1975 prices and include 5% of base costs for physical contingencies in the lending program. Price contingencies for machinery and equipment were applied on undisbursed balances for the years 1976 through 1980 on the basis of 9% in 1976, 8% in 1977-79 and 7% in 1980. No significant civil works are involved. Cost estimates, based on calcula- tions derived from the models and tables, are summarized as follows:  - 16 - Base- Foreign Total Project Costs line Exchange Category Local Foreign Total local Foreigm Total Costs Costs - (L million) --- --- TST$ million) - - T)( Investments Livestock 6.oo 2.00 8.00 3.00 1.00 4.00 25 25 Crops 2.30 3.50 5.80 1.15 1.75 2.90 18 60 Isleta. Plantation 0.28 1.12 1.40 0.14 0.56 0.70 4 80 Agro- Industries 0.54 0.90 1.44 0.27 0.45 0.72 4 63 Heavy Machinery 0.36 1.40 1.76 0.18 0.70 0.88 5 80 Physical ContingenciesO.32 1.28 1.60 0.16 0.64 0.80 5 - Sub-total 9.80 10.20 20.00 4.90 5.10 10.00 61 51 Technical Services Central Bank 2.00 0.40 2.40 1.00 o.20 1.20 7 17 MRN/1 1.00 3.40 4.40 0.5p 1.70 2.20 13 77 Isleta Plantation 0.24 0.90 1.14 0.12 0.45 0.57 4 78 INA 0.58 3.28 3.86 0.29 1.64 1.93 12 85 PAS 0.10 0.90 1.00 0.05 0.45 0.50 3 90 Sub-total 3.92 8.88 12.80 1.96 4.44 6.40 39 79 Project Costs 13.72 19.08 32.80 6.8 9.5 1640 100 58 Price Contin- gencies 2.90 4.30 7.20 1.45 2.15 3.60 22 60 Total Project Cost -16.60 23.40 40.00 8.30 11.70 20.00 122 60 /1 Includes US$600,000 for studies. 2 Local and foreign cost totals are rounded.  - 17 - D. Financing 3.22 Financing would be shared in the following amounts and proportions: Participa- Central Sub- IDA ting Banks Bank borrowers Total Category US mmil % uS mil % US$ mil % US$ mii % US$ mil 1. Livestock Farms 2.52 63 1.08 27 - - 0.40 10 4.00 2. Crop Farms 1.83 63 0.78 27 - - 0.29 10 2.90 3. Banana Rehabilitation 0.70 100 - - - - - - 0.70 4. Agro-industries 0.40 56 0.17 24 - - 0.15 20 0.72 5. Heavy Machinery 0.49 56 0.21 24 - - 0.18 20 0.88 6. Technical Services 5.40 84 - 1.00 16 - - 6.40 Contingencies 2.66 - 0.74 - - - 1.00 - 4.40 Total Project Cost 14.00 70 3.00 15 1.00 5 2.00 10 20.00 _= - = - = -= 3.23 The Project would be financed by an IDA Credit of US$14 million, or 70% of total Project cost, which would cover the estimated foreign exchange cost of about US$12 million, plus the equivalent of US$2 million in local costs. Participating banks/financial institutions (PBs) would contribute US$3 million, or 15% of Project cost; CB would directly finance US$1.0 million representing 5% of total cost; and the balance of US$2 million, or an overall average 10% of Project cost, would be supplied by sub-borrowers. Livestock and crop farmers, whether individuals or groups formed under the agrarian reform, would contribute at least 10% of the cost of investment in their sub-projects, but in the case of the rehabilitation of the Isleta settlement, the participants would not be required to contribute to the capital development cost. Sub- borrowers for well drilling equipment and heavy earth moving equipment would finance 20% of the cost of purchase of such equipment and spares. Technical services and studies would be largely (84%) financed by IDA and the CB would contribute the other 16% for meeting some of the costs of the PCU. Assurances that these cost sharing proposals would be followed were obtained during nego- tiations, and also that PBs would provide short-term loans and working capital to cover the needs of beneficiaries and that CB would provide PBs with redis- count facilities for both long- and short-term loans as outlined in paragraphs 3.31 to 3.34. The borrower would be the Republic of Honduras, which would bear the foreign exchange risk and would on-lend to CB at 2% for 18 years. Project cash flows to CB and PBs are shown in Annexes 9 and 10.  - 18 - E. Procurement 3.24 Bearing in mind that the farm development sublending program would be spread over 3 years, for investment over 5 years, would be widely distri- buted geographically, and would finance a wide variety of farm plans and thus items to be procured, bulk purchasing would not be feasible. Capital items would therefore be purchased from local agents who adequately repre- sent suppliers. Competition is good and spare parts and service facilities are sufficient. The same situation prevails in the case of the agro- industries component of the Project. Sub-borrowers under the Project for heavy machinery would also have their own preferences regarding standardiza- tion and equipment, so that these purchases would also be made through commer- cial suppliers which are adequately represented in Honduras. 3.25 For the equipment of Isleta and the equipping of INA for machinery and equipment and the purchase of vehicles under the category of technical services (Annex 8, Tables 1 to 4, and Annex 8, Tables 1 to 5), the CB would issue instructions to bulk items for international competitive bidding (ICB) in accordance with IDA guidelines. F. Disbursement 3.26 Project funds would be disbursed over a period of five years as follows: (a) 70% of amounts disbursed for sub-loans related to livestock and crop farms and agro-industries; (b) 100% of amounts disbursed for rehabilitation and investment sub-loans for Isleta; (c) 100% of the cost of training and technical services; and (d) 100% of the foreign cost of directly imported equipment for INA, PCU and MRN or 85% of their local cost representing the estimated foreign exchange component. (e) 95% of incremental salaries of MNR counterpart personnel during the first two years and 66% and 33% respectively in the third and fourth years of project implementation. Documentation supporting disbursements against sub-loans would not be submitted to IDA, but would be retained by CB for periodic inspection by IDA during the course of Project supervision missions. Disbursements of amounts for sub- loans for Isleta would not commence until (a) COHBANA has recruited technical experts in banana plantation management including marketing, banana production;  - 19 - irrigation and pest and disease control; and (b) marketing agreements satis- factory to the Bank be concluded with a fruit exporter for the sale of ac- ceptable inspected fruit. Estimated disbursements details are shown in Annex 11. Any surplus funds under the Credit would be cancelled. G. Organization and Management Administration 3.27 The CB would administer the Project. Coordination, supervisory and policy authority would remain with the Project Commission, which was established by decree to supervise the First and Second Livestock Development Projects. Assurances on these points were obtained at negotiations. The present Commission is composed of representatives from various Government agencies, participating banks and the National Cattlemen's Association. The Government is represented by CB (Chairman), MRN, Ministry of Economic Affairs and Commerce, INA, Superior Planning Council (CONSUPLAN), and the NDB. The Project Director acts as executive secretary to the Commission and prepares agenda and records the minutes of meetings. Under the proposed Project, mem- bership would also include a representative of COHBANA and one representative of the campesino organizations in Honduras. Assurances on the composition of the Commission were obtained at negotiations. 3.28 The Project would be managed and executed by the PCU of CB (Annex 8, para 2), headed by a Project Director approved by IDA, supported by an ade- quate technical and administrative staff and logistic facilities during the life of the Project (Annex 8, Table 1). An assurance on this was obtained at negotiations. The staff serving the Second Livestock Development Project would be enlarged to give better geographical coverage and to diversify exper- tise to include cropping as well as livestock activities. Initially, the number of assistants would be increased from four to eight, one of whom should be an agricultural economist who would organize and be responsible for data retrieval and evaluation (monitoring) during the life of the Project (dis- bursement plus subloan recovery phases). Project headquarters would remain at Tegucigalpa, and, in addition to the two offices now operating at San Pedro Sula and La Ceiba, both in the Atlantic zone, two new offices would be opened to handle the increased volume of lending. Additional staff would be recruited and the new offices opened at the recommendation of the Project Director and approval of the Project Commission. 3.29 The Project Director would analyze and approve on technical, financ- ial, and economic grounds all subloan applications for on-farm lending, agro- industries, and financing of heavy machinery. In addition, he would advise the PC, CB and the specific institutions involved on the financing of invest- ments. Assurances on the above were obtained at negotiations.  - 20 - Participating Banks including NDB 3.30 All banks and financial institutions would be eligible to partici- pate, subject to a favorable report by the Superintendency of Banks, approval by CB and the signing of Project Administration Agreements, satisfactory to IDA, which would specify operational, lending, accounting and other norms and procedures outlined in paragraph 3.34. Participating banks would also employ a number of qualified technicians, sufficiently dispersed and with logistic and administrative support, which, in the judgment of the Project Director, would be adequate to achieve Project objectives. NDB would employ additional technicians specifically expert in handling loans to small farmers and to cooperatives or other groups formed under the Agrarian Reform Law. The Project Director would review, from time to time, the technical staffing status of PBs in relation to their capacity to analyze, approve and supervise subloans, considering the number of subloans involved and their geographic distribution. He would then advise CB and the Project Commission of recommen- dations for additional staffing or for suspension of Project Administration Agreements. Under the Second Livestock Project, PBs employ 12 technicians of which 5 are in the NDB. The proposed Project would require an additional 15 technicians of which about 10 would be employed by NDB. Staff increases would be in relation to portfolio expansion under the Project. The additional cost would be covered by the margin of 5%. H. Lending Operations 3.31 The PBs would make subloans under all sublending categories at 11% annual interest rate. They would be able to rediscount with CB for 70% of certified advances made for approved sub-projects at a rediscount rate of 6%. For subloans advances made to Isleta, the NDB would be permitted to rediscount 100% with CB at 6%. The 5% spread to PBs is the minimum required to cover costs of technical services and bad debt risks. The proposed inte- rest rate of 11% to all sub-borrowers, which is in line with rates now gene- rally being applied within Honduras for production purposes, would represent a real interest of 3%, assuming a continuation of the 1975 inflation rate of 8% over the 5-year investment phase of the project. The interest rate of 11% be applied to subloans was agreed to at negotiations, and will be incorporated in Project Administration Agreements (para 3.34). 3.32 The following terms would apply to sublending under the Project:  - 21 - Sub-borrower Overall Subloan Grace Contribution to Period Period Sub-project Cost (Years) (Years) (%) Livestock Beef/Dairy 12 5 10 Fattening 6 3 10 Crops Bananas 7 2 10 Rice 9 3 10 Others 9 3 10 Isleta 7 2 0 Agro-industries Rice mills 9 3 20 Other 9 3 20 Heavy Machinery Well drilling 7 2 20 Earth moving 8 2 20 Incremental working capital for annual recurring costs will be provided at 11% per annum by participating banks from their own resources. This obliga- tion would form part of the Project Administration Agreement (para 3.34). 3.33 The proposed 11% interest rate to sub-borrowers and the rediscount rate of 6% with CB would give participating banks a margin of 5%, which is 1% more than they were allowed under the First and Second Livestock Projects. This proposed increase of 1% would cover the additional costs PBs would incur for enlarged technical staffs to perform careful subloan analysis, creditwor- thiness studies and proper supervision to reduce risk and cover bad debts. The Project would not differentiate in lending terms between individual small farms, agrarian reform cooperatives, or commercial producers, as all are equal in the eyes of Agrarian Reform Law 170, nor would it set a maximum aggregate subloan size, because of the range of farm sizes likely to be involved. Sub-loans of US$100,000 or less would require only the approval of the Project Director or his delegated representatives. However, subloans for more than that figure and all those for agro-industries would require IDA approval. Payments to institutions for the purchase of equipment, technical services and studies would be made in the form of contracts between CB and the institutions concerned on terms and conditions acceptable to IDA. Assurances on subloan approval procedures were obtained at negotiations. 3.34 Project Administration Agreements between CB and PBs would: (a) oblige PBs to make subloans only on the basis of farm plans which are technically, financially and economically sound;  - 22 - (b) incorporate rediscount and sublending terms and interest rates; (c) provide that PBs would repay CB following the same repay- ment schedule provided by the PB to the sub-borrower; (d) provide for the employment of acceptable technical staff by the PBs as recommended by the Project Director and approved by the Project Commission; (e) oblige PBs to provide complementary short-term loans to finance working capital requirements of the sub-borrower as recommended by the Project Director when he approves detailed sub-projects for financing; and (f) cover the obligation of CB to provide an adequate guarantee for PB subloans. Disbursements against sub-loans other than for Isleta would not be made until the applicable Project Administration Contract between the CP and the PB is executed. For the Isleta sub-project, disbursements would not be made until the overall Isleta development plan is approved by IDA, the Project Adminis- tration contract between the CB, the NDB and COHBANA is executed, and the conditions for effectiveness of the amendment to the Second Livestock Project (i.e., the contracting of technical specialists and the conclusion of a market- ing agreement for Isleta bananas) are fulfilled. Disbursements for the tech- nical assistance programs would not be made until applicable technical assis- tance contracts between the CB and the executing agency are signed. Agreement on the above was obtained at negotiations. I. Accounts and Auditing 3.35 Under the First and Second Livestock Development Projects the Super- intendency of Banks, which is an independent authority, has audited Project accounts in the CB and PBs. Its performance has been generally satisfactory. Assurances were obtained during negotiations that the CB and PBs would estab- lish and maintain readily identifiable separate accounts for Project activ- ities, that these accounts would be audited annually by the Superintendency of Banks or independent auditors satisfactory to IDA, and that the audited reports would be submitted to IDA not later than four months after the close of each fiscal year (para 6.01, h).  - 23 - IV. PRODUCTION, MARKETS AND MARKETING, PRICES AND PRODUCER BENEFITS Production 4.01 Incremental annual production by farmers benefitting from the Project would be substantial, as shown below. The figures are derived from illustrative models only and thus the range of products analyzed is also limited. 1974 Incremental Annual Project Production National at Full Development Product Production Production as % of National Production -----(metric tons) ------- in 1974 Bananas /1 824,000 85,358 10 Rice (paddy) 13,200 6,820 52 Beef 36,000 730 2 Milk 196,000 7,850 4 /1 1975 estimate. 4.02 Incremental production data are based on a thorough study of, and the reasonable application of well known local production and management techniques, the use of irrigation for cropping and improved nutrition through better grazing of beef/dairy animals. Production parameters which have been used in model building are conservative and reflect what is already being done, and which could be achieved by Project beneficiaries. Markets and Marketing 4.03 Project production of rice and milk are import substitutions and thus would not face demand or marketing constraints. Difficulties in export- ing beef would remain as long as world oversupply, resulting in depressed prices, exists. Incremental beef production from the Project could be absorbed by domestic rising consumption due to population growth, at least until world beef export markets improve. The case of markets for, and marketing of, export quality bananas, would rest on (a) the use of the services of the foreign fruit companies, or (b) the direct intervention of the Government through COHBANA. Although strong markets for Honduran bananas exist in the USA, western Europe, and Japan, the market is volatile and the marketing process complex. For the moment at least, the Government would rely heavily on the services of the foreign exporting companies in order to maintain an effective marketing system. The agro-industrial component of the Project would contribute to the value added to production, but as this component is modest and the degree of transformation is limited, the greatest benefit would be in additional employment and income stabilization to producers and rural workers.  - 24 - Prices 4.04 Even with some market restrictions, prices should be adequate to guarantee financial success and provide incentives to produce. For milk and domestically consumed beef, prices received will depend largely on the degree of Government intervention to restrict retail prices. Decree 91 of November 1973 empowers the Directorate of Internal Commerce of the Ministry of Finance to control prices to avoid inflation and to curtail market monopolies and speculation. It also empowers NDB to act as the main purchaser and market- ing agency for basic grains. Commodities subject to this Decree include rice, meat and milk. IDA would maintain a dialogue with the Government over pricing policies. 4.05 Prices paid to farmers for beef cattle have been for several years well below the level of prices paid in neighboring Central American countries. In 1975, prices received by Honduran farmers were only 60% of those enjoyed by producers in other Central American countries except Nicaragua, where prices were about the same as in Honduras. While prices for export beef have risen somewhat, from US$0.61 per kg of frozen boneless beef in 1970, to US$0.63 in 1974, the rate of increase has dropped since 1973, creating a cost/price squeeze for producers. As the outlook for future beef export is one of only moderate optimism and producers are reluctant to invest heavily in purely beef breeding operations, these will not be financed. Project emphasis will be on the more profitable enterprises of milk/beef production and fattening. 4.06 Prices received by banana growers will depend on the skill of COHBANA in negotiating prices with the foreign exporting companies or bilateral con- tracts with major banana importing countries. Producer Benefits 4.07 A summary of producer benefits derived from the illustrative models (Annex 4 to 7) is shown below:  - 25 - Beef/ Model Dairy FatteninR Bananas Rice Isleta Rice Mill (No. of Units) (215Y (40) (20) (1) (2) Financial Return (%) 15 20 24 21 18 27 Average Unit Size (ha) 40 40 40 50 2,000 - Number of Families/Unit /1 4 4 10 10 700 12 Number of Persons/Unit 24 24 60 60 4,000 72 Investment Cost (US$) 17,300 7,100 48,000 67,500 1,500,000 70,000 Net Annual Farm Income at Full Development with Project (US$) 5,740 11,100 28,500 22,800 2,600,000 60,100 Without Project (US$) 2,510 5,500 5,650 5,250 (29,000) 7,200 Per Capita Income without Project (US$) /2 105 220 95 88 N/A 100 Incremental Net Farm or Farm Income before Debt Service (US$) 3,230 5,600 22,850 17,550 2,629,000 52,900 Average Debt Service (US$) 2,145 3,115 5,530 8,950 450,000 13,600 Incremental Farm Income after Debt Service (US$) 1,085 2,485 17,320 8,600 2,179,000 39,300 Incremental Net Family Income after Debt Service (US$) 270 620 1,730 860 3,110 3,275 Incremental Net per Capita Income (US$) 45 103 288 143 518 545 /1. The figures indicate the number of families likely to be settled on the respective farm units. /2 Per capita incomes of the people involved, fall generally into the lowest 40% group in the "without project" phase. The table indicates the significant financial benefits that may be derived from the progressive intensification of agricultural production giving least benefits to livestock producers and most to enterprises in agro-industries. The objectives in raising net family incomes would not be realized without the simultaneous input of technical services and improved seeds and the ready availability of recurring inputs such as fertilizers and working capital. The Project provides for these but the ultimate success of the Project would depend on the dedication of all of the institutions that would be involved in its execution.  - 26 - V. BENEFITS AND JUSTIFICATION 5.01 The Project would assist the Government of Hunduras in its simul- taneous efforts to return to and pass the levels of production achieved before the hurricane of 1974 and the drought of 1975; to feed a growing population; and to implement its social programs of land reform and income distribution. The Project would help to ease foreign exchange constraints which now limit many development projects in Honduras. The Project also focuses on products which have a direct export and foreign exchange earning potential such as bananas and beef and import substitution products includ- ing rice and milk. 5.02 Under the assumptions made in Annex 12, the economic rates of return for the different components were found to be 35%, 40%, 24%, 50%, 39% and 50% for the dairy-beef, beef fattening, bananas, rice, Isleta rehabilitation and rice mills models respectively. The total investment costs for each one of these components were respectively, L 8.1 million, L 0.5 million, L 2.8 mil- lion, L 1.9 million, L 3.0 million and L 0.3 million. The weighted average rate of return for the components indicated above which accounts for 63% 1/ of total project baseline costs was calculated to be 41%. The aggregate rate of return excludes the following components, for which no rate of return could be estimated because of the predominance of non-quantifiable effects; MRN-- technical assistance, INA--technical assistance and training, and PAS--training components. The sensitivity analysis (Annex 12) indicates that the overall rate of return would decrease from 41% to 31% with a drop of 10% in revenues. The greatest effect of this change, however, would occur in the rice farm models but not to such degree as to justify exclusion of this operation. 5.03 The annual farmgate value of incremental production of bananas, rice, beef and milk would be about US$4.5 million per year at full develop- ment (1975 farmgate prices), which would represent annual foreign exchange earnings or savings of about US$9.6 million if all incremental production were exported or imports reduced commensurately (including value added in processing, packaging and transportation). 5.04 The Project would provide additional on-farm employment (either as cooperative members or wage earners), to about 2,900 adults, representing about 17,000 people. Off-farm employment in agro-industries or support ser- vices would directly employ an additional 100 adults, representing 600 people. There would be considerable, but unquantifiable benefits in professional employment and developmental impact in the provision of funds for regional studies for agrarian reform settlement, research and investigation, support of INA, and the strengthening of the Project Credit Unit of the Central Bank. The successful implementation of the Project would also strengthen the insti- tutional capability of BNF and help relieve the considerable socio-political 1/ Including the Isleta Technical Assistance component (L 1.54 million) and the Central Bank Project Unit costs (L 2.4 million).  - 27 - tensions which exist within the country. Project financing of the agricul- tural School at Zamorano would help to provide better training of the 40 Honduran students who enter the school each year, and in addition provide residential, practical short courses to about 150 campesino leaders per annum. The multiplier effect of this training would be significant and extend beyond the life of the Project. VI. AGREEMENTS REACHED AND RECOMMENDATION 6.01 Assurances have been obtained from the Government that: (a) it would cause the MRN to assign two counterpart personnel for each of the consultants in applied research, extension and training and in crop seeds production, agree to the salary supplement proposed for such counterparts and pay all salary costs for such personnel within five years (para 3.18); (b) it would establish priorities for regional studies and obtain IDA approval on the areas to be studied and terms of reference for such studies prior to awarding any contracts (para 3.18); (c) it would agree to cost sharing arrangements proposed in paragraphs 3.22 and 3.23; that PBs would provide short-term loans and working capital to beneficiaries; and that CB would provide appropriate rediscount facilities (para 3.23); (d) CB would administer the Project under the supervisory and policy authority of a Project Commission (PC) (para 3.27); (e) the Project would be executed by the PCU of CB, headed by a Project Director acceptable to IDA, with adequate staffing and logistic support (para 3.28); (f) the Project Director would analyze and approve all subloans and also advise PC on financing of investments (para 3.29); (g) subloans for more than US$100,000 and for agro-industries would be made with IDA approval, and grants to institutions for the purchase of equipment, technical services, and studies would be made in the form of contracts between CB and the institution concerned on terms and conditions acceptable to IDA (para 3.33); and  - 28 - (h) CB and PBs would establish and maintain separate accounts for Project activities, these accounts would be audited annually by independent auditors, and audited reports would be submitted to IDA not later than four months after the close of each fiscal year (para 3.35). 6.02 It would be a condition of effectiveness that the Government will establish a system to maintain the liquidity of PBs which acquire agrarian reform bonds as a result of expropriation of a subborrower's land (paras 2.11 and 3.03). 6.03 It would be a condition that disbursement against subloans would not be made until the applicable Project Administration Agreement between the CB and PB is executed. For the Isleta sub-project, disbursements would not be made until the Isleta development plan is approved by IDA and the Project Administration contract between CB, NDB and COHBANA is executed. Disburse- ments for the technical assistance programs would not be made until applicable Technical Assistance contracts between the CB and the executing agency are signed (para 3.34). 6.04 With the indicated assurances, the proposed project constitutes a suitable basis for an IDA credit of US$14 million for 50 years, including a ten-year grace period. April 30, 1976  ANNEX 1 Page 1 HONDURAS AGRICULTURAL CREDIT PROJECT THE AGRICULTURAL SECTOR A. Agriculture in the National Economy 1. Agriculture is the most important economic sector in Honduras (Table 1). Its contribution to GDP averaged 37% of the total 1/ in the period 1970-74. However, at the same time, the sector's rate of growth was about 2.5% per year while total GDP grew at 2.6%, indicating a rela- tive stagnation and lack of dynamism compared to the performance of the total economy. 2. Economic growth in Honduras depends to a large extent on the per- formance and development of agricultural exports, both aspects adversely affected in September 1974 by Hurricane Fifi, which damaged approximately 1 million ha of crops in the departments of Cortes, Atlantida, Yoro and Colon, the most productive areas in the country. This damage resulted in a 2.8% reduction of the sector's GDP in 1974 as compared with that in 1973. The reduction of the volume of the main export commodities and the low prices obtained in the world market, together with the increase of price of import commodities, has resulted in a stagnation of the total GNP at the 1973 level. Furthermore, preliminary estimates of the Honduras Government indicate that the GNP for 1975 will be still lower, resulting in a negative real rate of growth of GNP per capita of 6.6% for the year due not only to the impossibil- ity of repairing all of the hurricane damage and reaching the levels of pro- duction existing prior to 1974, but also to the shortage of rainfall during the first half of 1975 which seriously affected the yields of basic food crops. 3. Total agricultural exports for the 1972-74 period annually aver- aged L 397 million, accounting for about 80% of total exports. The four major agricultural export commodities--bananas, coffee, beef and lumber-- for the same period came to L 362 million annually, representing 91% of total agricultural exports (Table 2). 4. The total value of most of the main export commodities fell off during 1974, with bananas hitting the 1970 level. However, bananas seem to be a special case, since the Government considers that, in addition to the decrease of production due to Hurricane Fifi, there has also been a reduction in the activities of the banana companies due to dissension over the banana tax recently imposed by the Government. 1/ At factor cost, 1966 lempiras.  ANNEX 1 Page 2 5. During the 1970-75 period, the production of the main crops has been practically static (Table 3). Total value added (in constant terms) in agriculture increased from L 429 million (1970) to only L 489 million in 1973, and then it decreased to L 476 million in 1974 (Table 4). Poultry production and basic food crops, such as corn and beans, have been stagnant or they decreased in absolute terms. This performance clearly indicates that in the case of basic food crops and livestock exports, commercial opportunities and natural events have probably influenced agricultural development more than Government policies for the sector. These events have led to a deterioration of terms of trade resulting in a current account deficit of about L 180 million for 1974 (for imports, see Table 3). 6. Population grew at a rate of 3.5% per annum for the 1970-75 period, reaching a total of about 2,980,000 by June of 1974 (Table 5). Of the total population, 72% was living in rural areas in 1973, with an annual rate of growth for the 1970-73 period of only 2.9%, while the comparable rate for urban population was 5% per annum. For 1973, total economically active population was estimated to be 830,000, of which 540,000 (65% of the total) was engaged in the agricultural sector. Projecting the data shown above, it is estimated that, as of June 1975, the total rural population was about 2,110,900 of which about 570,000 were employed or economically active in agriculture. 7. Average per capita income for the country approximated US$340 in .1971 but it is estimated that about 60% of the rural population have an annual per capita income of less than US$100. About half of this group live on less than US$60 per year. For the 1970-72 period, about 45% of the families in Honduras, which include most of the rural population living on agricultural activities, received only 8.8% of total income and the aver- age cash and subsistence income per capita of this group was L 120 (US$60) per year. 8. Although the average output per worker has been increasing, the output of rural workers declined in recent years. There is no indication that this trend is changing. Rural wages have remained stationary and agricultural production has not been able to generate additional employment in the rural sector. 9. Under-employment in the rural sector is large but not quantified. Employment in agriculture is closely geared to rainfall and is highly seasonal, with labor shortages and upward wage pressures during the harvest periods on basic food crops, cotton and coffee. Agricultural wages actually paid fluctuate from L 1.5 to L 3 per day (US$0.75 to US$1.5), increasing at harvest time from L 4 to L 5 per day although the banana companies pay from L 5 to L 6 daily throughout the year to maintain a constant labor force. 10. Wage legislation in effect stipulates that the minimum agricultural wage is L 2.00 per day and that it should be increased to L 2.50 per day after two years from the date in which the law was published. In addition to  ANNEX 1 Page 3 standard wages, the employer has to pay 5% over the minimum salary for social security, thus increasing the total cost of labor to L 2.10 per day. The employee and the Government each contribute with an additional 2.5% of basic wage to the Social Security Fund, giving a net to the employee of L 1.95 per day of which up to 30% per day may be claimed in kind (food, housing, and the like) by the worker. According to Decree No. 121 of April 20, 1974, the total minimum wage cost to the employer would be L 2.62 and the net income in cash or kind to the employee, L 2.43 per day. B. Land Tenure and Agrarian Reform Tenure Distribution of Land 11. Honduras has a disorderly system of land titles, with a variety of systems of tenure superimposed on the traditional Spanish private (sitio) and public (ejido) land grant systems. Units of measurement have changed over the years, enclosure has been haphazard rather than planned, and many property boundaries bear little relation to their original title deeds. Superimposed on this is a variety of systems of sub-tenancy, widespread squatting, and various forms of share cropping. Deed registration is often regarded as an unnecessary formality and there is no up-to-date cadasral land register. Consequently, many land titles are easily challenged in a court of law. 12. In addition, the distribution of land is skewed. Reliablq figures are not available but the most recent census in 1965 1/ states that there are a total of 178,361 farms occupying a total of 2.5 million ha of lan4. Nearly 70% of these farms (120,000) are said to be less than 7 ha in size (average 2.5 ha) yet they occupy less than 15% of the total farmed land. At the other end of the scale, some 660 large farms, which represent less than 0.5% of the total number of farms, occupy about 27% of the total farmed land (Table 6). 13. There are three main types of tenure (Table 7). National lands belong to the state, although a high proportion of the land so classified is held by private individuals, including de facto occupiers, lessees, and concessionaires. Ejidal lands belong to the municipalities and arise from the Central Government's long-established practice of granting land to new towns for the use of the town residents. As with national lands, the ejidal lands are now held mainly by private individuals under de facto or lease arrangements. This category includes much of the nation's most 1/ The 1974 census is now being processed.  ANNEX 1 Page 4 valuable agricultural land. The third type is private lands. However, pro- perty registration practices and agrarian legislation have not produced a clear definition of private property. There is no precise information available on the amounts of national, ejidal or private lands. 14. The sub-leasing of national and ejidal land is a common practice. Lessees and sub-lessees pay a fee for the use of the land, or, instead of paying a fee, are allowed to take a subsistence crop in return for clear- ing, after which the area is sown to pasture. Squatters occupy private, national, or ejidal lands without legal right. Some 30,000 families are probably under this precarious tenancy form, mainly on national lands. It is estimated that rather more than 50% of the land in agricultural use is under some type of absentee ownership. It should also be noted that a large percentage of the small farms are located in marginal areas, especially in the mountainous Central Zone. Most of these farms are on either "rented" private lands or on a mixture of leased or squatter-occupied ejidal or na- tional lands, with many being operated under other forms of secondary tenancy. Conversely, many of the larger farms are frequently located on the better land and are used for extensive ranching operations although they have the poten- tial for much more intensive systems of both crop and livestock production. Land invasions have occurred with every increasing frequency during the last decade and a main issue for the Government was to forestall violent confronta- tion with the peasantry and to accelerate policies leading to agrarian reform. Land Reform Legislation 15. Since agrarian reform was a major issue, it has received consi- derable attention. On December 27, 1972 the new Government issued Decree No. 8, which was intended to provide short-term solutions to the land problem and to provide a breathing space for drawing up a longer plan for national agrarian reform. Decree 8 was superseded by Decree Law No. 170 on December 30, 1974 promulgating a new Agrarian Reform Law in a climate of widespread rural unrest, characterized by seizures of land by campesinos and spasmodic outbreaks of violence. This unrest reflected extremely low living levels, a rapidly growing population, and difficulties in getting access to land. 16. Decree Law No. 170 makes the Agrarian Reform Institute (INA), established in 1961, responsible for carrying out the reform and gives the Director of INA cabinet status, being now directly responsible to the Head of State, thus involving him more personally in the reforms. The new law deals with the entire array of issues in an effective way and provides an adequate legal basis for making land available to the rural  ANNEX 1 Page 5 poor as well as activating the on-going commercial farm sectors. Legal procedures and rules for its implementation are now being developed. 1/ 17. Provisions. The Law states that agrarian reform is an integral part of the national development strategy and that it is intended to pro- mote social justice and increase production and productivity. Allowable maximums on farm size (Table 8) range from 100 ha in irrigation districts to 2,000 ha in the Department of Gracias a Dios. No person (individually or as a shareholder in a corporation) may hold in one or more farms a total of more than the indicated maximums. However, areas less than the indicated maximums are also subject to expropriation if (a) within six months of the date of the Law the land is not operated directly by the owner; (b) within three years (January 1978) the farms is not efficiently exploited; or (c) the land is in excessively fragmented units. Lands which are totally unexploited are subject to immediate expropriation. At the end of three years, owners of partially or inefficiently exploited lands may retain at least 50 ha, or double the amount of the efficiently exploited area, whichever is larger, up to a maximum imposed for each region. Land carrying two head of cattle per ha is considered to be effectively worked in the better regions; the criterion for the poorer regions is 0.67 head per ha. For permanent crops, 90% of the cultivable area must be used, and for annual crops, one crop a year must be produced, if long cycle, and two crops a year if short cycle. 18. Small farms (less than 5 ha) can also be taken over for redistri- bution after consolidation into larger units. Land in asentamientos under Decree 8 are automatically expropriated. Land in bananas, sugarcane, African palm, coffee, pineapple, citrus and tobacco are not expropriable as long as efficient exploitation is maintained. With Government approval, land in excess of the above-mentioned maximums can be held if needed to support a specific production unit requiring investment of at least L 750,000. All state and municipal lands are subject to immediate expropriation, with the exception that persons having worked such land for 10 years in accordance with the outlined intensity standards may retain up to 200 ha. 1/ As of October 1975, the supporting legislation in force for carrying out the reform was: Resolution No. 346 (August 5, 1975), which re- gulates the valuation of productive improvements, buildings and per- manent crops; Resolution No. 347 (August 18, 1975), which regulates the expropriation procedures; Decree No. 263 (September 10, 1975), which regulates the application of Article 39 of the Law (permits the legal ownership of farms of larger size than the limits set by the Law); and Decree Law No. 253 (September 15, 1975), which eli- minates all concessions given to the Tela Railroad Company (United Brands) and to the Standard Fruit Company.  ANNEX I Page 6 19. Areas with the better infrastructure (roads, irrigation, and the like) will receive priority attention. Expropriated land will be priced at the average value declared by the owner for real estate tax purposes during the three years just prior to expropriation. The value of improvements will be determined by INA and payments will be in cash and transferable bonds. Class A bonds, amortizable over 15 years, will carry a 6% interest rate; Class B bonds, 20 years, 4%; and Class C bonds, 25 years, 2%. Improvements will be paid for in cash (up to 10% of value, up to a maximum of L 20,000) and the remainder in Class A bonds (if the total is less than L 5,000, pay- ment will be in cash). Farms well exploited but in excess of the legal limits are to be paid in cash (up to 10% of value, with a maximum of L 10,000) and the remainder in Class B bonds. Idle land is to be paid for in Class C bonds. Bonds may be used by the recipients to finance up to 50% of Govern- ment-approved industrial projects. 20. Persons working land under any form of rental, and the landless, have priority in land distribution programs. Provisional titles will be given and these will create eligiblity for public credit. Payment for the land at INA valuation, will be made over a 20-year period, including two years of grace. Definitive titles will be given on completion of payment. Provision is made for distribution to family units and cooperative and associ- ative farms, although the latter two are given priority. Family units of not less than 5 ha or not more than 10 ha are authorized, if irrigated; equivalent areas (in an income-earning sense) are authorized for non-irrigated areas. In general the Agrarian Reform law reflects the basic technical economic, social and political realities in Honduras. It is intended to promote a change in land tenure that will result in an expanded agricultural production and higher incomes for the rural poor and promote forms of rural cooperatives, combining efficient work and economies of scale, and the settle- ment of the maximum number of families on land and the promotion of workers' participation in management. The agrarian reform is the single most important issue facing the Government of Honduras and it has been given the first priority in the Honduras 1974-78 Development Plan. However, difficulties are many and large amounts of resources will be needed to ensure the success of the program. The authorities are only beginning to become aware of the problem of providing the variety of farm services required for agricultural development, such as credit, extension, education and technical assistance in the area of production, marketing and cooperative management. There is in Honduras a great shortage of well qualified technicians, which may itself become the most formidable obstacle to a successful agrarian reform program. 21. Agrarian Reform Institute (INA). The Law gives responsibility to INA for the formation and promotion of campesino associative enterprises (Empresas Asociativas de Campesinos, EAC). Each enterprise must have a minimum of five members and is required to utilize mainly family labor. A statute (Estatuto de las Empresas Associativas de Campesinos) governing this  ANNEX 1 Page 7 new legal form of agricultural enterprise is being prepared. INA will have extensive participation in planning, organizing, and auditing these new cooperatives. In addition to the EAC, cooperatives governed by existing cooperative laws may also be beneficiaries of land transfer. 22. INA is required to implement the reform in accordance with the national development plan and a National Agrarian Council is set up to advise the Chief of State. The Council is made up of three lawyers, two representatives of the commercial farmer organizations, two representatives of the campesino organizations, and a professional agronomist; none may be public employees or key members of political parties. The President and Secretary of the Council are appointed by the Government. INA is managed by an Executive Director, who is not a member of the National Agrarian Council, but may attend by invitation. In addition to advising INA, the Council will receive and rule on complaints which grow out of INA resolu- tions, working in accordance with the Code of Administrative Procedures. The judgments of the Council may be appealed to the Supreme Court. The law does not mention colonization but it gives INA control over public and private water resources in cases relevant to implementation of agrarian reform. Forestry lands continue to be under the jurisdiction of the Honduras Forestry Corporation (COHDEFOR) established in February 1973. 23. Up to 1973, INA was financed from: Government appropriations, in- come derived from the sale or lease of national land held by INA, loans provided by international agencies, and donations in both cash and services. The new Law does not provide for direct Government financing of INA, except for budgetary allowances, through the Central Bank, to service the Agrarian Reform Bonds. 24. Accomplishments. In its 14 years of existence, INA has been respon- sible for settlements involving 119 cooperatives and 623 associative enter- prises, with a total of 123,000 ha and benefiting 29,580 families (Table 9). In addition, INA's program for the years 1976-79 calls for settling an addi- tional 61,860 families on about 310,000 ha (Table 10), bringing its total (as of October 1975) to 434,000 ha and benefiting 91,400 families (approximately 548,000 persons), with an average of about 4.7 ha per family. The program prepared by INA estimated an average size of holding per family to be 5 ha for the years 1976-79.  ANNEX 1 Page 8 C. Production, Marketing and Prices 25. Farm products are marketed almost entirely through private channels, both for export and domestic consumption. Government activities in pricing and marketing are increasing but so far there is little evidence of their im- pact. For export products, mainly bananas, beef, coffee, and cotton, there exist well organized and relatively efficient marketing systems. Bananas are handled by the fruit companies, coffee and cotton by the producer coopera- tives, and beef by the packing plants licensed for export sales. Producers have at hand a considerable amount of domestic and international price in- formation, and a small number of intermediaries participate in collection, processing and distribution. Although there may be a large number of pro- ducers, the central processing facilities and export arrangements contribute to marketing efficiency. 26. In contrast, basic grains and other major food products which move mainly in the domestic market go through many channels, and a large (but un- known) number of agents participate in collection and wholesale distribution. The itinerant trucker is the principal link between the farmer or local buyer, the main urban consumption centers and their retail markets, and the grain buying stations of the National Development Bank (NDB) (Table 11). The trucker may operate independently or act as agent for a wholesaler. The producer typically sells to either a trucker-buyer who purchases at the farm or a nearby road or to a wholesaler in the nearest town. Only a few producers sell grain directly to NDB or directly in the local market. 27. The number of stages and ownership transfers in the movement to market may be large, particularly in those areas remote from the principal buying stations of the NDB or the main consumption centers of Tegucigalpa and San Pedro Sula. NDB storage capacity and locations of the buying stations are given in Table 12. 28. The principal public institution which markets farm products and inputs is the NDB. In addition to its credit activities, the NDB sells inputs and buys basic grains (maize, rice, beans and sorghum). The Input Sales Section supplies inputs to all types of farmers, particularly those receiving agricultural credit from the NDB, and has been operating since the 1950s. The Cereals Division is responsible for the grain buying, storage and sales programs as established by the Basic Grains Commission. 29. The Basic Grains Commission is made up of the President of NDB, the Minister of Economy, the Minister of Natural Resources, and two representa- tives of the private sector. The Commission receives technical advice from the Central Bank, the National Agrarian Reform Institute and the Superior Council of Economic Planning, as well as the Federacion Nacional de Agricul- tores y Ganaderos de Honduras.  ANNEX 1 Page 9 30. The Commission directs the implementation of the price stabiliza- tion program for basic grains. It sets the minimum prices to be paid at the buying stations of the NDB, the maximum selling price of NDB sales to whole- salers and retailers, and the NDB transportation charges. The Commission has the final say on the imports and exports of basic grains through its approval of import and export requests made by private traders. 31. The objective of basic grains price policy is intra-year stabiliza- tion in the interest of both producer and consumer. Production costs, world prices and Central America's support price levels are taken into considera- tion when determining the level of the support price for corn, beans, rice and sorghum in Honduras (Table 13). 32. In addition to the Basic Grains Commission, the Government inter- venes in pricing through the Directorate of Internal Commerce of the Ministry of Economy. This office was set up by Decree 91 of November 1973 and is con- cerned with ensuring that prices of basic foods do not rise as a result of excessive market influence (monopoly power) or speculative hoarding. The Directorate has a limited number of inspectors who check on the prices of a few basic commodities. The agricultural products subject to Decree 91 are sugar, basic grains, milk, eggs, coffee and meat. For the latter, however, price controls have not been implemented. 33. Decree 91 gave the NDB interim authority to make direct sales (Table 14) through existing retail outlets of basic consumption items, including grains. The Decree requires national distributors to sell to the NDB at mutually agreed prices and in quantities sufficient to ensure adequate domestic supplies. The Decree also permits the Government to fix the amount (as a percent of sales) of export commodities which must be reserved for the national market. 34. The main reason for Decree 91 was the inflation which began to develop during 1971 and thereafter accelerated, strongly affecting the price of food, as shown below: Consumer Price Index 1969-74 (1966 = 100) 1969 1970 1971 1972 1973 1974 Total 105.3 108.4 111.6 115.4 120.7 136.2 Food 104.8 110.4 113.7 119.1 125.3 146.8 Source: Central Bank of Commerce. Decree 91 authorizes the Ministry of Economy to temporarily exempt from import duties those products that are in short supply. This was done in December 1973 and again in 1974 after Hurricane Fifi. Although mention is made in Decree 91 of maintaining prices which will provide sufficient incen- tive to producers, it is apparent that the concern is with the consumer.  ANNEX 1 Page 10 D. The Livestock Sub-sector 35. The cattle industry in Honduras has been increasingly important in recent years and the potential for development is as yet unused. Official preliminary figures from the 1974 Agricultural and Livestock census indicate a national herd of 1.7 million (Table 15) although the actual figure could be as much as 2 million. Cattle are widely distributed throughout the country, with about 44% of the total herd in the Atlantic Region, 42% in the Central, and the remainder in the Pacific (Table 16). The 1965 census lists 58% of all cattle on farms of less than 65 ha; 22% on medium size farms (65 to 320 ha), and 20% on farms over 30 ha. 36. Most of the cattle are of native or Criollo type and, though often small and stunted by poor nutrition, they are capable of greater productivity than currently achieved. In recent years there has been a sizeable intro- duction of improved breeds such as the Brahman, S. Gertrudis and Charolais for beef while Brown Swiss and Holstein are preferred for dairy. Purebred bulls and semen are becoming available, but productivity standards are very poor, with an estimated average production of about 25 kg of carcass weight per animal/year. 37. It is impossible to separate beef from milk production since most of the livestock activity is dual purpose and most of the milk produced in the country comes from predominantly beef-type animals that are milked once a day. There is very little specialized dairy farming and the national daily average production of milk is about 1.5 to 3.5 liters, depending on the quality of the breeding stock. However, poor nutrition has more effect on productivity than the herd genetic potential. 38. Beef production has increased steadily from 19,000 tons in 1965 (Table 15) to 41,000 tons in 1971. The observed growth of beef production during the period is uneven since the rate of extraction depends more on the world market and short-run policy considerations than on herd growth or im- provements in productivity. During the 1965-74 period, exports of meat in- creased from 8,000 tons (1965) to a maximum of 28,000 tons (carcass weight) in 1973. Total domestic consumption increased during the same period by only 3,000 tons, changing the relationship of export-internal consumption from 40%/60% in 1965 to 70Z/30% in 1974. It is estimated that domestic con- sumption is probably higher than the official figure due to the clandestine slaughtering. 39. Most of the beef produced is exported as boneless to the United States, a market which is open because Honduras is free of foot and mouth disease. Honduras began exporting processed beef in limited quantities to the US in 1958, and quantities remained low until 1968 due to the lack of slaughter capacity. In 1968, the US Congress imposed a voluntary quota system for all countries exporting fresh beef to the US. Quotas were based on past deliveries and currently available supplies. Countries with excess beef  ANNEX 1 Page 11 could sell, out of quota, processed beef products prepared for direct sale to retail outlets or for further processing into packaged foods by industrialy - users. 40. In 1968 the law allowed Honduras a quota of 6,400 tons (boneless beef) and by 1972 it had risen to 7,700 tons (11,200 tons of carcass weight). How- ever the system was suspended, and Honduras' total exports rose to 26,000 tons in 1972 and 28,000 tons in 1973. In 1975, the US quota system was again en- forced allowing a total market of 15,800 tons (23,000 tons of carcass), of which 9,500 tons had been exported by August. 41. As a result of this large growth in the export market for fresh beef, seven modern export-oriented slaughterhouses, with a kill and boning capacity of 444,000 head per year, were constructed in Honduras. Three of the plants, Alus, Corsa, and Del Norte, are located in the cattle-rich northern part of the country, and two more, IGHSA and Carnilandia, are in the south. The plant capacity and percentage of utilization are shown below. Plant Utilization 1973 1974 Installed No. of No. of Capacity /1 Head % Head % CORSA 75,000 64,120 85.0 43,316 58.0 ALUS 120,000 46,824 39.0 25,647 21.4 IGHSA 75,000 29,650 40.0 11,090 13.4 Del Norte 37,500 14,512 38.7 6,689 18.0 R. San Lorenzo 51,500 32,067 63.0 23,639 46.3 ORINSA 45,000 1,023 0.02 5,077 11.3 Carnilandia 30,000 9,115 30.4 8,259 27.5 Total 434,000 197,311 44.5 123,717 27.9 /_ 300 days. Source: CONSUPLAN. 42. The export slaughter plants must meet the US sanitary standards, and, for this reason, they are modern, efficient, and well designed units, complete with boning rooms, refrigerated beef coolers, and freezer storage. Each plant has a veterinary meat inspector and several assistants available to inspect the live animals, beef carcasses and by-products, and the boned meat to ensure that only wholesome meat products leave the plant. The plants appear to be well run and have aggressive management. 43. Since the packers are the main outlet for beef cattle, there are no cattle markets in the accepted sense in Honduras. Animals are bought by the packers through cemmission agents and are trucked direct from farm to packing- house. The packers also tend to dominate the market in feeder cattle. They  ANNEX 1 Page 12 purchase stock from farmers in the breeding areas and transport them to farmers in the fattening areas for finishing. Various arrangements are made, ranging from outright cattle purchase and subsequent resale to agree- ments involving no change in ownership of the cattle and a division of pro- fits between the feeders and the packers. It is estimated that the majority of cattle purchased for fattening are financed by the packers, in one form or another. 44. The domestic meat market is at present mainly supplied with culled female cattle, collected by local butchers and their agents and killed in the local municipal slaughterhouses, or elsewhere illegally. Regulations limit the slaughter of females by the packers to 10% of their total throughput, and this has the effect of ensuring a source of animals to the domestic market. As a result, the majority (above 75%) of animals killed in the municipalities are females. The domestic market is also supplied by the export packers who are required to sell at least 10% of their production in the domestic market. In addition most of the offal produced by the packers is sold to the local market. 45. Up to 1963 beef cattle exports to Guatemala and El Salvador were very important, but regulations prohibiting live cattle exports were initiated in 1963 and, in 1973 even more severe rules were enforced which closed com- pletely the frontier to live cattle trade. It appears that these regulations were a result of pressures put on the Government by meat packers. Because all packing plants operate at levels below full capacity, they compete with one another for the supply of cattle, but this competition has not increased prices to producers to any marked extent, giving rise to the feeling that packers are engaged in price fixing. 46. Despite the financial strength of packers or their hold on farmers, a small, clandestine, export trade of live animals continues, and producers on the Nicaragua and Guatemala borders receive attractive prices from foreign buyers. This limited trade, however, does not affect domestic prices, which are the lowest in Central America (Table 17) and in the 1972-75 period, have gone up very little and are quite modest compared with the average price received for Honduras beef exports (Table 18). 47. There is no Government price policy on cattle, and the meat packers are left to set whatever price is necessary to obtain their supply. Honduras producers received as an average for an 800-pound steer (363 kg) L 0.64 (US$0.32) per kilogram in 1974 and 1975, while prices in the rest of Central America ranged upward to a high of L 1.10 per kg in Panama. For the current year, producers able to sell cattle outside of Honduras have been receiving, as an average, a price differential of L 0.12 to L 0.15 per kg compared to the price obtained in the local market. 48. Dairy production has risen at a more modest rate, from 138 million liters in 1965 to 196 million in 1974 (Table 15). Milk output has not been  ANNEX 1 Page 13 to keep up with rising demand, and imports of milk increased correspondingly from 14 to 25 million liters of fluid milk equivalent (1,400 to 2,500 metric tons of dry powder milk) in the 1965-74 period. Milk production figures, however, have to be viewed with extreme caution since at best 8% to 10% of total reported milk production goes to processing plants in Honduras, with the rest being consumed on the farm or sold directly to consumers as fluid crude milk or in the form of homemade cheese and butter. Furthermore, an analysis of the official production data shows that the milk production grew at an average rate of 2% and 1% per year, respectively, for the period 1965-70 and 1971-74, but at a rate of 22% for 1970/71. Given the low price of milk vis-a-vis the alternative prospects of beef exports and the dual-purpose nature of the herd, it is not surprising that milk production decreased some- what in the period 1971-74, but it is very difficult to explain the sudden increase reported for the year 1970/71. 49. Most of the milk produced in Honduras is transformed into sub- products at the farm level or sold fresh within the area in which they are produced. Only a small fraction of the total production goes to the six dairy processing plants (two in Tegucigalpa, two in San Pedro Sula and two at La Ceiba). Total processing capacity is about 45 million liters, which represents only 23% of total 1974 reported production; plant capacity varies from a maximum of 40,000 liters per day (two plants) to a minimum of 2,000 liters per day. Plant utilization is rather low and, on the average, it is estimated that 35% of total plant capacity is being utilized. 50. Consumption of fluid milk is estimated to be 25% of total reported production. Very few cities in the country consume pasteurized milk, and about 60% of total consumption is made up of non-pasteurized milk sold most of the time directly from producers to consumers. Furthermore, since there is a very limited capacity for handling and storing milk products, most of the consumption is localized in the larger urban centers and in the pro- duction areas. 51. Producers are paid according to milk quality and butterfat content. A sampling of three plants indicates that the average price per liter re- ceived by farmers in 1975 at the plant level was L 0.32, L 0.30, and L 0.25 in Tegucigalpa, San Pedro Sula and La Ceiba, respectively. On the other hand, the price to consumers was L 0.60 per liter and it is under Govern- ment price control schemes. Most of the milk imports are in the form of whole dry powdered milk. Reported average CIF prices paid for milk imports were L 0.26 per liter (US$0.13) and the import volume is not regulated by the Government. 52. The small increases observed in milk production seem to be due to the low prices paid to farmers for fluid milk up to mid-year 1974 (L 0.10 per liter), together with the fact that the price of imported (CIF) processed milk is lower than the price paid to producers for fluid milk. Given the price relationship, the best alternative for those plants that are in a position to reconstitute milk is to use imported milk rather than purchase locally produced fluid milk--a situation that does not coincide with the Government's desire to increase domestic production.  ANNEX I Page 14 E. The Crop Sub-sector 53. The project would, in principle, finance most of the crops grown in the country, provided that operations are viable. This section, however, deals only with bananas and rice, which are of major interest to the Project. Bananas 54. Banana is the most important export crop, accounting for 35% of total export earnings in the country (para 3). The area planted with bananas is about 38,000 ha (Table 19), but only 21,500 ha are used by export-oriented plantations with good standards of productivity. The rest of the banana area (16,500 ha) is used generally for domestic consumption, which averages 40% of total production (Table 20). 55. The production of bananas for export purposes is completely dominated by two foreign companies--Tela Railroad Company (United Brands) and the Stand- ard Fruit Company, which owns and operates 13,700 ha (64%) of the total area of commercial banana. The rest is formed by private individuals that produce under medium-term contracts to the two firms, and are dependent on them in matters related to technical assistance, some production credit and market services. The situation has changed somewhat recently and it is expected that the Government will play a more active role in the future, implementing some production and marketing policies for the banana sector. All the concessions that the banana companies had and which gave them a special legal and economic status were eliminated in September of 1975. 1/ In addition, the Government created 2/ the Corporacion Hondurena del Banano (COHBANA) for the purpose of dealing with all matters related to Government services and policies concern- ing the banana sector. It is also authorized to take an active part in pro- duction and marketing of bananas. 56. Under the agrarian reform law, lands planted with bananas or other permanent crops are not subject to expropriation and it is expected that the foreign companies will continue to operate in Honduras. However, a workable arrangement has to be implemented protecting both the interests of the com- panies and those of the Government (COHBANA) in regard to marketing by in- dependent producers and agrarian reform beneficiaries. Production and exports of bananas decreased by about 200,000 metric tons between the years 1973 and 1974 (Table 20), and it is difficult to know how much of the losses are due to Hurricane Fifi and how much to the problems between the banana companies and the Government (para 4). 1/ Decree Law No. 253. 2/ October 25, 1975.  ANNEX 1 Page 15 57. Under current market arrangements, individual producers sell the bananas to export packing sheds. Prices paid to farmers varies from L 1.72 per box (L 94.5 ton) to L 1.0 per box (L 55.0 ton), depending on the grade of the product. It is estimated, based on the actual contracts between producers and the banana companies, that the average negotiated price for all bananas bought and exported is about L 1.85 per box. This figure is only a general point of reference, however, since the price varies, depending on the grade of the banana produced and on the particular supply and demand situation of the banana company to whom the producer is selling. Thus, the percentage of rejects may go up and down, depending on the company's banana harvest. 58. Prices (FOB) received for Honduras banana exports have shown a sustained upward trend for the last five years (Table 21), increasing from L 192 per ton in 1970 to L 248 per ton in 1974, with an average price for the period of L 214 per ton (L 3.89 per box). Practically all the bananas Honduras exports go to the US market. The local market is supplied both by the non-commercial production and by rejects from the export market. Rice 59. Rice is the third (after corn and beans) most important food crop of low income farmers and it is basic in the urban diet. Any shortfall in output leads to immediate shortages which then effect diet and real income through higher prices. The total estimated requirements (for human, animal, industrial and seed) suggest that Honduras will need to increase rice production from the estimated 15,000 tons achieved in 1974 to 30,000 tons in 1980 to meet total internal demand (Table 20). 60. The area used and total production figures for rice, as for most basic food crops, vary considerably from year to year. Most rice production is rainfed, thus any change in the usual rainfall pattern affects total produc- tion profoundly, both in terms of yield per ha and the area harvested. 61. Rice is produced in the Northern Coast and North Central areas in Atlantida (13% of national output), Colon (6%), Cortes (12%), and Yoro (7%), and there is important production in Olancho (10%). However, Honduras has an overall deficit in rice, and imports are made both by the Government, through the NDB and by private traders, with the previous approval of the Basic Grains Committee (para 30). In 1975, due to the hurricane and the shortage of rainfall during the first half of 1975, imports increased to an all-time high. By September, NDB had imported 22,000 tons (Table 13) which is three times the reported annual imports for 1970-74.  ANNEX 1 Page 16 62. The proportion of production sold, varies considerably from region to region. For the nation as a whole, it is estimated that approximately 60% of the rice crop is marketed. NDB annual purchases in the local market averaged 21% of total production (Table 13) for the 1971 to 1974 period. Prices received by farmers, aside of the support price paid by NDB, are not well known and reportedly are substantially lower than those paid by that Government agency. March 22, 1976  HONDURAS AGRICULTURAL CREDIT PROJECT Gross Domestic Product at Factor Cost 1965-1974 (In millions of 1966 Lempiras) Averagte 1965 - 1969 1970 1971 1972 1973 1974 Total GDP At Factor Cost 1054.8 1,163.1 1,207.8 1,254.9 1,317.3 1,318.1 Agriculture 409.6 429.5 456.1 470.0 489.5 475.7 Mining 22.3 24.4 24.2 26.0 33.0 39.7 Manufacturing 132.7 152.1 160.4 172.9 186.9 186.2 Construction 45.1 54.3 50.2 45.5 52.0 60.5 Utilities 11.5 14.4 13.2 14.6 15.2 16.2 Transport and Communications 67.0 71.2 94.9 78.8 83.4 83.7 Commercial 139.7 157.7 158.4 160.2 162.9 158.4 Financial 22.1 26.6 29.6 32.2 34.0 36.1 Housing 76.7 89.9 95.4 101.2 103.7 106.3 Public Administration 34.2 36.4 31.1 37.6 39.2 39.6 Other 93.9 106.6 110.3 115.9 117.5 115.7 PERCENTAGES Total GNP, 1965-1969 = 100.0 100.0 110.3 114.5 118.9 124.9 125.0 Total Non-agricultural GNP 1965 - 1969 = 100.0 100.0 113.7 116.5 116.1 128.3 130.5 Agricultural GNP 1965 - 1969 = 100.0 100.0 104.8 111.3 114.8 119.5 116.4 Agriculture as % of total GNP 38.8 36.9 37.8 37.5 37.2 36.1 - ME~~~~~~~~~~I' Source: Central Bank of Honduras and Bank estimates. HIH February 8, 1976  AKNEI 1 Table 2 HONDURAS AGRICULTURAL CREDIT PROJECT Commodity Exports 1965-1974 (Millions of current Lempiras) 1965-1969 1970 1971 1972 1973 1974 Exports FOB 315.4 348.6 373.7 417.0 524.1 552.4 Agricultural Products 213.9 219.1 254.0 256.1 301.0 297.6 Bananas 141.9 1507 l9l1.4i IIT7 71F7 Coffee 39.6 51.6 46.1 54.5 96.9 87.8 Cotton 9.7 2.2 1.0 1.3 2.9 6.3 Tobacco 4.4 4.5 4.2 4.4 5.7 8.5 Corn 5.7 1.9 1.8 1.3 0.5 * Beans 6.3 3.3 4.8 4.0 0.5 6.3 Livestock 4.3 1.1 0.5 2.8 0.2 * Others 2.0 3.8 4.2 6.o 6.3 7.7 Industrial Products 83.7 109.0 93.9 127.1 175.9 229.9 Beef 10.0 25.0 15.9 T7.7 43.3 Sugar 1.9 2.4 3.2 4.1 * 9.0 Processed Fruits 2.9 4.3 4.6 4.7 4.2 4.8 Vegetable Oil 1.4 2.2 0.4 1.2 1.5 0.7 Lumber 25.0 32.4 38.4 54.2 78.2 81.4 Cigars and Cigarettes .3 o.6 0.7 1.3 1.7 3.0 Textiles .3 3.9 * 0.2 3.3 7.e Clothes and Shoes 4.2 4.7 1.0 0.6 0.9 1.1 Lumber Products .6 1.5 0.9 1.9 3.9 6.o Chemicals 5.9 5.7 2.1 4.3 6.1 12.9 Petroleum (fuel) 5.1 6.6 5.6 6.o 7.7 28.P Others 26.1 25.4 12.0 16.7 24.8 41.0 Mineral Products 16.8 17.7 19.2 29.1 42.7 44.8 Silver 9 o. e.o :5 14.P ig" Lead, Zinc 7.5 9.4 11.2 18.6 27.9 29.3 Fishery Products 1.0 2.8 6.6 4.7 4.5 8.1 Shrimp and Lobster I:- iF 7. 77 b: :i * Less than L 100,000. Source: CONSUPLAN and DCEG. February 8, 1976  HONDURAS AGRICULTURAL CREDIT PROJECT Merchandise IDports 1965-1974 (Millions of Current Lempiras) P ercentage of Change 1965-1969 1970 1971 1972 1973 1974 1974/7 Total Merchandise Imports CIF 327.7 429.9 396.6 392.0 535.9 782.8 46.o Consumers, Goods 97.3 135.7 97.8 100.0 128.8 153.6 19.3 Non-durable Z77 -YIi5 77 64.0 -TF-T 22.9 Durable 32.3 44.2 41.1 36.0 49.2 55.8 13.4 Raw Materials 125.4 146.4 159.9 159.4 211.6 316.6 49.6 Agriculture -I"77 17.4 19.4 320.7 - 3O 27.9 Industry and Mining 97.5 127.8 126.8 125.1 160.9 249.8 55.2 Construction 14.6 22.9 15.7 14.9 27.9 36.5 30.8 Lubricants and Fuels 18.8 27.9 33.0 37.0 51.0 126.9 148.8 Capital Goods 78.8 110.4 94.2 88.1 131.2 179.4 36.7 7 griculture T7 77T I77 -TT7 -7-7 28.3 Tndustry 46.2 64.4 51.8 58.4 85.0 92.4 8.7 Transport 20.3 29.2 25.4 17.3 28.9 64.8 124.2 Unclassified and Balance *rPayments Adjustments 7.4 9.5 11.7 7.5 13.3 6.3 (52.6) Source: Central Bank of Honduras February 5, 1976  ANNEX 1 Table 4 HNtDURAAS AGRICtLTURiL CMEDIT PROJECT Value Added in Agriculture 1965-1974 2 (Millions of 1966 Lepirae) As r of the Thtl 1973/?4 1965-1969 1970 1971 1972 1973 1974 AVIZ B eagnas 110.8 128.0 142.0 138.0 141.0 121.0 27.2 Coffee 43.o 44.o 48.o 52.0 64.o 61.0 13.0 Corn 41.4 44.0 44.0 45.0 44.0 44.0 9.1 Beans 17.6 15.0 16.0 15.0 13.0 14.0 2.8 Others 58.6 53.0 57.0 631.0 65.0 72.0 14.2 Sub-total 271.4 284.0 307.0 311.0 327.0 312.0 66.3 livestock 71.8 69.o 70.0 71.0 74.0 71.0 15.0 Poultr 18.h 15.0 16.0 17.0 16.0 16.0 3.3 Forestry 46.8 57.0 59.0 64.0 68.o 73.0 14.6 Fishing and Hunting 4.2 4.o 4.0 7.0 4.0 4.0 0.8 Total 412.6 429.0 456.o 470.0 489.0 476.0 ioo.o PERCDITAGLS crops 100.0 104.6 113.1 114.6 120.5 115.0 Livestock 100.0 96.1 97.5 98.9 103.6 98.9 Poultry 100.0 81.5 87.0 92.4 87.0 87.0 Forestry 100.0 121.8 126.0 137.7 145.3 156.0 Hunting and Fishing 100.0 95.2 95.2 166.7 95.2 95.2 Total 100.0 104.0 110.5 113.9 118.5 115.3 1/ Value of agriciatural output *dnoJ purchaed inuts. Source: rentral Bank of Ronduras. March 9, 1976  HONDURAS AGRICULTURAL CREDIT PROJECT Population 1970 - 1975 ('000) Mid-year Growth Geographical Distributionp/ Year populationl/ Rate Urban Rural 1970 2,508.7 679.9 1,828.8 1971 2,595.8 3.5 713.9 1,881.9 1972 2,686.5 3.5 749.6 1,936.9 1973 2,781.4 3.5 787.2 1,994.2 1974 2,879.3. / 3.5 N.A. N.A. 1975 2,981.9 3.5 N.A. N.A. 1/ DGEC - Projections based on the 1961 population census. Prepared by CELADE. / COONSUPLAN - DGEC projections. 2/ Preliminary information of the 19.74 census indicates that total population was 2,654,000. February 8, 1976 o z  HON1DURAS AGRICULTURAL CREDIT PROJECT Farm Dize and Land Use Land Use (as p6 of Total Farm Land) Average Annual Permanent Total idle or Farm Size Size Numer of Area Crops Crops Crops Forest Land (ha) (000J ('000 ha) Less than 7 ha 2.5 120.4 67.5 299.7 12.4 52.1 15.8 67.9 32.1 7 to 35 ha 14.7 47.1 26.4 664.8 27.5 17.8 10.1 27.9 72.1 35 to 350 ha 77.7 10.1 5.7 787.9 32.6 6.6 5.9 12.5 87.5 Over 350 ha 295.8 0.7 0.4 664.7 27.5 2.4 4-4 6.8 93.2 Total 13.5 178.3 100.0 21,417.1 100.0 14l1 7.9 22.0 78.0 Sources DGEC. February 8, 1976  ANNEX 1 Table 7 HONDURAS AGRICULTURAL CREDIT PROJECT Land Tenure and Land Use No. Area Annual Permanent Other Tenure Farms (ha) Crops (ha) Crops (ha) Uses (ha) Privately Owned 39,991 1,106,907 85,157 64,421 957,328 National 20,089 204,950 41,373 30,097 169,480 Ejidal (Municipal) 44,123 368,671 69,928 38,232 260,510 Rented 40,053 122,760 68,201 9,796 44.,761 Squatter 4,308 30,144 8,438 2,565 19,110 Owmed + National 1,359 78,636 5,370 7,892 65,373 Owned + Ejidal 3,944 170,335 10,852 11,395 148,087 National + Ejidal 1,777 29,622 4,203 4,282 21,136 Other Forms 22,717 269,057 48,531 21,725 198,800 Total 178,361 2,417 05l 342,056 190,409 1&286h587 Source: DGEC 1965 census. February 8, 1976  ANNEX 1 Table 8 IIONDUIiS AGRICULTUTRALL CREDIT PROJECT Agrarian ReLeorm Law: Maximum Size or Holdings Nlaximum Allowed Area or Location (ha) 100 - In any Government irrigation district 250 - Iowlands of the Sula valley - Cuyamel valley - Lowlands of the Atlantic coast - Lowlands of the Quimistan valley 300 - Middle and low Aguan valley 00 - iighlands of the Sula valley - Iighlands of the '.uimistan valley - Guayape valley - Jamastran valley - Zamorano valley - Coastal lands of the departments of Choluteca and Valle - Moroceli valley - Talanga valley - Siria valley - Morazan and Negrito valleys in the department of Yoro - Valleys of the departments of Copan, Santa Barbara and Ocotepeque 700 - Comayagua valley - 3atuca valley in the department of Olancho - North of the Agalta valley - Paulaya and 3ico vallays 1,000 - Of any -l'at land not indicated above 1,500 - Of any land with 30,o on more slope 2,000 - In the department of Gracias a Dios Source: Decree Law No. 170. February 8, 1976  HONDURAS -AGRICULTURAL CREDIT PROJECT INA Agrarian Reform Settlements (As of September 1975) Cooperatives Associative Enterprises Total No. of Area Ha per No. of Area Ha per No. of Area Ha per Region Location Number Families (ha) Family Number Families (ha) Family Families (ha) Family Central Tegucigalpa 3 113 700 6.2 59 3,186 7,424 2.3 3,299 8,124 2.5 Southern Choluteca 23 659 4,035 6.1 135 5,721 13,075 2.3 6,380 17,110 2.7 Olancho Juticalpa 1 45 140 3.1 62 2,013 6,617 3.3 2,058 6,757 3.3 Eastern Danli 3 85 896 10.5 36 1,373 3,973 2.9 1,458 4,869 3.3 North West San Pedro Sula 17 854 4,117 4.8 263 7,992 24,180 3.0 8,846 28,297 3.2 Atlantic La Ceiba 72 4,197 37,573 8.9 95 3.342 20,993 6.3 7,539 58.506 7.8 Total 119 5,953 47,401 8.0 623 23,627 76,262 3.2 29,580 123,663 4.2 Source: INA, Planning Department, October 1975. February 8, 1976  AENNE 1 Table 10 HONDURAS AGRICULTURAL CREDIT PRDJECT INA Arrin for Progr No. of Area Year Region Department Area, Plan Families (he) Total I.H.A Program 61.60. 1976 Total for the Year 36 698 183.460 North Cortes Cholome 300 15.000 Yoro El Negrito 2,000 10,000 Yoro Guaymas 6,000 30,000 Atlantic Atlantida Magica 603 3,000 Atlantida Lean 1,200 14,000 Colon Aguan 7,340 36,701 Colon Isletas 6,500 32,507 Choluteca Choluteca Area 1 2,634 11,303 Choluteca Area 2 462 3,000 Choluteca Area 3 1,275 4,949 Valle Area 4 678 3,000 JuticalPe Olancho Jutiquile 1,600 8,000 Central Comayagua Comayagua 600 3,000 Fcn. Morazan Talanga 1,000 5,000 La Paz La Paz 306 1,500 Danli El Paraiso Jamsatran 600 3,000 Ste. Rosa de Copan La Entrada 500 2,500 Copan Ocotepeeue Seneenti 400 2,000 1977 Total for the Year 10.802 52.500 North Cortes Cuyamel 722 3,000 Yoro Guanchias 914 4,000 Yoro Monatan 1,000 5,000 Atlantic Yoro Olanchito 600 3,000 Atlantida Jutiapa 700 3,500 Juticalpa Olancho Catecasias 1,400 7,000 Olancho Juticalpa 700 3.500 Olancho San Pca. de Bacerra 800 4,000 Central Comayagua Palomgl 1,000 5,000 Fco. Morazan Zmorano 1,400 7,000 Intibuc- Mayes 280 1,400 Danli El Paraiso Moroceli 200 1,000 El Paraiso Onopoli 580 3,000 Sta. Rosa de Copan Florida 506 2,100 Copan 1978 Total for the Year 7 260 39.400 North Cortes Sta. Crus de Yojoe 300 1,500 Cortes Rio Lindo 300 1,500 Cortes Villanueva 600 3,000 Sta. Barbara Quimistran 800 4,000 Juticalpa Olancho Culmi 500 2,500 Olancho San Esteban 1,000 5,000 Central Comayagua Guasistag.a 400 2,000 Fco. Morazan San Juan de Flores 900 4,500 Fco. Morasan Siria 580 3,000 Intibuca La Esperanza 600 3,000 Danli El Paraiso El Paraiso 600 3,000 El Paraiso Trojes 300 4,500 Ste. Rosa de Copan Cucuyagua 200 1,000 Copan Lempira IaPFlores 180 900 1979 Total for the Year 7,100 35,000 North Cortes San Manuel 200 1,000 Cortes Yojoa 500 2,500 Sta. Barbara Naeo 500 2,000 Juticalpa Olancho Guayspe 1,000 5,000 Olancho Le Paguare 600 3,000 Olancho Patuca 3,000 15,000 Central FPo. Morae.n Orice 200 1,000 Danli El Peraiso Jacaleapa 400 2,000 El Paraisn Ste. Marie 700 3,500 Source: INA,Planning Depart-eet, October 1975 February 8, 1976  ANNE 1 Table 11 El HONDURAS AGRICULTURAL CREDIT PROJECT NDB Grain Storage Capacity (Metric tons) Storage Site Capacity Percent of Total 1. Tegucigalpa 17,987 44. 3 La Burrera 1,Is414 Cermo de Hule 2,273 Col Kenneyr 14,300 2. Choluteca 714 1.8 3. Comayagua 1,164 2.9 4. Juticalpa 473 1.2 5. Catacamas 250 0.6 6. lxanii 664 1.6 7. E Porvenir 300 0.7 8. San Pedro Sula 16,118 39.7 Terminal S.P.S 14,300 San Pedro Sula 1,818 9. Puerto Cortes 682 1.7 10. Tela 623 1.5 11. La Entrada 300 0.7 12. Qaimistan 300 0.7 13. E:. Negrito 300 0.7 14. Clanchito 473 1.2 15. Cuyamel 277 0.7 Total 40,625 100.0 Source: NDB February 3, 1976  ANNEX 1 Table 12 HONDURAS AGRICULTURAL CREDIT PROJECT NDB Support Prices for Basic Grains 1970-75 1 (Lempiras/ton) Crop Year Corn Beans Rice 1969-70 132 264 154 1970-71 132 308 154 1971-72 143 308 209 1972-73 143 308 220 1973-74 148 319- 242 1974-75 198 441 342 1975-76 331 463 397 1J In year 1975976 BNF will start buying sorghum,and the support price announced is L 264 per ton. Source: BNF. February 8, 1976  ANNEX 1 Table 13 HONDURAS AGRICULTURAL CREDIT PROJECT NpB Market _perations in Basic Grains 1971-74 and 1975 Prozram (Tons) 1975 1971 1972 1973 1974 Program Corn Internal Purchases 10,055 18,759 6,216 8,488 17,730 Imports - - - - 33,952 j/ Exports 907 4,476 4,164 - Beans Internal Purchases 6,80o 7,515 1,711 4,935 11,340 Imports - - 190 - Exports 5,843 3,482 591 _ Rice Internal Purchases 3,057 3,308 3,470 120 5,790 Imports 1,904 2,535 - 1,133 22,083 1/ / Imported as of September 1975. Source: NDB. February 8, 1976  HONDURAS AGRICULTURAL CREDIT PROJECT Livestock, Total Production, Imports, Exports and Apparent Domestic Consumption Beef (thousand metric tons) Milk (million liters) Total Total Cattle Total Domestic Total Total Domestic Year (,< heation Production Consumption Exports Production Tmports Consumption 1965 1,483.2 19.5 16.7 7.8 138.6 13.6 152.2 1966 1,501.8 19.8 10.8 9.0 140.9 14.1 155.0 1967 1,520.6 23.3 14.1 9.2 143.2 15.7 158.9 1968 1,539.6 26.0 16.2 9.8 145.6 21.8 167.4 1969 1,558.9 28.9 12.6 16.3 148.o 32.7 180.7 1970 1,578.4 30.0 12.1 17.8 151.4 32.3 183.7 1971 1,598.0 35.8 13.8 22.0 185.5 33.1 218.6 1972 1,618.1 39.4 13.3 26.1 187.8 27.7 215.5 1973 1,640.6 41.0 12.7 28.3 190.4 19.3 209.7 1974 1,689.9 36.1 14.9 21.2 196.1 24.9 221.0 Source: CONSUPLAN. February 8, 1976 El'  Table 15 HONDURAS AGRICULTURAL CREDIT PROJECT Livestock Population Distribution by Departments 1974 - ('000 Head) Apparent Milking Cows Total Milking to Total Zones and,'Departments Cattle X Cos 2/ (%) ATLANTIC 741*.7 78.6 11 Atlantida 78.4 _ 8.3 - Col6n 57.9 - 6.2 - Santa Barbara 140.0 - 14.8 - Cop&n 98.3 _ 10.4 _ Gracias a Dios 9.8 - 1.0 - Yoro 137.9 14.6 _ Ocotepeque :42.7 - 4.5 - Islas de la Bahia 4. - .5 _ Cort6s 172.3 _ 18.3 - CENTRAL 714.4 42 75.7 11 El Paraiso 142.9 - 15.1 - Francisco Morazan 126.5 - 13.6 - Olancho 190.3 - 20.2 - Comayagua 77.5 - 8.2 _ Intibuca 50.7 - 5.4 - La. Paz 43.3 - 4.6 _ Lempira 81.2 - 8.6 - PACIFIC 233.9 14 24.8 11 Choluteca 171.4 - 18.2 - Valle 62.5 - 6.6 - Total Livestock 1,690.0 100 179.1 11 2/ ~CONSUPLAN - DGEC. 2/ It is an indication of the lack of specialization of the national herd that the ratios of milking cows to total cattle is constant. It is also an indication of poor statistical data. February 8, 1976  ANNEX 1 Table 16 HONDURAS AGRICULTURAL CREDIT PROJECT Central America - Prices Paid to Farmers for a 263-kg Steer (800 lb) 1974-75 Price Per Kg on the Hoof Lempiras Country 1974 1975 Guatemala 0.93 1.o6 Costa Rica 1.06 0.93 Panama 1.10 1.10 Nicaragua 0.73 o.64 Honduras o.64 o.64 Source: CONSUPLAN. February 8, 1976  ANNEX 1 Table 17 HONDURAS AGRICULTURAL CREDIT PROJECT AveraRe Price (FOB) Received for Frozen Boeless. Beef Exports Year Lempiras/k Yearly Changes 1970 1.57 1971 1.65 5.7 1972 1.79 8.4 1973 2.23 34.6 1974 2.58 16.o Source: DGEC. February 8, 1976  HONDURAS AGRICULTURAL CREDIT PROJECT Selected Crops - Area Harvested. Total Production and Yields, 1965- 74-/ 1965- 1969 1970 1971 1972 1973 1974 Average -/ Projections-/ 1971 - 1973 1974 1975 1978 CORN Area ('000 ha) 287.1 271.8 262.8 266.5 282.8 321.2 270.7 Production ('000 tons) 334.2 339.2 273.5 281.8 331.8 296.6 295.7 222.9 412.6 417.4 Yield (kg/ha) 1,164 1,248 1,040 1,057 1,173 950 1,094 BEANS Area ('000 ha) 77.2 72.7 75.4 72.6 74.1 67.5 74.0 Production ('000 tons) 54.1 54.7 39.3 35.0 54.5 31.4 42.9 31.6 49.7 56.2 Yield (kg/ha) 700 752 521 482 735 465 579 RICE (Paddy) Area ('000 ha) 6.9 5.5 9.6 12.0 9.5 14.6 10.4 Production ('000 tons) 8.2 6.5 13.2 10.0 16.4 13.2 13.2 24.5 25.6 30.0 Yield (kg/ha) 1,188 1,181 1,375 833 1,726 904 1,273 SORGHUM Area ('000 ha) 36.7 33.2 33.9 27.4 31.7 55.2 31.0 Production ('000 tons) 48.9 47.9 47.2 33.7 55.2 38.3 45.3 38.9 52.2 59.9 Yield (kg/ha) 1,332 1,442 1,392 1,230 1,741 693 1,463 COTTON Area ('000 ha) 12.7 4.1 3.2 7.7 7.0 6.3 6.0 Production ('000 tons) 9.8 3.2 2.0 4.4 3.7 3.2 3.4 3.6 3.6 27.7 Yield (kg/ha) 771 780 666 628 528 507 564 SUGARCANE Area ('000 ha) 29.7 34.7 35.8 32.7 33.5 34.4 34.0 Production ('000 tons) 819.6 1,126.6 1,217.9 1,089.6 1,769.0 1,254.4 1,358.8 1,364.0 1,468.2 1,710.9 Yield (kg/ha) 27,596 32,466 34,019 33,321 52,806 36,465 39,965 BANANA Area ('000 ha) 29.0 34.6 38.4 42.2 34.2 35.2 38.3 Production ('000 tons) 1,075.1 1,280.4 1,441.7 1,546.7 1,524.4 1,342.3 1,504.2 781.0 1,255.8 2,880.6 Yield (kg/ha) 37,072 37,005 37,544 36,644 44,573 38,133 39,307 PLANTAIN Area ('000 ha) 5.2 6.5 6.8 9.1 11.1 12.4 9.0 Production ('000 tons) 94.7 118.8 125.9 137.8 158.7 170.4 140.8 125.1 158.5 210.3 Yield (kg/ha) 18,211 18,276 18,514 15,142 14,297 13,741 15,644 AFRICAN PALM Area ('000 ha) 2.3 3.1 3.3 3.9 4.3 4.7 3.8 Production ('000 tons) 26.5 35.8 32.6 37.9 44.0 44.4 38.2 40.0 47.6 59.2 Yield (kg/ha) 11,521 11,548 9,878 9,717 10,232 9,446 9,956 COFFEE Area ('000 ha) 91.9 100.5 104.0 104.0 n.a n.a 104 Production ('000 tons) 33.0 39.9 35.6 42.2 n.a n.a 38.9 57.6 60.2 58.0 Yield (kg/ha) 359 397 342 405 374 1/ DGEC for years 1965 to 1972. MRN for years 1973 and 1974. 2/ 1974 omitted due to Hurricane Fifi. - 3/ ODEPLAN reviewed projections - after Hurricane Fifi. February 8, 1976  ANNEX1 Table 19 HONDURAS AGRICULTURAL CREDIT PROJECT Bananas and Rice Productimn Trade and Apparent Domestic Consumption 1969-74 ('000 metric tons) Eananas Rice (Paddy) Total 1 Total Int'l Total - Total Int'l YEAR Production Demand Exports 2/ Production Imports Dnand 1969 1,280.7 508.8 771.9 7.2 n.a. 1970 1,350.9 577.7 773.2 6.4 n.a. 1971 1,441.7 471.9 969.8 13.3 n.a. 1972 1,546.3 699.5 846.8 10.0 7.4 17.4 1973 1,524.4 429.7 824.7 16.4 .7 17.2 1974 1,342.3 726.4 615.9 13.2 1.6 14.8 1/ DOEC - MRN. / Central Bank of Honduras. Note: CONSUPLAN estimates that total production of bananas for 1974 would be 1,140 tons.  ANNEX . HONDURAS Table 20 AaRICULTURAL CREDIT PROJECT Selected Export Commodities FOB Prices Received by Honduras (Lempiras/Metric ton) Average 1969 1970 1971 1972 1973 1974 1971-1974 Bananas 192 150 197 214 228 248 222 Coffee 1,472 1,992 1,851 1,668 2,436 2,853 2,202 Beef 1,553 1,567 1,634 1,771 2,213 2,566 2,046 Beans 355 354 391 372 503 1,001 567 Cotton 1,151 801 1,012 707 987 1,430 1,034 Corn 118 125 137 154 251 183 181 Sugar 274 250 317 338 250 1,199 526 Plantain n.a n.a 173 164 132 139 152 Source: Central Bank of Honduras. February 8, 1976  ANNEX 2 Page 1 HONDURAS AGRICULTURAL CREDIT PROJECT The Banking System and Agricultural Credit Introduction 1. Both private and state banks play an important role in providing credit to the agricultural sector. In 1974, credit for agricultural activities amounted to 31% of all lending, while, in descending order of importance, industry received 21%, housing 15%, and services 9%, with consumer and other loans together accounting for 5% of total credits granted. During 1974 the agricultural/livestock sector continued officially to have "most favored" credit status with an increase of 28.6% in lending volume of crops for about L 18.5 million as compared with the year before. Livestock credits grew at a lesser rate but were nevertheless about L 7.7 million greater than the volume for 1973. Loans and discounts of commercial banks during 1974 represented 73.1% of the whole banking system and passed the L 44 million of 1973; develop- ment banks in 1974 raised their lending by L 18.9 million or an increase of 18.8% over 1973 with a credit volume in 1974 of 21.3% of the total. In addition, special savings institutions provided 5.6% of the 1974 volume of credit, an increase of L 6.9 million over their operation in 1973 (Table 1). Central Bank of Honduras (CB) 2. The Central Bank of Honduras (CB), heads the banking system. CB was established by the National Congress in February 1950 and has head- quarters in Tegucigalpa, a branch office in San Pedro Sula, and eight agency offices throughout Honduras. It is governed by a Board of Directors composed of the president of the bank, appointed by the President of the Republic; the Minister of Finance and Public Credit, an ex-officio member; a repre- sentative from NDB; a representative from the private commercial banks; and a representative from the private sector. Each member has an alternate. 3. The President of the bank, in office for a seven-year term that may be extended, proposes to the Board of Directors the measures and resolu- tions necessary to execute bank policies and informs it of issues most re- levant to the operation of the bank. He also performs the legal representation, together with or apart from the management, and directs the relations of the bank and Board with public authorities, with the banking system, and with various international organizations where it represents the Government. 4. The manager of the bank is in charge of its direct administration and day-to-day operations. He is appointed by the Board, being responsible to it as well as to the President, and is assisted by several department managers, who, upon his recommendation, are appointed by the Board. An  ANNEX 2 Page 2 internal auditor, also appointed by the Board, for five-year terms, is responsible for the inspection and continuous audit of accounts. An external auditor, appointed by the President of the Republic and admin- istratively reponsible to the Minister of Economic and Finance and Public Credit, annually audits the departments of the bank for legal and financial compliance with the national banking laws and regulations. The Super- intendent of Banks, appointed by the Board and administratively responsible to the manager of the bank, is responsible for examining the operations of all private banks, finance companies, and Government banks (See Chart 1). 5. The CB acts as banker, fiscal agent, and economic and financial adviser to the Government, to its Ministries and Departments, and to official and semi-official entities. Its purpose is to promote monetary, credit and exchange conditions favorable to the development of the national economy. CB grants rediscounts at 100% against appropriate documentation at 5% per annum; for production marketing, 7%, and for specific operations (liquidity), 10% per annum. It establishes the interest rate structure for all bank deposits and loans, as well as the reserve requirements against deposits. For normal (non-specific) commercial bank loans up to an amount of US$1,250, interest rates are from 13.5% to 16% per annum, and for credits for production, the interest rate was fixed at 11% from September 16, 1974. Current interest rates paid on savings and time deposits are from 6% to 9.5% per annum. Reserve requirements for current accounts, savings and time deposits are 25% of value consisting of 18% in paper and 7% in cash for local moneys, or 30% in the case of foreign exchange transactions. The bank may also establish limits on advances, lines of credit in foreign currency, and rediscount facilities to private banks. CB may borrow from international lending institutions and, as fiscal agent for the Government, can also act, as Administering Agency for the proposed project - a role it successfully played for the First and Second Livestock Development Projects. 6. CB allocates its net earnings to its capital and to a Securities Fund. None of its earnings, therefore, flow into the National Income and Expenditure Budget. Even though there was strong pressure on international monetary reserves, due partly to increased petroleum prices and damage caused by Hurricane Fifi in September 1974, CB operations in 1974 were at a higher level than those in 1973. Net reserves rose in 1974 by L 2.6 million as compared with 1973, from about L 92 million to over L 94 million. Net financing to the public sector by CB rose from L 73.8 million in 1973 to about L 91 million in 1974, compensating for the increase in public sector deposits from L 39.8 million in 1973 to L 56.7 in 1974. In addition, during 1974, the CB made available to the banking system L 81.9 million in credits, or a 33% rise from the L 54.5 million granted in 1973. During the same period, bank deposits with CB dropped 13% from L 26.7 million to L 23.2 million (Table 2).  ANNEX 2 Page 3 Private Commercial Banks 7. The agricultural sector is competitively serviced primarily by 10 private commercial banks, six of which are participating in the First and Second Livestock Development Projects. The Banks are: (a) Banco Atlantida, an affiliate of Chase Manhattan Bank; 1/ (b) Banco la Capitalizadora Hondurena (BANCAHSA); 1/ (c) Banco de Honduras, an affiliate of First National City Bank; 1/ (d) Banco del Ahorro Hondureno; 1/ (e) Bank of America (f) Banco de la Financiera Hondurena; 1/ (g) Banco de Londres y Montreal; (h) Banco del Comercio; (i) Banco de Occidente; 1/ (j) Banco de Los Trabajadores. 8. The Banco Atlantida, on December 31, 1974, held about 30% of all deposits and 20% of the portfolio of the total banking system. Within the commercial banking sector, it held 33% of deposits and 28% of the credit volume, followed in importance by BANCAHSA with 16% of deposits and 15% of loans (Table 3). 9. The loan portfolio of the banking system is more or less constant in its proportion of short- medium- and long-term loans except for an in- crease in long-term loans granted by participating banks involved in the Livestock Projects since 1971 (Table 4). Generally, banks have become cautious in granting long-term agricultural/livestock loans because of uncertainties involved in the implementation of Agrarian Reform Law No. 170. These uncertainties revolve around the validity of using a first mortgage on land as a guarantee and the likelihood, in the case of the default of sub-borrowers, of INA repaying outstanding debts in long-term bonds bearing low interest. Participating banks are disposed to continue to lend for long-term development if the Government/Central Bank can resolve the 1/ Participating banks with First and Second Livestock Development Projects.  ANNEX 2 Page 4 problems of guarantees and/or the convertibility of bonds so that the banks can fulfill their cash repayment obligations to the Central Bank. The private participating banks which have a well developed system of branches throughout the country (Table 5) have lent great support to the execution of the previous livestock projects and require only a return of confidence to continue in this role. They have specialized credit and technical staff which would be strengthened for the execution of the current proposed Project. National Development Bank (NDB) 10. Functions. NDB is the major development bank in the country, with its head office in Tegucigalpa and 22 branch offices in all the important cities and towns. It was founded in 1950 and has since been the main source of institutional lending to agriculture. By the end of 1974, it had financed about 55% of total loans to the agricultural sector. The major part of this lending is medium and long term (about US$37.2 million) but it has also extended about US$11.1 million of short-term loans to the sector. NDB's activities are not restricted to agriculture. It has an industrial loan portfolio of about US$7.5 million and is involved in extensive non-banking activities such as operating the Government's grain marketing and storage program and running a series of farm supply stores, and, by means of its Development Department, an active technical assistance and promotion pro- gram in both agriculture and industry. NDB also operates as a commercial bank insofar as it solicits deposits (about US$14 million) from private and public institutions and makes commercial loans. Since the promulgation of Agrarian Reform Law No. 170, the NDB has the additional responsibility of financing the "reformed" sector. 11. Administration. NDB is governed by a Board of Directors, composed of a President (appointed by the President of the Republic for five year periods, two Government Ministers, one representative of the private banking sector, and five representatives of the business community, all of whom have an alternate (Chart 2). 12. Resources and Financial Structure. In December 31, 1974, the summarized consolidated balance sheet showed total assets of US$103.4 million (Table 6). Its main liabilities were owned capital of US$22.8 million, long- term loans (mainly from IDB and USAID) of US$17.2 million, rediscounts from the Central Bank of US$15.8 million, time deposits and short-term borrowings of US$6.5 million, and demand deposits of US$14.5 million. Its main assets were loans due, US$57.2 million; fixed assets, US$9.5 million; investments in various enterprises, US$4.4 million; and cash and holdings in the Central Bank, US$2.5 million. According to these figures, the overall debt/equity ratio is 2.4:1 and its term debt/equity ratio, 0.8:1. This seems a satis- factory situation, resulting largely from the fact that the Government's contribution to NDB's share capital has more than offset its balance sheet losses.  ANNEX 2 Page 5 13. Financial Results. NDB has operated at a loss for several years. In the three years 1972-74 annual losses have increased from US$1.2 million to US$1.4 million and now total about US$4 million. The losses incurred were in the Credit Department of NDB, not in the Development Department. Reserves of US$4.5 million are sufficient, considering the number of loans in arrears. Table 7 presents a summarized profit and loss statement for 1972-74. 14. Use of Resources. NDB's prime function is to make small agricul- tural loans. In 1974, it approved 19,491 loans distributed as follows: Amount of Loan in US$ 1974 Number % Amount % Up to 100 950 4.9 79 0.2 From 101 to 500 10,560 54.2 3,063 7.6 From 501 to 2,500 6,034 31.0 6,744 16.8 Sub-total 17,544 90.1 9,886 24.6 From 2,501 to 10,000 1,426 7.3 7,147 17.8 From 10,001 to 50,000 447 2.3 9,191 22.9 From 50,001 to 250,000 63 0.3 6,053 15.1 From 250,001 to 500,000 7 - 2,335 5.8 More than 500,000 4 - 5,558 13.8 Sub-total 1,947 9.9 30,285 75.4 Total 19,491 100.0 40,171 100.0 Loans were given for a wide variety of enterprises and many farmers had several. Some 90% of all loans were for US$2,500 or less but these repre- sented only about 25% of the total value of agricultural lending. 15. In 1974 NDB approved, overall, 49,800 loans amounting to US$57.0 mil- lion. Details are as follows:  ANNEX 2 Page 6 Total Value of Loans Percent of Amounts (US$' 000) Long term 11,976.5 21 Medium term 20,260.0 35 Short term 24,914.5 44 Total 57,151.0 100 16. Lending Policies and Procures. At present, loans may be approved in accordance with the following schedule: Limit for Loan Approval (US$Equivalent) Board of Directors up to 125,000 Credit and Operations Committee 1/ 75,000 - 125,000 Executive Committee 2/ 50,000 - 75.000 Central Office Credit Committee 3/ Up to - 50,000 Branches: 4/ San Pedro Sula and Choluteca up to - 35,000 Other branches have limits varying from 5,000 - 10,000 1/ Composed of members of the Boards of Directors. 2/ Composed of the President of NDB, the Manager of the Credit and Operation Department, and the Chief of the Credit Division. 3/ Composed of the Manager of the Credit and Operations Department, the Chief of the Credit Division, and the Chief of the Loan Section. 4/ At branch level, loans are approved by a committee composed of the Manager, the Accountant, and the Chief of the Loan Section.  ANNEX 2 Page 7 17. For working capital loans, the normal collateral is the pledge of the crop itself. Investment loans for terms of four to seven years are secured by chattel mortgages covering crops and investments. The amount of the loan may not exceed 80% of the value of the guarantee. Mortage loans are granted for a period of five to 25 years for on-farm investment, land purchase, and the construction of houses. The amount may not exceed 60% of the value of property pledged. 18. Portfolio Weakness. The NDB has a total portfolio of about US$57 million equivalent, of which US$13.2 million, or 23% of the portfolio, is in arrears. Details of overdue loans by sources of financing are shown below: Original of Overdues, (December 31, 1974) 1/ No. of Loans % Value % (US$'000) NDB funds 4,569 46 8,400 64 IDB loans 3,438 35 3,715 28 USAID loans 1,652 17 835 6 INA/ IDB loans 153 1 25 - Agrarian Reform Law No. 8 Loans 109 1 225 100 Total Overdue 9,921 100 13,200 100 1/ Note that IBRD funds are not involved. 19. Loan recovery of NDB's own funds is the most critical aspect. Overdue loans financed from NDB sources represent 64% of the value of all outstanding debts due or about 15% of the total portfolio. In addition to the US$13.2 million of loans overdue on December 31, 1974, other overdue loans to the value of about US$8.1 million were refinanced, which added to the value of actual overdues, amounts to US$21.3 million, or 37% of the total credit portfolio. This situation does not indicate sound financial management and it is evident that NDB must clean up its portfolio and replenish its capital, especially to fulfill its role in agrarian reform. 20. There are a variety of reasons for a poor loan repayment record, including the following: (a) Certain crops such as coffee and rice have not been profitable to farmers, due to poor yields and lack of good marketing facilities; (b) For many commodity loans, the harvest has been the sole collateral and poor harvests have led to poor loan repayments; (c) Poor credit control within NDB;  ANNEX 2 Page 8 (d) Inadequate legal procedures within NDB for loan collection; (d) Pressure by Government agencies to engage in marginal enterprises; (f) Lack of flexibility in loan repayment schedules; and (g) Lack of a penalty interest rate for loans in arrears. 21. Since its inception, NDB has been required by the Government, sometimes against its better judgment, to engage in activities that would not generally be considered suitable for a development bank. This is partly because there have been no other agencies that could undertake such functions. Examples are grain marketing, retail store management, and the operation of dairies and coffee processing plants. Management has not been and is not now equipped to run such operations. 22. In recent years, NDB has repeatedly attempted to reorganize itself, but reforms have been piecemeal rather than comprehensive and have, on occa- sions, either complicated issues or led to duplication of effort. One major reform -- the partial computerization of records and bookkeeping -- has been introduced. NDB is now in the process of being further reorganized as a result of studies and advice from IDB and USAID. Results to date are not encouraging. 23. The Accounting Division within the NDB is responsible for maintain- ing all accounting records and ensuring that they are kept up to date. Separate records are kept for the Credit and Operations Department and for the Development Department. The internal auditor of the NDB is appointed by the Board of Directors and aided by a total of 16 auditors. External auditing is carried out by the Superintendent of Banks in accordance with the banking laws of Honduras. So far NDB has not kept separate accounts for subloans-made with Second Livestock Project funds, but this situation has been drawn to the attention of NDB and is being remedied. 24. Participation in Second Livestock Project. When the First Livestock Project was appraised in January 1969, it was decided that the NDB should not participate, largely because its administration was weak, its technicians fully extended, and its debt collection poor. Because of favorable comments in 1973 by USAID and IDB experts on the improved performance of NDB, it was concluded that NDB participation in the Second Livestock Project was desirable. Although the Second Project became effective in January 18, 1974 and the NDB was authorized to become a participating bank by Decree No. 152 of November 11, 1973, it did not begin to operate actively until 1975. By November 1975, the NDB had approved only nine out of the total of 144 subloans made under the Second Project (6.3%) for a value of about US$205,000, or 5.6% of the total  ANNEX 2 Page 9 value of loans granted (Table 8). While NDB has about 37 other subloans under consideration, its operational processes are so slow that it has not lived up to the expectations expressed at appraisal of the Second Project, nor has it catered to the needs of small farmers, as its average subloan size has been almost US$23,000. 25. Participation in Agricultural Credit Project. Regardless of the financial, operational, and administrative weaknesses of the NDB, its parti- cipation in the Agricultural Credit Project would be vital in extending credit to the small farmer and cooperative enterprises established under Agrarian Reform Law No. 170. The Project is designed to grant loans to all types of farmers who now are obliged to operate under the Law, both in terms of farm sizes (type of enterprise and regional land use zoning) and certain levels of production efficiency. While no legally constituted producer is excluded as a likely borrower under the Project, the main thrust of the lend- ing component is towards small farmers, whether operating on a individual basis or collectively, who are beneficiaries of agrarian reform. The impor- tance of the NDB is further accentuated by the present mood of uncertainty in the private banking sector over the form and security of guarantees normally required as collateral against long-term lending for agricultural and live- stock development. 26. To comply with its future development obligations, the NDB needs to build up its technical staff for subloan request analysis and also review its position on guarantees and accelerate its processing of loans so that they are granted on a timely basis. As for a period of time the legal status of land ownership (i.e. titles) will sometimes be in doubt, the whole collateral situation might have to be modified whereby NDB would accept provisional titles or the guarantee of INA or the Government rather than first mortgages on land and/or chattel mortgages. The best form of guarantee, however, would still be sound sub-projects adequately analyzed and supervised by competent technicians. In view of the continued support of USAID and IDB in strenthen- ing NDB, it is proposed that for Project purposes, IDA maintan a close liaison with these organizations and not insist on additional reasons. Consolidated Loans Approved by Participating Banks under the First and Second Livestock Projects 27. Subloans under the First Livestock Project were approved by six participating banks, of which the Banco de Ahorro Honduras with 18%; and BANCAHSA with 18% for a total involvement of 17% of loan funds amounting to a total of about US$313 million, with the rest being shared by the other three participating banks (Annex 3). 28. Under the Second Livestock Project, the three major banks mentioned above approved 57% (about US$2.35 million) of the total amount of about US$4.1 million approved by October 31, 1975, bringing the total value of lending by all participating banks at that date to US$7.4 million as shown below (Table 8).  ANNEX 2 Page 10 Bank Loan Amount Percent of Value (US$ million) (Z) Ahorro Nondureno 1.85 25 Hondureas 1.45 20 Financiera Hondurena 0.60 8 BANCAHSA 1.40 19 Occidente 0.70 9 Atlantida 0.80 11 NDB 0.20 3 Central 0.40 5 Total 7.40 100 29. Participating banks have treated the subloans under the Livestock Projects as part of their normal operations rather than maintain accounts on a separate basis by which each could be identified individually. It is thus difficult at the moment to itemize the accounts, interest and principal re- covery and costs associated with the lending operations under the Projects. The Central Bank has been so informed and the situation is being rectified. General Financial Status of Banks 30. During the years 1970-74 inclusive, the commercial banks operated at a profit, but NDB has suffered losses in each of these five years and the Bank of America also had losses in 1973. Details are given in Table 9. March 22, 1976  HONDURAS AGRICJLTURAL CREDIT PROJECT Loans and Discounts by Sector for the Banking System to the Private Sector. (L million) 1972 Percent 1973 Percent 1974 Percent T. AGRICULTURAL SECTOR 1. Crops 59.6 14.9 64.7 13.2 83.2 14.9 2. Livestock 56.3 14. 68.6 14.0 76.3 13.6 3. Others 13.3 3.3 76.5 3.4 16.7 3.0 Sub-total 129.2 32.3 149.8 30.6 176.2 31.5 II. INDUSTRY P4.3 21.1 102.8 21.0 119.7 21.4 III. SERVICES 22.6 5.7 28.7 5.9 49.7 8.9 IV. REAL ESTATE 73.2 18.3 89.0 lP.1 05.9 18.9 V. COMMERCE 65.3 16.3 92.3 18.9 83.2 14.9 VI. CONSUMPTION 23.3 5.8 25.3 5.1 21.4 3.e VII. OTHERS .8 0.5 .8 0.4 3.4 o.6 Total Banking System 399.7 10.0 489.7 10.0 559.5 lO.C COMMERCIAL BANKS 296.0 74.1 365.2 714.6 409.2 73.1 NATICNAL DEVELOPMENT BANKS 87.4 21.9 100.4 20.5 119.3 21.3 OTHER FINANCIAL INSTITUTIONS 16.3 4.0 24.1 4.9 31.0 5.6 399.7 100.0 489.7 100.0 559.5 100.0 Source: Central Bank of Honduras, November 1975. 2ebruary 16, 1976 i r'   HONDURAS AGRICULTURAL CREDIT PROJECT CENTRAL BANK ORGANIZATION CHART Manager AcigManager Auditin|. Inreernale lreanrerSuperintendent Treasurer Foreign Exchange Subagencie Banks and of Insurances Credit EmsinAccounting Organiartenttionen naI IndustrndMehoolgyDearmetaa l Department Fiscal Fina:ncing L Personnel Engineeringare Control Spca eerce ucrn hltc Pt World Bank-15493(R) No-enber 1975   AORICZULWRAL CREDIT PRDJBCT Gentral Bank,81wnary of Financial Accounts, 1972-74 (L mllion) ASSETS 1972 1973 1974 LIABILITIES 1972 1973 1974 International Reserves 165.4 179.7 204.9 Foreign Liabilities 98.2 105.3 162.o Domestic Assets 107.1 128.3 172.5 Domestic Liabilities 168.6 194.5 206.5 Public Sector Credit 71.3 73.8 90.6 Notes in Circulation 91.4 115.4 112.9 Central Government 54.5 53.8 66.2 Coins in Circulation 9.2 10.0 0.8 Local Goverment 11.0 12.3 15.4 Public Sector DepoJits 41.4 39.8 56.7 Autonomous Institutions 5.8 7.7 9.0 Central Government 35.2 31.8 47.6 Local Government 0.3 0.3 0.3 Autonomous Institutions 5.9 7.7 8.8 Banking Sector Credit 35.8 54.5 81.9 Banking Sector Deposits 24.6 26.7 23.2 Commercial Banks 19.2 30.1 46.7 Comercial Banks 23.1 24.1 2X.5 National Development Banks 16.1 23.9 34.6 National Development Banks 1.1 2.0 1.0 Other Financial Institutions o.5 0.5 o.6 other Financial Institutions 0.4 0.6 0.7 Private Sector Securities 0.3 0.3 0.4 Private Sector Deposits 2.0 2.6 2.9 Miscellaneous 20.0 21.2 25.9 Miscellaneous 3.3 3.6 4.7 Capital and Reserves 22.7 26.1 30.5 Total Liabilities, Capital Total Assets 292.8 329.5 403.7 and Reserves 292.8 329.5 403.7 Source: Central Bank of Honduras, November 1975 $ t February 16, 1976 z  AGRICULTURAL CRBDIT PROJECT Consolidated Balance Sheets of Principal Banking Institutions December 31. 1974 (L million) Private Cossercial Banks Devel0t Banks Other IPgtit9t8ons Banco Bano banco Banco Bank Banco Dce Saan-de Sanco &.co Total Atlan de Bancah- Ahorro linanciera of del de Honduras y Nat'l. de Municipal Banco Banking tida Honduras sa Hondureno Hondurena America Camercio Ocojisate 1Montrel g famente Autonomo Upotacario Othrs Syst ASSETS Currant Cash 4.6 7.2 2.8 3.8 0.3 0.6 0.8 0.9 0.9 0.6 2.4 0.1 0.2 0.1 79.3 Deposits - Central Bank 8.0 3.2 3.8 3.0 0.7 1.6 3.3 0.8 0.5 0.8 2.6 0.1 0.1 0.2 28.7 (Governmient Securities 22.8 5.3 10.9 10.8 0.9 3.4 3.3 1.2 3.4 1.4 8.7 1.9 0.2 6.2 66.4 Other,Deposits3nd Checks 3.8 2.3 3.7 2.5 1.6 1.3 1.6 0.7 2.5 0.7 1.7 0.1 0.1 0.3 22.4 Sub-total 39.2 12.0 21.2 20.1 3.5 6.9 9.0 3.6 7.3 3.5 7.4 2.2 0.6 0.8 137.3 Invest_nts Loans and Discounts 102.8 35.7 56.2 49.9 45.7 15.2 23.7 15.9 14.5 19.1 114.3 3.5 12.6 12.9 521.1 Other Investments and Bonds 4.9 0.6 1.0 1.1 1.9 - 0.2 0.3 0.4 0.6 8.7 - 0.1 0.3 20.1 Sub-total 107.7 36.3 57.2 51.0 47.6 15.2 23.9 16.2 14.9 19.7 123.0 3.5 12.7 12.3 541.2 Isat Estate and Equipment 10.7 1.6 3.6 1.6 1.5 0.7 1.4 0.6 1.3 1.1 19.0 0.2 0.5 0.2 44.0 Contingent Assets 19.7 92.0 21.9 22.4 28.9 53.4 3.1 9.8 7.5 9.7 35.4 3.1 13.5 - 320.4 Other 13.5 5.5 8.8 4.3 3.9 3.8 1.6 1.8 0.6 2.2 22.2 8.2 0.6 1.7 70.7 Total Assets 190.8 147.4 112.7 99.4 85.4 80.0 39.0 32.0 31.6 36.2 207.0 17.2 27.9 15.0 1.121.6 LIABILITIES Deposits Demand 68.3 27.5 27.8 20.9 13.5 14.4 10.7 7.1 9.0 4.9 29.0 1.7 0.3 1.3 236.4 Time 73.6 12.1 31.1 42.1 0.9 8.5 7.0 11.1 10.0 5.5 13.0 0.2 1.1 2.8 219.0 Special Savings - - 10.1 12.2 - - 22.3 Sub-total 141.9 39.6 69.0 63.0 14.4 22.9 29.9 18.2 19.0 10.4 42.0 1.9 1.4 4.1 477.7 Other LIAbilities Central Bank 2.1 1.2 1.5 2.6 0.5 - - 1.0 - - 31.5 - - - 41.0 Acceunts Payable 0.5 0.7 0.3 0.3 1.7 0.1 0.2 0.1 0.2 0.5 0.1 0.1 0.1 - 4.9 Long-teem Forsign Loans 3.4 4.0 4.7 1.5 20.8 - - - - - 34.4 - 9.0 4.3 82.1 Miscellaneous 7.5 1.9 9.9 4.9 12.1 _ 2.3 0.7 0.8 7.3 3.3 3.9 2.6 3.4 60.6 Sub-total 13.5 8.4 16.4 9.3 35.1 0.1 2.5 1.8 1.0 7.8 69.3 4.0 11.7 7.7 182.6 Contingent Liabilities 19.7 91.9 21.9 22.4 29.0 53.4 3.1 9.8 7.5 9.7 35.4 3.1 13.5 - 320.4 Capital and RsernCs Capital-paid up 9.0 3.0 3.0 0.4 5.0 3.0 2.3 1.0 3.5 6.3 45.5 3.8 1.0 2.6 84.4 Capital Payable - - - - - - - - - 0.8 - 4.2 - 0.4 5.4 Legal Reserves 8.4 3.1 0.7 2.9 1.3 - - 0.; 0.1 0.4 - - 0.2 0.1 17.7 Contingency Reserves 0.5 0.7 0.7 0.6 - 0.1 - 0.3 - 0.1 0.2 - - - 3.2 Valuation Reserves 2.8 0.7 1.0 0.8 0.6 0.5 1.2 0.4 0.5 0.7 14.6 0.2 0.1 , 0,1 24.2 Sub-total 15.7 7.5 5.4 4.7 6.9 3.6 3.5 2.2 4.1 8.3 60.3 8.2 1.3 3.2 134.9 Total Liabilities, Capital and Reserves 190.8 147.4 112.7 99.4 85.4 80.0 39.0 32.0 31.6 36.2 207.0 17.2 27.9 15.0 1,121.6 Source: Caneral Bank of Honduras. T7*1085 16, 1976  hONDURAS AGRICULTURAL CREDIT PROJECT Portfolio Loans of BRnks, 1970-1974 Balance At The End Of Th. Year (L million) A - Pantirientiog Books in the Livestock Irojooto A P.ti.ip.i.x B.k. i th~ i-.t.k LML--r- 1970 1971 1972 1973 1974 Short-teen Mdionten Long-tern Ttn Short-to Medics-teen Loon-ters Total Short-tarQ Medilo-term Long-te. Total Short-te Medi-tem L -tee Total Short-te Medis-te-n Long-tern Total Ban-o Atlontida S.A. 64,842 15,728 994 81,564 62,934 17,427 2,273 82,574 55,883 24,425 4,268 R4,576 64,434 24,471 9,301 98,206 63,702 26,609 12,484 102,795 B-no del Ahorro Hondreno SRA. 24,114 2,755 229 27,098 24,348 4,837 1,969 31,154 29,748 3,405 2,387 35,540 34,511 5,137 5,760 45,408 38,042 5,864 5,972 49,878 .ane. LaCapiotli.adoro Hondoren S.A. 14.550 2,570 6,268 23,388 22,646 2,173 5,169 29,988 29,923 3,868 5,726 39,517 35,067 6,937 7,969 49,973 35.989 10,737 9.441 56,167 Ranc do Occidente S.A. 3,969 1,928 126 6.023 5,357 2,457 168 7,982 6,497 2,997 543 18,057 8,566 4,016 1,233 13,815 9,584 4,593 1,714 15,901 aB Finittc rHondorena S.A. 8,640 14,725 1,265 24,630 9,513 16,330 430 26,273 13,10R 13,792 NS5 27,785 17.292 13,162 1,427 31,881 27,208 14,8537 3,605 45670 Bonto do Hondords SA. 22,821 38,352 593 61,766 18.411 489 1.627 20 527 22.096 2L268 1.892 26,256 29,918 5,533 1,085 36.536 27.679 72113 943 35 735 Sub-ttotl 138,936 76,058 9,675 224,469 143,209 43,713 11,576 198,498 157,255 50,755 15,691 223,711 189,788 59,256 26,755 275,819 202,214 69,773 34,159 306,146 Pe-nentake 62% 34% 4% 107D 727. 22% 6% 100% 70% 23% 7% 100% 69% 217. 101 100% 66% 23% 11% 107. B - Non-pnrtiiipOti.g Sanko in the Livestock Projects Haneo Nacionol de Fonento 1/ 35,122 24,108 10,013 69,243 36,256 22,775 13,140 72,171 30,276 32,079 21,793 84,148 36,389 36,057 25,143 97,589 49,829 40,520 23,953 114,302 Rank of jerrie 16,083 1,641 19 17,543 16,446 798 438 17,682 18,389 459 436 19,284 16,616 2,B84 15 19,515 12,896 2,291 28 15,207 Banco delCooetiio S. A. 3,191 3,979 3,847 11,017 5,108 4,598 2,754 12,460 5,710 6,406 2,822 14,938 7,737 8,937 4,317 20,991 15,071 7,326 1,308 23,705 Banto da Londret y Montreal 12,989 354 7 13,350 11,633 310 3 11,946 12,359 333 - 12,692 12,552 7,907 - 14,459 12,305 2,112 49 14,466 Ban.o dn Los Trbhajadotes 7,920 464 - 8,384 9,924 591 3,304 13,819 9,973 899 910 11,782 11,327 1,307 589 13,223 11,071 1,547 733 13,351 Banto Contientel SA. - - - - - - - - - - - - - - - - 5,382 326 - 5,708 Banco Municipal Antoenom 2,814 597 - 3,411 2,736 549 - 3,285 2,012 785 - 2,797 1,486 907 - 2,393 2,670 860 - 3,530 Banno Hipotecario 8.A 2/ 1.124 1S0 175 1.479 2.252 161 1.306 3,719 2,639 377 2 426 5,442 5,823 252 3,189 9,264 8,330 797 3,474 12 601 Sub-total 79,243 31,123 14,061 124,427 84,355 29,782 20,945 135,082 81,S58 41,338 28,387 151,083 91,930 52,251 33,253 177,434 117,554 55,779 29,537 202,870 Totol 218,179 107,181 23,736 348,896 227,564 72,495 32,521 333,580 238,613 92,093 64,078 374,794 281,718 111,407 60,008 453,253 319,768 125,552 63,696 509,016 Perceet.ga 63% 31% 6% 70% 687, 22% 108 102% 64% 24% 121 1002 627 25% 137 100% 63% 25% 12t 100I 1/ Started in April 1975 in the livestock project. 2/ Started in Octohbo 1975 in the li eatook proj-ct. Sant-e C-nt-I B.nk of H.ndu-., N-v_bet, 1975. . z February 16, 1976  HONDURAS AGRICULTURAL CREDIT PRDJECT Localization of Private Banks and Number of Branches Nmuber of Number of Banks Main Office Branches Agencies Baan Atlantida Tegucigalpa 15 31 Buo e 0 Honduras Tegucigalpa 3 4 Banco de londres y Montreal Tegucigalpa 2 4 Bank of America, N.T., S.A. Tegucigalpa 1 1 Banco del Ahorro Handureflo, S A. Tegucigalpa 6 18 Banco LB Capitaliuadora I Hondureftia S.A. (BANCAHSA) Tegucigalpa 2 28 Banco de Occidente S.A. Sta. Rorade Copeu 3 10 Banco del Comercio S.A. San Pedro Sula 1 1 Banco de los Trabajadores Tegucigalpa 3 7 Banco Finanolera Hondurefa S.A. San Pedro Sula 1 2 Banco Hipotecario S.A. San Pedro Sula 1 1 Banco Municipal Autonomo Tegucigalpa 1 1 Banco Nacional de Fomento Comayacula 2 20 Banco Central de H%nduras Tegacigalpa 3 1 Banco Continental San Pedro Sula - Source: Central Bank of Honduras, November 1975. February 16, 1976  Chart 2 HON DU RAS AGRICULTURAL CREDIT PROJECT National Development Bank Directorat F ......na SecretarV | ] Dvso Diviio | Section Credit and _ _ Development Dept. Operations Dept._ Credit l l Accounting General S InDusia | Division Division Divison D -| Loans l l Treasurer l DAgricultural Division Livestock Division -F 7Suprys'7,-n ~ ~~~~~~~~~~~~~~~~~~~Enterprises g Supervision l l ~~~~~~~~~~~~~~~~~~~Division | Construction and Commerce Division -| Agencies l l Storage Sales Section Agencies Construction World Bank-15492(R)   HONDURAS AGRICULTURAL CREDIT PROJECT National Development Bank Summarized Balance Sheets, 1972-74 (L million) ASSETS 1972 1973 1974 LIABTLIrIES 1972 1973 1974 Current Deposits Cash 1.9 2.1 2.4 Demand 17.9 27.6 29.0 Deposits - Central Bank 1.7 3.2 2.6 Time 13.6 14.5 13.0 Government Securities - 0.7 0.7 Special Savings - - _ Other Deposits and Checks 3.o 2.0 1.7 Sub-total 6.6 8.0 7.4 Sub-total 31.5 42.1 42.0 Investments Other Liabilities Loans and Discounts 84.2 97.6 114.3 Central Bank 16.8 23.1 31.5 Other Investments and Bonds 8.3 7.1 8.7 Accounts payable 0.2 0.2 0.1 Long-term Foreign Loans 28.3 27.7 34.4 Miscellaneous 2.4 3.8 3.3 Sub-total 92.5 104.7 123.0 Sub-total 47.7 54.8 69.3 Real Estate and Equipment 12.7 18.3 19.0 Contingent Assets 13.1 25.8 35.4 Contingent Liabilities 13.1 25.8 35.4 Other 19.6 22.8 22.2 Capital and Reserves Capital Paid Up 37.8 42.6 45.5 Capital Payable - - - Legal Reserves - - _ Contingency Reserves 0.1 0.2 0.2 Valuation Reserves 14.3 14.7 14.6 Sub-total 45.5 66.9 76.6 Sub-total 52.2 56.9 60.3 Total Liabilities, Capital - Total Assets 144.5 179.6 207.0 and Reserves 144.5 179.6 207.0 Source: r!ational Development Bank, November 1975 February16, 1976  ANNEX 2 Table 7 HONDURAS AGRICULTURAL CREDIT PROJECT National Development Bank Summarized Profit and Loss Statements (1972-1974) (L million ) 1972 % 1973 % 1974 % Gross Income Financial 6.9 76 7.5 71 9.4 76 Others 2.2 24 3.1 29 2.9 24 Total 9.1 100 10.6 100 12.3 100 Expenses Financial 2.9 25 3.8 28 5.1 34 Others 8.6 75 907 72 10.0 66 Total 11.5 100 13.5 100 15.1 100 Profit (2.4) (2.9) (2.8) Source: National Development Bank, November 1975. February 16, 1976  HONDURAS AGRICULTURAL CREDIT PROJECT First and Second Livestock Projects Amount Approved by Banks. October 31, 1975 (L million) First Project Second Project Total First and Second Project Banks Contribution CR-179-HO Contribution CR-434-HO CR-179-HO and CR-434-Ho IDA Banks Total % IDA Banks Total % IDA Banks Total Ahorro Hondureno 1.7 o.6 2.3 35 1.1 0.3 1.4 17 2.8 0.9 3.7 25 Honduras 0.9 0.3 1.2 18 1.3 0.4 1.7 21 2.2 0.7 2.9 20 Financiera Hondurena 0.3 0.1 0.4 6 0.6 0.2 0.8 10 0.9 0.3 1.2 8 BANCAHSA 0.9 0.3 1.2 18 1.2 o.4 1.6 19 2.1 0.7 2.8 19 Occidente 0.4 0.2 o.6 9 0.6 0.2 0.8 10 1.0 0.4 1.4 9 Atlantida 0.7 0.2 0.9 14 0.5 0.2 0.7 8 1.2 0.4 1.6 11 Banco Nacional de Fboento - - 0.3 0.1 0.4 5 0.3 0.1 0.4 3 Banco Central de Honduras - - - - o.6 0.2 0.8 10 o.6 0.2 0.8 5 Total 4.9 1.7 6.6 100 6.2 2.0 8.2 100 11.1 3.6 14.8 100 Source: Livestock Project Central Bank. November, 1975 i Febrapry 16, 1976  HONDURAS Agricultural Credit Proiect Profit and Loss Account of the Banking System. 1970-74 - -(L m jion 1970 1971 1972 1973 1974 Net Net Net Net Net BANK(S Income Expenses Income Income Expenses Income income Expenses income income Expenses Income Incm Expenses IncomE Banco Atlantida 10.3 7.8 2.5 18.9 9.3 1.6 11.2 9.3 1.9 13.1 10.1 3.0 15.8 13.0 2.8 Banco de Honduras 2.9 2.8 0.1 3.2 3.1 0.1 3.9 3.6 0.3 5.2 4.4 0.8 7.7 6.1 1.6 Banco de Londres y Montreal 1.8 1.7 0.1 1.8 1.8 0.0 1.9 1.7 0.2 2.2 1.8 0.4 2.6 2.4 0.2 .XRnmcG del Ahorroro Hondureno 3.3 2.9 0.4 3.9 3.6 0.3 4.9 4.3 0,6 6.0 5.4 0.6 7.9 7.2 0.7 Bank of America 2.4 2.1 0.3 2.7 2.3 0.4 2.7 0.0 0.0 3.2 3.5 (0.3) 3.6 3.5 0.1 Banco Financiers Hondurena 2.5 1.4 1.1 2.9 1.8 1.1 3.1 2.0 1.1 3.9 2.5 1.4 5.9 4.1 1.8 Banco de occidente 0.7 0.5 0.2 1.0 0.9 0.1 1.4 1.2 0.2 1.9 1.6 0.3 2.5 2.2 0.3 Bancahsa 7.3 6.6 0.7 7.8 7.4 0.4 9.0 8.3 0.7 10.5 9.9 0.6 12.8 12.1 0.7 Banco de Trabajadores 0.9 0.7 0.2 1.3 1.1 0.2 1.6 1.3 0.3 1.6 1.3 0.3 1.9 1.5 0.4 Banco del Comercio 2.8 2.4 0.4 1.8 1.3 0.5 2.3 1.6 0.7 3.5 2.5 1.0 4.1 3.1 1.0 Banco Continental - - -- - - - - - - - - 0.3 0.1 0.2 Banco Nacional de Fomento 6.5 7.4 (0.9) 9.4 10.1 (2.7) 8.4 10.8 (2.4) 10.6 13.5 (2.9) 11.9 19.7 (2.8) Banco Municipal Antonomo 0.5 0.4 0.1 0.5 0.6 (0.1) 0.2 0.7 0.1 0.7 0.6 0.1 0.8 0.9 (0.1) Banco Hipotecario 0.2 0.2 0.0 0.5 0.4- 0.1 1.1 0.9 0.2 1.9 1.6 0.3 2.3 2.1 0.2 Source: Central Bank of Honduras November 1975 c February 16, 1976  Annex 3 Page 1 HONDURAS AGRICUTRAL CREDIT PROJECT Performance Under Previous Agricultural Projects First Livestock Development Project (Credit 179-HO) 1. Credit 179-HO (US$2.6 million) was the first credit made by the Bank group to Honduras in the agricultural sector to provide long-term loans to ranchers on terms and conditions appropriate for ranch development. The participating banks (PBs) made sizeable contributions to the Project in the form of capital for on-ranch investments and operating capital and also provided technical and administrative services. Operations were country-wide but concentrated in the Atlantic Coast. The Project became effective in October,1970. 2. The Borrower was the Republic of Honduras and the program was carried out by the Central Bank (CB), which channeled funds to ranchers through six participating commercial banks. CB established a Livestock Project Account to administer and disburse the proceeds of the Credit Project operations which were conducted under the direction and supervision of a Project Commission and a Project Director (PD), appointed with IDA approval. Technical staff from the PBs were seconded to work under the Project Director. Subloans to ranchers under the Project lending program were made by PBs only after the PD had approved the respective ranch devel- opment plans. 3. The objective of the Project was to assist Honduras in pursuing its national agriculture policy for raising the country's low level of beef consumption (3.7 kg per capita in 1967) and help to diversify its agriculture. To accomplish this, the Project aimed to develop about 135 beef ranches and dairy farms, which would increase national livestock production by about 15%. 4. The Project had a significant impact on livestock production, but it is difficult to determine precisely how much credit can go to the Project exclusively. Herd expansion, greater milk production, higher per capita beef consumption, and increased exports were also influenced by such factors as changes in purchasing power, price policies, and liberalization of US beef import quotas (most of the beef is exported to the US). The following table shows the increases recorded over the past five years.  ANNEX 3 Page 2 1969 1974 Increase % Cattle population ('000 head) 1,559 1,690 131 8 Beef production (metric ton) 28,948 36,149 7,201 25 Beef exports 16,319 21,202 4,883 30 Beef consumption 12,629 14,947 2,318 18 Per capita consumption (kg/year) 5.20 5.47 0.27 5 5. While the Project was designed to assist about 135 farmers, only 78 subloans were actually made, representing only about 58% of the participation expected. However, the total area and the number of cattle involved under the Project were greater than planned at appraisal. On the other hand, the number of hectares put into new pasture was only 50% of that expected, which indicates that the 78 ranches financed by the Project were exploited in a more extensive way than was planned at appraisal. A survey of 23 ranches, or 30% of the Project population, showed that average yearly beef production per farm increased 100%, compared with production before the Project, and milk was about 43% higher, as shown in the table below:  Average Performance per Ranch Based on the Average Performance per Surv=y= f 23 Ranches Ranch Based on tha Appraisal Before Actual &gtimaG Of 1 Rnehe \J the at Time of Before 5 year 0s Project Survey Increase / Development Developmient Increase % Beef animals sold (No.) 36 73 37 103 54 152 98 3.81 Liveweight (kg)l/ 12,600 25,550 12,950 103 18,900 53,200 314,300 181 Milk (liters) 82,670 118,370 35,700 43 9,600 15,900 6,300 65 Effective calving rate (%) 57 68 11 19 51 70 19 37 Total Cattle (No.) 329 602 273 83 393 628 235 60 Animal Units (AU)2/ 246 376 130 53 315 479 164 52 1/ Average liveweight per head, 350 kg. 2/ AU'?Cattle over eight months old. 1Ju  ANNEX 3 Page 4 Apart from the generalized data shown above, it is difficult to draw inferences on the results of the First Livestock Project. Second Livestock Development Project (Credit 434-HO) 6. This Project, for a total value of US$11 million, was financed by an IDA Credit of US$6.6 million and supports an extension of the First Project and part of the borrower's program for livestock development. It consists of credit for livestock farmers, the rebuilding or upgrading of municipal slaughterhouses and provision of technical services and training. The Project is administered by the Central Bank and executed by a Project Unit. Funds are channeled through participating banks who employ techni- cians for farm planning. 7. The Project, was successfully initiated in January 1974, but slowed down in 1975 due to uncertainties over the application and implications of the Agrarian Reform Law. These uncertainties have now largely been removed. 8. The IDA Credit was 61% committed as of March 31, 1976. Details are shown below: Amount Amount Balance of Credit Committed of Credit (US$) (US$) (US$) I and II Subloans to Livestock Farms 5,600,000 3,382,875 2,217,125 III Abattoirs 700,000 310,000 390,000 IV Technical Services 300,000 270,500 29,500 Total 6,600,000 3,963,375 2,636,625 In addition to the above project activity, IDA, on March 10, 1976 approved the use of US$1 million of the uncommitted balance for the emergency finan- cing of 2000 ha of banana lands now settled by agrarian reform beneficiaries. Once the Amending Agreement to the Livestock Development Credit Agreement is ratified by the Borrower, commitment will rise to 75% of the Credit funds. The CB is at the point of reaching agreement with the Municipality of Tegucigalpa for the construction of a new abattoir at a cost of from US$600,000 to US$750,000. Overall there are prospects of an 85% commitment by June 30, 1976 and full commitment by the end of September 1976.  ANNEX 3 Page 5 9. As of March 31, 1975, the last quarterly report, shows actual pro- gress against expected performance at appraisal. Details are as follows: Expected at Appraisal (E) Compared with Actual (A) Subloans in Execution Percent of Value of Category Number Average Size Subloans (US$'000) (%) E A E A E A 1. Small Dairy Farms 50 10 6.1 7.9 4.5 2.4 2. Med-Large Dairy/ Beef Farms 335 162 14.3 28.3 71.0 86.6 3. Pig Farms 12 - 50.0 - 8.9 - 4. Abattoirs 3 1 350.0 413.0 15.6 10.1 Total: 400 173 - - 100.0 100 Note: The table shows the lower than estimated lending for small farmers and consequent greater concentration on medium and larger farmers; the total lack of demand for pig production subloans; and the delays in implementing the modernization of abattoirs. 10. IDA Credit disbursements as of April 30, 1976 reached US$ 2.14 mil- lion, or about 60% of the appraisal estimates. Details are shown below: % of Credit Credit Disbursed Disbursements (US$) (US$) I. Small-farm Subloans 500,000 30,000 6.0 II. Medium-farm Subloans 5,100,000 2,106,000 41.3 III. Abattoir Subloans 700,000 - 0.0 IV. Technical Services 300,000 7,400 2.5 Total 6.600,000 2,143,400 32.5  ANNEX 3 Page 6 II. Distribution of investment costs to March 31, 1976 compared with appraisal estimates is shown below: Investment Value of Percent of Value of Percent of Category Investment Investment Investment Investment (US$'0000) (%) (US$'000) (%) Pastures 1,600.0 14.5 1,175.1 16.0 Fencing 1,000.0 9.1 612.9 8.3 Water Supply 1,500.0 13.6 476.0 6.5 Building, Civil Works 900.0 8.2 608.0 8.2 Machinery and Equipment 2,200.0 20.0 492.6 6.7 Breeding Stock 2,700.0 24.5 3,408.0 46.4 Technical Services 700.0 6.5 561.4 7.6 Miscellaneous 400.0 3.6 15.8 0.3 Total Project Cost 11,000.0 100.0 7,349.8 100.0 12. At 1975 prices, average subloan size was about US$25,600 as compared with appraisal estimates of about US$20,500. Although the average subloan sizes are adjusted by the general inflation rate as measured by the consumer index, the actual inflation of on-farm investments was considerably higher from appraisal to 1975. The major discrepancy is to be found in the failure to commit the US$500,000 allocated under the credit to small farmers under Category I of the Project. However, even if these funds were totally commit- ted for small farmers, their weighted influence would not reduce the size of actual subloans to any great extent. 13. As the first subloans were made only about 18 months ago, it is too soon to make a valid estimate of results obtained from the execution of farm plans and the provision of technical assistance, but there is no reason to expect less from the Second Project than the First, provided sufficient financial incentives exist. May 4, 1976  ANNEX 4 Page 1 HONDURAS AGRICULTURAL CREDIT PROJECT Livestock Models 1. In Honduras, the production of beef and milk from dual-purpose herds is normal. Calves are separated from the mothers overnight and cows are milked each morning only. Depending on the distance of the farm from population centers, milk is either sold fresh or made into butter or cheese. Calves are sold at about nine months of age -- surplus heifers for breeding and the males for fattening or slaughter. 2. Government livestock policy, which for the present is ill-defined, has aimed at: (a) disease control - concentrating on brucellosis and T.B.; (b) gradual grading-up of native cattle through the use of better quality bulls; and (c) improvement of nutrition levels through improved pastures and the use of crop residues and improvement of management standards. 3. As standards of management improve and infrastructure develops, it can be expected that there will be a re-structuring of the industry into specialized beef cattle breeding, beef cattle fattening, and dairying. As the demand for agricultural land for cropping increases, particularly under the pressure of agrarian reform, there will be geographic shifts-- cattle breeding will be pushed out to the drier and/or hilly, more remote areas; cattle fattening will be integrated with cropping; and dairying for fresh milk will tend to be concentrated on the fringes of the main popu- lation centers. 4. Under the Project, funds would be available for any beef produc- tion and/or dairying sub-project that is economically sound, with the em- phasis, where possible, placed on cooperative enterprises. Individual lend- ing programs, particularly to large cooperatives, could involve funding a variety of integrated crop and livestock enterprises. 5. From a range of possible cattle enterprises, two are presented; (a) Dairy/Beef Farm (Tables 1 to 4)  ANNEX 4 Page 2 This model represents the first steps towards increasing productivity and profit per hectare by the use of improved pastures and subdivisions. The enterprise would be conducted on land not generally suited to agriculture, with no irri- gation potential, but with opportunity for pasture improvement. Cows would be milked once a day. All milk would be sold fresh, with none retained for cheese or butter manufacture. Surplus calves would be sold at about nine months of age - heifers as potential breeders and steers (or bull calves) at about 115 to 125 kg liveweight, either for slaughter or fattening. The model provides sub-loan funds of US$15,570 to be used for pasture improvement and renovation, fencing, provision of stock water supplies and livestock purchases. These funds, together with of US$1,000 of working capital in the second year, would make it possible to raise the carrying capacity from 0.65 to 2.00 AU/ha, and would lift the operating net income per hectare from L 377 to L 2,872 within five years, assuming a grace period of five years. The estimated internal financial return is 15%. (b) Beef Fattening Unit (Tables 5 to 7) 6. Under the Project, cattle fattening would tend to be associated with cropping enterprises. In the Atlantic zone crops are likely to be rice, bananas or sugarcane and in the Pacific zone, maize and sorghum. In the model, the fattening program would center on grazing unfertilized improved or renovated pastures with supplementary feeding of cattle with minerals, urea and molasses during the dry season and minerals and molasses during the wet season. Crop residues would be used as available. 7. Long-term subloan funds of US$6,350 are provided, mainly for pasture improvement and renovation, fencing, and for the provision of stock water supplies. This would enable the net operating income per hectare to rise from L 353 to L 1,463 within four years, assuming a three-year capital grace period. The estimated internal financial return would be 20%. May 6, 1976  IDI1IBAS UKECULTUNAL CEDIT PROJECT Dairy/Heof Fam (1k0 ha) - Invtment Coats Total Peroentag Units Coot - - - - - - - - - - - Investiaent B' Year - - - - - - - - - - Coat of per Unit per I 2 3 pr Total pr Uiost rr U Cost Units Cost Units if__ Pasturs New (ha) 20 150 3,000 10 1,500 10 1,500 - _ 1,500 Renovation (Ha) 20 50 1,000 20 1,000 - - - 500 11.6 FencingR :/ Nev (kn) 6 650 3,900 4 2,600 2 1,300 - _ 1,950 Renovation (ka) 4 300 1,200 2 600 2 600 - - 600 14.7 Stock WLter: well 1 1,000 1,000 1 1,000 - - - - 500 Tnlk and Phap 3/ 1 1,600 1,600 1 1,600 - - - B o00 Pipe Fitting 1 1,000 1,000 1 1,000 - - - - 500 Tmnug 1 200 200 1 200 - - - _ 100 11.0 Buidin. and Yards: Yards 1 1,000 1,000 1 1,000 - - - - 500 2.9 Machinery angd_ra&_nt: Tractor 0.1 15,200 1,520 0.1 1,520 - _ 760 Slosher 0.1 1,800 180 0.1 180 90 4.9 Brooding Stocks I/ Bulls A1 i 1,g 000 1 1,000 - 6 500 Cowo 30