Bolivia - Ulla Ulla Development Project

Report No. 1708a-BO t c C 04 Appraisal of Ulla Ulla Development Project Bolivia December 27, 1977 Projects Department Latin America and Caribbean Regional Office FOR OFFICIAL USE ONLY 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 Bank authorization.  CURRENT EQUIVALENTS US$1.00 = $b 20.00 $b 1.00 = US$0.05 WEIGHT AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS ACE - Agricultural Credit and Extension Division of INFOL ASI - Agricultural and Social Infrastructure Division of INFOL BAB - Agricultural Bank of Bolivia BE - State Bank COMBOFLA - Bolivian Committee for Promotion of Wool COMPRO - Marketing and Processing Division CORDEPAZ - Regional Cooperative for Division of La Paz DESEC - Center for Social and Economic Development DPH - Department of Public Health of University of San Andres FOMEX - Export Promotion Division FOMO - National Manpower Development Services FORNO - Private Company for Processing Wool FOTRAMA - Alpaca Wool Processing and Marketing Company IBTA - Bolivian Institute for Agricultural Technology IDB - Inter-American Development Bank IDIF - Physic Research Institute of the University of San Andres INBOPIA - National Institute for Handicrafts and Small Industry INFOL - National Institution for the Development of Wool MPAA - Ministry of Peasant Affairs and Agriculture MPSSP - Ministry of Social Security and Public Health NCSA - National Council for Social Action OAS - Organization of America States PM - Planning and Monitoring Division SNC - National Roads Services SNDC - National Community Development Service FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY BOLIVIA ULLA ULLA DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS . ........... ................... i - iv I. INTRODUCTION ...................... ............... II. BACKGROUND ..............1......................... A. General ......... .. ... 1 B. Agriculture and the Rural Sector ............ 2 C. Wool Textile Industry ................ 7 D. Handicraft Industry ......................... 10 E. Project Area ................................ 12 III. THE PROJECT ...................................... 14 A. Brief Description ................ ........... 14 B. Detailed Features ........................... 15 C. Cost Estimates ... ............. ............ . 19 D. Financing ............. ....... .... .................... 21 E. Procurement .................................... 22 F. Disbursement . .. .......... ....*............ 23 IV. ORGANIZATION AND MANAGEMENT ................... ... 24 V. PRODUCTION, MARKETING AND PRICES, AND PRODUCER BENEFITS ...... ........................ 30 VI. BENEFITS AND JUSTIFICATION ....................... 33 VII. AGREEMENTS REACHED AND RECOMMENDATION .. ......... 36 Schedule A - Lending Terms and Conditions ....... . 40 This report is based on the findings of an appraisal mission which visited Bolivia in March, 1977. Members of the mission were Messrs. N.P. Sharma (LCPA2), E. Ruderfer (LC2DE), Ms. D. Babelon and Messrs. C. Plaza (LCPA2), B. Kanchanalak (AGPOP), and S. Miquel (LCPHW), and R. Levy, J. Villarroel, E. Franco, 0. Echeverri, and W. Minto (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 Page No. 1. Research and Extension Component ...................... 43 Table 1 - List of Measuring Devices and Equipment - Irrigation System - Investment Costs .. 49 Table 2 - Project Facilities - Investment Costs .. 50 Table 3 - Project Facilities *..................... 51 Table 4 - Irrigation System ....................... 52 Table 5 - Commercial Farm ..... .................... 53 Table 6 - Commercial Farm - Alpaca Herd - Herd Projection .................. ..... 54 Table 7 - Commercial Farm - Llama Herd - Herd Projection ............................ . 55 Table 8 - Commercial Farm - Alpaca/Llama - Production Projection ................. 56 Table 9 - Commercial Farm - Alpaca/Llama (2,500 ha) - Sales and Operating Costs .......... ... 57 Table 10 - Commercial Farm - Alpaca/Llama (2,500 ha) - Cash Flow Projections ................. 58 Appendix 1 - Consultants' Terms of Reference ......... 59 2. Livestock Development (Alpaca/Llama) ................... 61 A. Project Area ........................... ....... . 61 B. Livestock in the Project Area .............. ...... 64 C. Livestock Development under the Project .......... 66 Table 1 - Farm Model No. 1 - 100-Alpaca Herd (1 or 2 families) - Investment Costs 70 Table 2 - Farm Model No. I - 100-Alpaca Herd (1 or 2 families) - Herd Projection ... 71 Table 3 - Farm Model No. 1 - 100-Alpaca Herd (1 or 2 families) - Production Projection ............................ 72 Table 4 - Farm Model No. 1 - 100-Alpaca Herd (1 or 2 families) - Production Value and Operating Costs ................. .. 73 Table 5 - Farm Model No. 1 - 100-Alpaca Herd (1 or 2 families) - Cash Flow Projection ..... .................... ... 74 Table 6 - Farm Model No. 2 - 400-Alpaca Herd (5 families) - Investment Costs ....... 75 Table 7 - Farm Model No. 2 - 400-Alpaca Herd (5 families) - Herd Projection ........ 76 Table 8 - Farm Model No. 2 - 400-Alpaca Herd (5 families) - Production Projection 77 Table 9 - Farm Model No. 2 - 400-Alpaca Herd (5 families) - Production Value and Operating Costs ....................... 78  TABLE OF CONTENTS (Continued) ANNEXES Page No. Table 10 - Farm Model No. 2 - 400-Alpaca Herd (5 families) - Cash Flow Projection 79 Table 11 - Farm Model No. 3 - 1,000-Alpaca Herd (12 families) - Investment Costs 80 Table 12 - Farm Model No. 3 - 1,000-Alpaca Herd (12 families) - Herd Projection ....... 81 Table 13 - Farm Model No. 3 - 1,000-Alpaca Herd (12 families) - Production Projection 82 Table 14 - Farm Model No. 3 - 1,000-Alpaca Herd (12 families) - Production Value and Operating Costs . ............. ......... 83 Table 15 - Farm Model No. 3 - 1,000-Alpaca Herd (12 families) - Cash Flow Projection 84 Table 16 - Farm Model No. 4 - 5,000-Alpaca Herd (55 families) - Investment Costs ...... 85 Table 17 - Farm Model No. 4 - 5,000-Alpaca Herd (55 families) - Herd Projection ....... 86 Table 18 - Farm Model No. 4 - 5,000-Alpaca Herd (55 families) - Production Projection 87 Table 19 - Farm Model No. 4 - 5,000-Alpaca Herd (55 families) - Production Value and Operating Costs .... .................... .. 88 Table 20 - Farm Model No. 4 - 5,000-Alpaca Herd (55 families) - Cash Flow Projection 89 Table 21 - Financial Analysis - Rates of Return and Sensitivity Testing ....*............... 90 Table 22 - Alpaca, Llama, Vicuna - Estimated Production Projection ................. 91 Table 23 - Total Lending Program ..* ................ 92 Table 24 - Phasing of the Lending Program .......... 93 Chart 1 - No. 17641 - Farm Management Schedule 3. Vicuna Conservation and Development Component ......... 95 Table 1 - Investment and Recurrent Cash Costs ..... 99 4. Wool Collection, Storage and Processing Component ..... 100 I. Background ........................................ 100 II. Wool Collection, Storage and Processing under the Project .............. ................ 105 Table 1 - Bolivia - Prices paid by COMBOFLA for Alpaca Fiber ...................... 113 Table 2 - Peru - FOB Prices, First Quality Raw Fiber (Greasy) ................... . 113 Table 3 - Processing Plant - Volume of Raw Material Processed ... ................ ......... . 114  TABLE OF CONTENTS (Continued) ANNEXES Page No. Table 4 - Processing Plant - Alpaca Raw Material Available ................................ 115 Table 5 - Incremental Costs ....... ................ 116 Table 6 - Project Costs ................. .......... 117 Table 7 - Equipment ........ . . . ...... ...................... . 118 Table 8 - Direct and Indirect Labor and Annual Cost .................................. 119 Table 9 - Technical and Administrative Personnel and Cost ............... ............... 120 Table 10 - Processing Plant - Investment Costs ..... 121 Table 11 - Income Statement ..... . .................. 122 Table 12 - Financial Rate of Return ..... ........... 124 Table 13 - Cash Flow Projection ...... .............. 125 Chart I - No. 17639 - Proposed Production Flow for the Plant ............... Chart 2 - No. 17640 - Implementation Schedule. 5. Handicraft Component .................................. 128 A. Background .... ................................... 128 B. Handicraft Component ........... .................. 130 Table 1 - Investment Costs ..... ................... 135 Table 2 - Credit to Artisans - Total Lending Program ... ..................... ....... 136 Table 3 - Handicraft Model No. 1 - One Family of 2 to 3 Artisans - Cash Flow Projection 137 Table 4 - Handicraft Model No. 2 - Group of 30 Artisans - Cash Flow Projection ....... 138 Table 5 - Handicraft Model No. 1 - One Family of 2 to 3 Artisans - Sales and Operating Costs ............. .................... 139 Table 6 - Handicraft Model No. 2 - Group of 30 Artisans - Sales and Operating Costs 140 Table 7 - FOMO - Total Costs .......... .. .......... 141 Table 8 - INBOPIA - Total Costs .... ............... 142 Table 9 - Phasing of the Lending Program ......... . 143 6. Road Component ....... ................................. 144 Table 1 - Suggested Design Standards .... .......... 146 Table 2 - Equipment Investment Cost ............... 147 Table 3 - Total Costs ............................. 148 Chart 1 - No. 17846 - Implementation Schedule 7. Health Component .................... ..................... 150 I. Background ....... ................................ 150 II. Project Health Facilities ................. ..... 152 Table 1 - Investment and Operating Cost Phasing .... 157  TABLE OF CONTENTS (Continued) ANNEXES Page No. 8. Water Supply and Human Waste Disposal Systems ... ...... 158 Table 1 - Details of Cost Estimates for Hand-pump Well .............. .. .................. 162 Table 2 - Pit Privy System - Investment Costs ..... 163 Table 3 - Water Supply - Total Costs .............. 164 Table 4 - Waste Disposal (Pit Privies) - Total Costs ................................ . 165 9. Education Component .................... ............... 166 Table 1 - Estimated Enrollment 1976-81 .... ........ 170 Table 2 - Basic Education Schools - Costs of Construction and Furnishing . .......... 171 Table 3 - Intermediate School (Ulla Ulla) - Costs of Construction, Furniture and Equipment . 172 Table 4 - Total Costs ............................. 173 Chart I - No. 17845 - Implementation Schedule 10. Women's Participation Component ............. .......... 175 I. Introduction ..................................... 175 II. Participation of Women under the Project .... ..... 177 Table I - Total Costs ............................. 179 11. Technical Assistance .................................. 180 A. Llama Fiber Dehairing Research .... ............... 180 B. Solar Energy ..................................... 183 Table I - Llama Fiber Dehairing Research - Suggested Specification for Pilot Processing Plant ...................... 186 Table 2 - Llama Fiber Dehairing Research - Costs of Machinery, Equipment and Laboratory Facilities ............................ 187 Table 3 - Llama Fiber Dehairing Research - Total Costs ........................... 189 Table 4 - Solar Energy - Investment Costs .... ..... 190 12. Project Administration ..... ........................... 191 Table 1 - National Institution for the Development of Wool (INFOL) - Total Cost .... ...... 198 Table 2 - Project Staff ........................... 199 Chart 1 - No. 17638 - The National Institution for the Development of Wool (INFOL) ....... Appendix 1 - Terms of Reference for the Administration and Management Expert .... ............. 201  TABLE OF CONTENTS (Continued) ANNEXES Page No. 13. Investment Cost Phasing ................... ............ 202 14. Table I - Total Project Costs ..... .................... 203 Table 2 - Detailed Project Costs ................. .... 204 15. Estimated Schedule of Disbursement .................... 205 16. Project Cash Flow .......... ........................... 206 17. Chart No. 17847 - Implementation Schedule 18. Economic Analysis ......... ..................... ....... 208 A. Economic Values of Labor and Goods ............... 208 B. Economic Rates of Return ......................... 209 Table 1 - Summary of Calculations .... ............. 214 Appendix 1 - Llama Dehairing Research - Economic Rate of Return ... ..................... 215 Table 1 - Llama Dehairing Technology - Production Mix of the Processing Plant .......... . 216 Table 2 - Llama Dehairing Technology - Economic Rate of Return - Summary ...... ........ 217 Map No. 12907  BOLIVIA ULLA ULLA DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises an integrated rural development project for which an IDA credit of US$9 million and a Bank loan of US$9 million equivalent are proposed to finance continued development of Bolivia's Altiplano begun under the Ingavi Rural Development Project (Loan 1211-BO). The proposed project would provide critical assistance to families living in the Ulla Ulla region of the Altiplano where Bolivia's poverty is most severe and widespread. About 70% of Bolivia's estimated population of about 5.6 million lives in rural areas with a per capita income of US$60 to US$100. The Altiplano and the valleys, which account for about 30% of the national territory, contain about 85% of the rural population. Deep-rooted cultural ties have inhibited Altiplano inhabitants from migrating in large numbers to the more prosperous regions of the east. While commercial agriculture in the tropical eastern lowlands has been growing rapidly, the small farm subsistence sector concentrated in the Altiplano (3,000-4,500 meter) has stagnated. Agriculture in the Altiplano is based on the cultivation of a few crops, such as quinoa, oats, barley, beans and potatoes, and on raising livestock, mostly llamas, alpacas, sheep and cattle. ii. There is little scope for expanding land under cultivation and the extremely small-scale farm operations (less than 6 ha) and low soil fertility in the Altiplano have kept production at low levels. However, the potential for livestock has not been fully exploited yet. Bolivia's efforts to develop alpaca and llama for wool production, as a source of foreign exchange and as an additional income and employment source for the rural poor, are deficient and lag far behind the intensive programs under- taken in Peru. Alpaca and llama fiber production has been low, and programs to improve alpaca and llama breeds for their high value wool have been con- fined to only small-scale research programs. iii. The Government has outlined its strategy for agricultural and rural development in the recent National Development Plan, which emphasizes the reduction of the country's dependence on imported foodstuffs and the alleviation of acute poverty and underemployment in the Altiplano. For the latter, agricultural investment would be directed toward integrated rural development projects to provide basic social services, infrastruc- ture, marketing, credit, and extension services to increase productivity. iv. The Government has modest expectations concerning development efforts in the Altiplano. It recognizes the difficulties in bringing about an orderly development of the region, which is endowed with limited resources and harsh conditions and where the population has in the past been less receptive to change and is to some extent suspicious and unapproachable. Implementation of rural development projects in the Altiplano would imply taking more than the usual risks, particularly since the results obtained  - ii - by other institutions in this region have been mediocre and to some extent inconclusive. Despite these constraints, there have been some positive changes recently in the attitude and ideals of the Altiplano rural poor toward social and economic changes. Communities have become more sensitive to progress and indicate strong desires to participate in the development process. This, in addition to the Government's new determination and declared commitment to engendering development in the Altiplano, could be the over- riding factors insofar as the success of rural development projects in the Altiplano is concerned. v. To date, IDA/Bank financing for agriculture has amounted to US$27.2 million which has been used to assist the Government to initiate a long-term program for the development of a viable livestock industry in the lowlands, to increase agricultural production and to improve living conditions on the Altiplano, as well as to strengthen the Banco Agricola as a development institution. vi. The proposed project would emphasize the alpaca/llama agri-business complex, integrating diverse components into a single development scheme begin- ning with production of the raw material and including processing to semi- finished products and conversion to handicrafts and their marketing. The project would also improve the environmental and social conditions in the Ulla Ulla region. In addition, the project would have substantial impact on institution building. The National Institution for the Development of Wool (INFOL), the newly created institution for regulating the growth of the wool textile industry, and the National Institute for Small Industries and Handi- crafts (IMBOPIA), for the development of the handicraft industry, would be strengthened under the project. vii. Specifically, the proposed project would finance an Experiment Station for the execution of a research program for the development of alpaca and llama herds and a commercial farm to serve as a demonstration unit and to establish farmer confidence and trust in the development program. The project would provide farmers with technical and veterinary services and credit to about 2,500 farm families for on-farm investments and herd develop- ment, and would make provision for the establishment of a pricing mechanism to provide incentive to farm_rs and artisans to increase production and reduce the illegal flow of alpaca fiber into Peru. The project would also expand and strengthen the conservation program for vicunas and would finance the expan- sion and improvement of the wool collection system, a new centrally located warehouse and a new processing plant. In addition, the project would include credit for the wool handicraft industry for about 3,400 families, mostly in rural areas, and would improve the living conditions of about 3,000 families in the project area through provision of health and education centers, drinking water and waste disposal facilities, and improved roads. viii. The proposed project would also include several innovative fea- tures. Through a technical assistance component, the project would finance development of a llama fiber dehairing technique to increase production of llama fiber and to utilize more fully the 2.2 million llamas now available in Bolivia. It would also finance the preparation of solar energy devices, for use in the rural areas of the Altiplano where this energy is an impor- tant natural resource. In addition, concerted efforts would be directed  - iii - toward women in the project area through provision of technical assistance to improve and develop basic skills and to increase productivity. ix. The Government places high priority on the project, which is in line with the Government's strategy to improve the economic and social conditions of the rural poor of the Altiplano. The proposed project, with the Ingavi Rural Development Project (Loan 1211-BO), would provide the basis for a long- range program to develop the Altiplano. x. The total cost of the project is estimated at about US$24 million, of which US$9 million, or 38%, represents the foreign exchange component. The proposed IDA credit (US$9 million) and Bank loan (US$9 million) for the project would finance US$18 million, equivalent to 75% of the total project costs. The IDA/Bank funds would cover 100%, or US$9 million, of the foreign exchange costs and 60%, or US$9 million, of local costs. The Commission of the European Community has agreed to participate in the project and will provide a grant equivalent to about US$2 million to finance local expenditures. The Government would provide the remainder of the funds (US$4 million, or 17% of total project costs) and would be committed to continuing contribution of funds after project completion. The beneficiaries would not make any financial contribution; however, they would make a labor contribution in kind to project works valued at US$160,000. Also, the beneficiaries would contribute about 4,000 ha for the establishment of project facilities in the project area. xi. Local cost financing is justified in Bolivia in view of the country's poverty and its intensive efforts to mobilize domestic savings and also because of the importance of the project to the Government's overall strategy in engendering development in the Altiplano. xii. The project would be administered by INFOL, the newly created institution under the auspices of the Ministry of Agriculture and the Ministry of Commerce and Industry for the development of the wool industry. The Agricultural and Social Infrastructure Division (ASI) of INFOL would be directly responsible for project execution. For the handicraft, solar energy, physical infrastructure components (roads, health, education, and water and waste disposal facilities), INFOL would enter into operational agreements with each respective participating agency. xiii. Sub-loan terms would range up to 10 years, including grace periods of up to four years, at an interest rate of 12% on outstanding subloan balances. New equipment for the processing plant, road construction and maintenance equipment, and vehicles would be awarded through international competitive bidding according to Bank procedures. Also, tender packages for laboratory equipment, commercial farm equipment, and equipment for schools, health and project administration, water and waste disposal facilities, solar energy and handicrafts in excess of US$100,000 equivalent would be procured through international competitive bidding according to Bank procedures. Since some of the equipment for llama dehairing research facilities would be second-hand, procurement would be through negotiations acceptable to IDA/Bank. Procurement of most farm inputs would be made by farmers through normal  - iv - commercial channels because of the size and timing of individual purchases. Road work would be undertaken by the National Roads Service (SNC) on force account. Civil works for health centers, schools, trading posts and storage facilities, processing plant, dehairing research facilities, and project unit facilities would be carried out through local competitive bidding, acceptable to IDA/Bank. xiv. Financial rates of return for alpaca livestock development have been estimated to range from 30% to 100%, and for the handicraft development the financial rates of return have been estimated at over 100%. The overall economic rate of return of the project is 25%, excluding the social infra- structure and technical assistance components. The economic rate of return for the livestock development component is 18%, the cost of which is US$5.1 million; 30% for wool collection, storage and processing, the cost of which is US$4.9 million; and 70% for handicraft component, the cost of which is US$3.0 million. xv. The wool textile industry as a whole would benefit from the project through improvement of research, extension and farming systems at the produc- tion level; improvement and expansion of marketing infrastructure; moderni- zation of the processing facilities; and development of llama dehairing technology. The handicraft industry would also benefit through provision of credit and technical assistance. Annual incremental production of alpaca fiber at full development would be about 330 m tons and yarn production would amount to 250 m tons, including 190 m tons of alpaca yarn. Also, at full development, the annual incremental value of handicraft items is estimated at US$6.4 million. The project would be directly responsible for the employ- ment of 290 persons and would substantially reduce underemployment in the project area and of artisans in the rural area. Beneficiaries in the project area are in the poverty group, and, under project conditions, it is expected that the average farm family income based on livestock activity would increase from less than US$100 to US$896 at full development (12 years). Likewise, a typical artisan family with three of its members actively engaged in making alpaca/llama/sheep wool-based handicraft items could earn a cash family income of about US$1,800. Other benefits would include improved environmental and social conditions in the project area. xvi. During negotiations appropriate assurances were obtained that provide a suitable basis for an IDA credit of US$9 million and a Bank loan of US$9 mil- lion at standard terms for Bolivia. The Government would be the borrower and would bear the foreign exchange risk involved. December 8, 1977  BOLIVIA ULLA ULLA DEVELOPMENT PROJECT I. INTRODUCTION 1.01 The Government of Bolivia has requested an IDA credit of US$9 million and a Bank loan of US$9 million to help finance a second integrated development project in the Altiplano. The proposed project would provide critical assistance to families living in the Ulla Ulla region of the Altiplano, where Bolivia's poverty is most severe and widespread. It would emphasize the alpaca/llama agri-business complex, integrating diverse components into a single development scheme, beginning with production of raw material, its processing to semi-finished products, conversion to handicrafts, and marketing. In addition, the project would include development of solar energy in the Altiplano and a conservation program for vicunas. The Government places high priority on the proposed project, which is in line with the Government's strategy to improve the economic and social condition of the rural poor of the Altiplano. The pertinent feasibility studies were prepared by the Organization of American States (OAS) with Bank assistance. 1.02 To date, the Bank has made 11 loans and IDA has granted 10 credits to Bolivia for total amounts of US$212.0 million and US$60.3 million, net of cancellations, respectively. The largest portion of the financing, 36%, has been for transportation, with 20% going for power, 10% for mining and industry, 9% for a gas pipeline, 6% for urban development, 5% for education, and 4% for water supply. The remaining 10%, US$27.2 million, has been directed to agriculture to assist the Government in initiating long-term development of a viable livestock industry, increasing agricultural produc- tion, and improving living conditions on the Altiplano, as well as strengthen- ing the Agricultural Bank of Bolivia as a development institution. II. BACKGROUND A. General 2.01 Bolivia has maintained a favorable economic and financial position during the 1971-76 period, with real GDP increasing steadily at an average annual rate of 6%. Following a similar trend, per capita GNP increased from US$197 in 1973 to US$320 in 1975, but it continues to be one of the lowest in the hemisphere. The sustained economic growth can be attributed to the continued political stability, better management of public institutions and the economy, an increase in hydrocarbon prices, and the growing domestic savings and greatly increased capital flows. However, a high incidence of poverty in rural areas and the lagging growth rate in domestic agriculture remain serious problems.  - 2 - 2.02 Bolivia's population is estimated at about 5.6 million, 70% of whom live in rural areas where per capita income ranges between US$60 and US$100. The Altiplano and the valleys, which jointly account for abo-- 30% of the national territory, contain about 85% of the rural popu- lation. Income distribution remains skewed. This disparity is reflected in the fact that the lower 40% of the population accounts for only 13% of the total income, compared to the 36% of the national income enjoyed by the top 5% of the population. The poorest segment consists largely of small farmers and agricultural laborers engaged in subsistence agriculture. 2.03 The Government is well aware of the major impediments to develop- r-ent and has consequently directed its efforts towards mobilization of domestic resources and preparation of a national development program. However, success- ful implementation of this program is contingent upon the availability of sub- stantial external assistance. B. Agriculture and the Rural Sector 2.04 Agriculture accounts for 21% of GDP and provides employment for over 50% of the country's labor force. Agricultural exports in 1976, mainly sugar, cotton, coffee, timber and beef, amounted to US$73.5 million, or about 12% of the total export value, while food imports amounted to US$56.2 million, accounting for 10% of total merchandise imports. Although commercial agri- culture in the tropical eastern lowlands has been growing rapidly, the small farm subsistence sector concentrated in the Altiplano region has stagnated. Regional imbalances appear to be pronounced largely because of the disparities in growth potentials, the level and pattern of agricultural development, and the extent to which each region has attracted resources and governmental support. 2.05 Agriculture in the Altiplano (3,000-4,500 meter) is based on the cultivation of a few crops, such as quinoa, oats, barley, beans and potatoes, and on raising livestock, mostly llamas, alpacas, sheep and cattle, but the extremely small scale of farm operations, low soil fertility, and harsh envi- ronmental conditions have kept production at low levels. There is admittedly little scope for expanding land under cultivation but the potential of live- stock has not yet been fully exploited (para 2.19). Agricultural production is further deterred by outdated technology and low factor productivity, limited skilled manpower, inadequate factor and product markets, and lack of access to agricultural credit, especially long-term credit to finance agri- cultural infrastructure and inputs, for a very large segment of producers. The problem is further compounded by the lack of viable farmer organizations, adequate infrastructure, and supporting services. 2.06 In contrast, the farmers and ranchers of the modern export-oriented agriculture, which is confined to the Santa Cruz and Beni regions, have large farm holdings and enjoy substantial financial support from the Government as well as from the private sector. Modern techniques are used, especially in the mechanized production of cotton and sugarcane in Santa Cruz, and marketing arrangements and support services are better developed and established.  Rural Poor and Government's Development Efforts 2.07 Bolivia's rural poor are mainly small farmers living under subsis- tence conditions, mostly in the Altiplano. The high incidence of poverty can be linked directly to the sizeable small-farm sector which is plagued by low productivity, a traditional technological base, underemployed resources, and a disproportionately small share of agriculture growth and development. Other rural poverty problems are (a) a high infant mortality rate (250 per 1,000 live births); (b) high adult illiteracy (85% - only 4% complete primary school); (c) malnutrition and a life expectancy of about 45 years; (d) a language problem since a high proportion of the rural population speak only Aymara or Quechua; and (e) inadequate infrastructure and services. However, with all these handicaps, deep-rooted cultural ties have inhibited Altiplano inhabitants from migrating in large number to the more prosperous eastern regions, which argues for a rigorous policy to expand employment opportunities to occupy the growing labor force. 2.08 Bolivia's efforts to ameliorate rural, social, and economic condi- tions will be vastly influenced by economic dualism in the rural sector, i.e., large farm operators and a preponderance of small-scale farmers, each with different needs and problems. There is evidence that productivity and the living standards of the rural poor would be improved considerably, provided the Government takes a number of essential measures, including (a) preparing and executing investment programs and establishing a proper institutional framework to execute such programs in the Altiplano and -valleys; (b) channeling adequate credit and technical assistance to small farmers in support of such programs; (c) organizing small landholders into cooperatives or other functional groups; and (d) conducting research to develop appropriate crop varieties for the climatic conditions of the Altiplano and valleys. 2.09 Recently, the Government has begun to channel more financial and human resources to small farmers, and it has also taken steps to reform pertinent institutions and improve sector management capabilities. To this end, the Ministries of Agriculture and Peasant Affairs were merged in 1974, and a special office to coordinate all the development activities on the Altiplano was established with the assistance of the UNDP. Assistance has also come in the form of external financing for agricultural and rural development, which has been increasing steadily, with IDB, USAID and the World Bank being principal donors. USAID is considering the possibility of providing technical assistance for the improvement of the Ministry's effectiveness in the formulation of policies, sector planning, and coordina- tion and supervision of investment programs. It is also providing tech- nical and financial assistance to the National Community Development Services (SNDC) to expand its role beyond its present involvement in infrastructure projects only. A reorganization study for the Agricultural Bank of Bolivia (BAB), aimed at improving the efficiency of this institution, is being financed under Credit 261-BO. The Center for Social and Economic Develop- ment (DESEC), a non-profit private organization, is also active in the rural areas. DESEC's primary functions are to promote and organize cooperatives in  - 4 - rural areas, provide technical assistance to farmers and prepare feasibility studies. It assisted FAO/CP in the preparation of the Ingavi Rural Develop- ment Project (Loan 1211-BO) and is now assisting UNDP in preparing the feasibility study for a third integrated development project. Also, more recently (May 1977), Bolivia organized a meeting in which UN agencies participated to discuss Government's strategy and development plan for the rural sector and a framework for coordinated assistance from the UN system. Bolivia is the first nation among the less developed countries to undertake such a measure directed toward rural development. The Government now plans to establish a multi-disciplinary unit that would coordinate development efforts. 2.10 Government Strategy. According to the recent National Development Plan, the Government's efforts would be directed at reducing the country's dependence on imported foodstuffs and to alleviate acute poverty and under- employment in the traditional agricultural sector. For the latter, agricul- tural investment will be directed toward integrated rural development projects to provide basic social services, infrastructure, marketing and credit, and extension services. The Government plans to use the Ingavi Rural Development Project (Loan 1211-BO) and the Ulla Ulla Development Project as prototypes for development of the Altiplano and the intermediate valleys and to seek support from external agencies to improve planning, coordination, and supervision of development programs to benefit the rural poor. For the period 1977-79, the Bolivian Government is seeking external financing in the amount of US$331 million, about 15% of total external financing for all sectors, for agricultural and rural development. 2.11 The Government recognizes the difficulties in bringing about an orderly development of the Altiplano, which is endowed with limited resources and harsh conditions and where the population has in the past been less receptive to changes and, to some extent, suspicious and unapproachable. Thus, implementation of rural development projects in the Altiplano would imply taking more than the usual risks, particularly since the results obtained in this region by other institutions have been mediocre and somewhat inconclu- sive. 2.12 However, there have been positive changes recently in the attitudes and ideals of the rural poor in the Altiplano towards social and economic changes. Communities have become more sensitive to progress and indicate strong desires to participate in the development process. This, then, in addition to the Government's declared commitment to engendering development in the project area, could be the overriding factor insofar as the success of rural development projects in the Altiplano is concerned. 2.13 Government Agencies. The Ministry of Peasant Affairs and Agricul- ture (MPAA), BAB, SNDC, the Regional Development Corporations, and the National Institution for Colonization are the principal institutions involved in rural areas.  - 5 - 2.14 MPAA, through the newly created semi-autonomous Institution for Agriculture and Teclnology (IBTA), is responsible for extension services and research as well as for establishment of overall sectoral policies and formulation of specific priorities. These are then submitted for review and approval by the Ministry of National Planning and Coordination. 2.15 BAB is the major institutional source of agricultural credit, but most of its lending is confined to large farmers. However, after its forthcoming reorganization and with competent staff, it could emerge as an important and viable agricultural development institution. 2.16 SNDC, which was created with the assistance of USAID, has focused on construction of schools and roads in rural areas, but it has recently placed emphasis on credit and small irrigation schemes. 2.17 The Colonization Institution is responsible for directed coloniza- tion schemes. IDB and USAID have assisted in the preparation and financing of these schemes, but, by and large, the few that have been attempted have failed. 2.18 To date, the three most active regional development agencies in the agricultural sector are in Santa Cruz, La Paz and Chuquisaca. The Santa Cruz Works Committee, with its own financial resources obtained from royal- ties on petroleum sales, is actively engaged in financing small-scale agri- cultural projects and supporting infrastructure, while CORDEPAZ, the regional development agency in La Paz, has participated in the preparation of the Ingavi Project, financed pre-feasibility studies for rural integrated projects in the Northern Altiplano, and now plans to finance a sugar development program in Apolo. It also finances infrastructure in the rural areas in the Department of La Paz. The Chuquisaca Development Committee has obtained financing from IDB (US$2.2 million) for development of the swine industry and it now plans to expand its activities in the Department of Chuquisaca for agricultural and rural development. Alpaca, Llama and Vicuna Livestock 2.19 Alpaca/llama/vicuna livestock is an important resource in the Altiplano. Most recent estimates indicate that there are about 2.2 million llamas, 300,000 alpacas, and 1,000 vicunas. While llamas are predominant in the dry and arid southern and central Altiplano, about 50% of the alpaca population is concentrated in the more humid, higher reaches of the northern highlands. The remaining animals are dispersed throughout the central Altiplano where natural conditions in some areas are favorable. To date, the Government's efforts to develop agriculture in the Altiplano have been centered exclusively on raising yields of the traditional crops (potatoes, quinoa, barley, alfalfa, and some vegetables) and introducing improved breeds of sheep and cows at the farm level. However, Bolivia's efforts to develop alpaca and llama and wool production as a source of foreign exchange and as an additional income and employment source for the rural poor are deficient and lag far behind the intensive programs undertaken in Peru. Alpaca and llama fiber production has been low and programs to improve alpaca and llama breeds for their high value wool have been limited to a small-scale research  - 6 - program at the Patacamaya Experiment Station. Emphasis on improving alpaca and llama fiber production would generate forward linkages, i.e., expansion of wool processing and the handicrafts industry. 2.20 Alpaca. In recent years, alpaca fiber averaged 132 m tons annually. The average yield of fiber is 0.8 kg per animal, compared to about 1.3 kg in Peru under improved breeding and herd management practices. The average size herd in Bolivia is estimated at 100 alpacas, generally characterized by low fertility (35%) and a high mortality rate (20%). Pasture rotation is not practiced, and unrestricted grazing has led to the depletion of good range land. Animals are kept until they die from natural causes, and no effort is made to cull the male animals. As a result, there is a high share of non- reproductive animals. Animal health problems are acute and no measures are taken to control animal diseases. Alpacas are sheared every two years instead of annually and the method is haphazard. Usually animals are sheared with a knife, tin can lids, or even broken glass, and no effort is made to separate the fiber according to fineness, which varies from one part of the body to another. 2.21 Peruvian experience indicates that alpaca fiber production in Bolivia could be increased almost fourfold but only through a coordinated package of activities in adaptive research, technical assistance, credit for on-farm investment and herd development, and supporting infrastructure. 2.22 Llama. There is potential for large-scale production of llama fiber; however, the real problem has been lack of a dehairing technology (para 2.35). Llama fiber production varies considerably from year to year, but has been estimated at about 55 m tons per annum in recent years. Most of the fiber is exported to the USA and Europe, where it is processed into fabrics. '2.23 The average annual yield of llama fiber is about 1.0 kg per animal, but with improved breeding and herd management this could go up to 1.3 kg. With dehairing technology, total animal llama fiber production would be in excess of 800 m tons a year. 2.24 Vicuna. The vicuna, unlike the llama and alpaca, is undomesticated, and lives primarily at high altitudes on the Altiplano of Peru and Bolivia, although small numbers have been sighted in Chile and Argentina. Currently, there are only about 1,000 in Bolivia of which about 60% are in the Ulla Ulla reserve area. It is estimated that the total vicuna population in South America dropped from 400,000 in the early 1950s to only about 5,000 at the end of the 1960s, owing to the high prices and strong demand for its fleece. Top quality vicuna wool can be bought for about US$25 per pound compared to only 40 cents per pound for high-grade sheep wool. The majority of these survivors have been saved and numbers have since increased due to the conservation measures taken by Peru and Bolivia, but vicunas are still being killed for their high-valued fleece in the two countries. 2.25 The Government is now placing priority on the vicuna conservation and development program and it plans to establish firm control over poachers. It also intends to seek assistance in conducting detailed research on vicunas and in evaluating ways of breeding them for commercial purposes.  -7- Solar Ener~Iy 2.26 The rural poor of the Altiplano depend on non-commercial energy sources for fuel for household needs. Currently, dried animal dung is the single most important source of energy, but resources are inadequate to meet household requirements, providing for only limited cooking and no heating during the Iarsh winter months. Also, the use of dried animal dung to generate energy eliminates its use as fertilizer. Therefore, alternative sources of energy in rural areas are of critical importance. 2.27 Solar energy is a potentially usable resource in the Altiplano, and the Go .nment places high priority on its exploitation and development. At an average altitude of more than 13,000 feet above sea level and with an average of 2,500 sun hours per annum, the region receives high levels of solar energy, ranging from about 400 cal/cm /day in winter months, to more than 600 cal/cm /day in summer, well above the minimum limits for the economic operation of solar energy devices. 2.28 Bolivia has already initiated a solar energy program at the Physics Research Institute (IDIF) of the University of San Andres in La Paz, which is well known for its research in cosmic ray physics. To date, water heaters, food driers and metalurgical and mineral devices using solar energy have been developed and tested to some extent. There is, however, a shortage of funds for equipment and tools for the workshop and for carrying out further research and experimentation. .C. Wool Textile Industry 2.29 The Bolivian textile industry, accounting for almost 20% of the labor force in the industrial sector, has been growing in recent years at a rate of about 3.5% to 4% per annum. Installed capacity is estimated at 54,000 spinning spindles and some 1,650 looms, with the wool industry alone accounting for about 28% and 20% of spindles and looms, respectively. Of the estimated 125 mills registered, only seven belong to the wool sector, two of which account for 75% of the installed capacity. In terms of labor force, the wool industry employs about 28% of the total force in the textile indus- try, being second to the cotton sector. 2.30 In spite of the upward trend in the textile industry, a recent study by Werner Management consultants on behalf of the Bolivian Government in 1974/ 75 found that mills were generally obsolete and in a poor state of mainte- nance, with inadequate processing technology, working methods, and management. Processing 2.31 The principal raw materials for the wool industry are sheep wool, alpaca/llama fiber, and acrylics, all of which are processed into fabric, yarn, blankets and traveling rugs and hats. Only two enterprises -- the state enterprise, COMBOFLA, and a cooperative, FOTRAMA -- are involved in spinning alpaca fiber (para 2.33). A third enterprise, FORNO, also buys small quanti- ties of fiber, usually from COMBOFLA, to incorporate into woolen blankets and  -8- traveling rugs. Most of the fiber collected, however, is processed into knitting yarns for sale to artisans. Total yarn production has been increasing by about 12% a year since 1974 and in 1976 reached 45 m tons. 2.32 The amount of llama fiber presently produced is small relative to the potential for large-scale production. Except for some sales to FORNO, fiber has been mostly exported to the USA and Europe, although the demand for coarse fiber is limited. 2.33 The Alpaca Wool Processing and Marketing Company (FOTRAMA) complex is an integrated cooperative established to provide education, health care and employment to communities in the Cochabamba area. This cooperative has a small mill which produces coarse semi-worsted alpaca yarn for distributing to its members to use in making handicraft items. The Bolivian Committee for Production of Wool (COMBOFLA) processing plant in Pulacayo is not suitable for processing. Raw material must be transported by train, a 15-hour run from La Paz. The plant layout is deficient and most of the equipment is obsolete. Work methods and plant conditions are poor; quality control is non-existent; and technical and supervisory staff lacks the know-how and experience required to run a modern mill. The plant is not expected to con- tinue operations for more than three to five years. 2.34 Increasing sales of artisanal end products have generated a large demand for yarn by low income groups in rural and urban areas where unemploy- ment and underemployment are high. This demand, however, cannot be met because Bolivia's processing capacity of alpaca wool is limited to an esti- mated 50% of total production. Therefore, a new processing plant with improved technology and processing facilities and improved management and organization is urgently needed. Llama Fiber Dehairing Technology 2.35 Traditionally, llama fiber is considered inferior to that of the alpaca or vicuna due to heterogeneity, which results from the presence of varying amounts of coarse hair mixed with fine, soft fibers. The presence of these coarse fibers creates processing problems in conventional spinning, weaving and dying, and gives a rough and unpleasant texture to fabric. Very little research has been done in Bolivia to develop a dehairing processing technique. However, dehairing processing technology has been developed by several countries although the details remain a "trade secret't of specialized firms in both the USA and Europe. 2.36 With about 2.2 million llamas in Bolivia (para 2.19), the Govern- ment places high priority on acquiring a suitable dehairing technology, since it would have substantial impact on livestock production, the wool industry and the handicraft sector. A conservative estimate places potential llama fiber production after dehairing in excess of 800 m tons annually (para 2.23).  -9- Institutional Arrangement 2.37 Development of the alpaca and llama resource has lagged, mainly because of the lack of strong institutional support. In 1962, the Government established COMBOFLA as an independent state enterprise under the auspices of the Ministry of Peasant Affairs and Agriculture, but it has not fulfilled its responsibilities for the integrated development of the entire wool industry. Instead, it has concentrated exclusively on collecting and processing alpaca/ llama fleece for export, marketing yarn to its affiliated artisans, and selling artisanal products. It has also mishandled the purchasing of wool from alpaca/llama owners, which has resulted in about 20% of Bolivia's total fleece production being smuggled into Peru, where prices are higher and there are other incentives as well to Bolivian producers (para 2.41). Because of the comparative lower price it offers, its involvement with the artisan industry, and its failure to promote integrated development of alpaca/llama and sheep, COMBOFLA has been steadily losing the confidence of both the public and private sectors. 2.38 An independent national institution under the Ministry of Peasant Affairs and Agriculture and the Ministry of Industry and Commerce has now been established to revitalize the alpaca/llama textile industry and to help improve incomes of the rural poor on the Altiplano (para 4.01). Marketing and Prices 2.39 Marketing. COMBOFLA accounts for most of the collection of alpaca and llama raw material although FOTRAMA gathers some from the central Altiplano and a substantial amount is bought by itinerant tradesmen directly from pro- ducers at local fairs. However, due to the poor marketing infrastructure at the production level and because of higher prices in Peru, about 40% of total production in the project area is sold across the border. 2.40 COMBOFLA's gathering system covers only selected producing areas, leaving out some remote regions that account for a substantial part of total annual production. Currently, it has four main gathering posts and 13 second- ary posts, operated by a staff of 21 persons. In general, facilities, such as offices, warehouses and equipment, are small, inadequate, and in poor condi- tion, but transportation constitutes the major bottleneck. 2.41 Marketing and price information is scarce, with COMBOFLA providing what it can at the main gathering centers only. The fiber brought by the farmers to the collecting points is paid for by the kg, which is equivalent to 2 lb instead of 2.2 lb, but this confuses the farmers, who are used to the Peruvian system of selling by the pound. In addition, the farmer often does not receive immediate cash payment but instead is issued a credit voucher which he will exchange against cash when it becomes available (often a month or two later). 2.42 Bolivia has developed a tourist and export market of artisanal end products, the added value of which as against raw material is of the order of 150%. Bolivian export legislation discourages the export of raw materials,  - 10 - imposing a tax of 25% on unprocessed textile raw materials. The domestic tourist market for these artisanal products is good and is expected to remain attractive if appropriate product adaptation and market development efforts are undertaken. Additionally, the export potential for alpaca/llama products is high, since they are available in Bolivia and Peru only, and world demand exceeds present supplies (mainly from Peru). 2.43 Alpaca/llama meat, hides, and pelts are also marketed on a small scale. At present an excessive number of pelts is being processed for the handicraft industry, mainly for bedspreads, hats, and rugs, but the supply comes from dead animals and the slaughtering of young animals. Currently, there is no legislation to regulate the production and marketing of pelts, but to avert a decline in the alpaca and llama population in the long run, control over the slaughter of young animals may be needed. 2.44 Prices. The current farmgate prices of alpaca fiber are $b 90, or US$4.5, per kg for white and an average of $b 56 (US$2.8) per kg for colored. COMBOFLA is the main buyer and it fixes prices every six months. In Peru prices are usually 15% to 25% higher for white wool and 20% to 30% higher for colored wool. The selling price of alpaca yarn, set by COMBOFLA is currently US$12.5 per kg. This subsidized price does not, however, allow the Pulacayo processing plant to cover its costs. In Peru, the ex-factory price of alpaca yarn is about US$19 per kg for yarns of about the same quality. The lower COMBOFLA price is actually equivalent to a subsidy to foreign tourists in Bolivia, although the booming Peruvian handicraft indus- try shows that its higher prices have not kept the market from growing. To correct the imbalance in the Bolivian system, prices of yarn should be adjusted to reflect production cost, and farmgate prices should be adjusted to follow the Peruvian prices so that the substantial outflow of raw materials to Peru can be stopped. The possibility of increased income would also give sufficient incentive to increase production. D. Handicraft Industry 2.45 The Bolivian handicraft industry generates about US$4 million in foreign exchange annually and is a vital source of supplementary income and employment for about 200,000 poor rural and urban families. While Bolivia has developed a profitable tourist and export market for its handicraft products, i.e., sweaters, ponchos, blankets and other garments, it has realized only a fraction of the possible benefits associated with handicraft trade because of (a) shortages of alpaca/llama/sheep wool and yarn; (b) lack of credit for the purchase of wool, yarn, tools, machinery and for establishment of workshops; (c) lack of essential training and technical assistance programs; (d) deficient promotional and marketing programs; and (e) weak organizational arrangements. 2.46 The bulk of Bolivia's small artisans depend mainly on subsistence farming for their livelihood and supplement their basic income from sales of handicrafts. Families have sufficient time to engage in making articles  - 11 - for sale as the agricultural season is concentrated in a period of about five months of the year, which leaves them about seven months for other activities. Potentially, a typical artisan family with three of its members engaged in making alpaca/llama/sheep wool-based handicraft items could earn about US$1,800 equivalent a year. 2.47 Customarily, women prepare the wool for further processing and do spinning and knitting, while men do mostly weaving. They knit and weave sweaters, ruanas, decorative bags, colorful hats, ponchos and the like, all made from alpaca/llama wool. Some of these items are used by the family and the rest is either bartered for essential commodities needed to sustain the family throughout the year or sold to intermediaries. The production process under present conditions is tedious and requires long working hours. Spinning and knitting is often done by hand or with wooden looms. Dyeing techniques are primitive, with the coloring chemicals extracted from vegetable substances that tend to fade after exposure to the sun. Finished products are stored in the artisans' adobe huts until the intermediaries or representa- tives of the commercial firms arrive in the village to make purchases. The prices offered by the purchasing agents for the items, however, are very low compared to what could be obtained by selling directly in urban centers. 2.48 The role of the private sector in the handicrafts trade has been positive but limited in scope. A few individuals with some capital and much imagination and drive have taken the initiative and organized a rela- tively small number of artisans into production cooperatives to whom they sell wool and yarn at subsidized rates in exchange for the right to purchase their end products. 2.49 Prospects for the growth of the handicrafts industry improved with the establishment in August 1974 of the National Institute for Small Industries and Handicrafts (INBOPIA) as a decentralized institute under the auspices of the Ministry of Industry, Commerce and Tourism. Its main purpose is to plan and promote the development of small industrial enterprises and the handicrafts industry in Bolivia and while it has made some progress, its efforts have been hampered by lack of funds and support staff. 2.50 INBOPIA's budget for 1977 amounts to US$150,000 and it has a total staff of 25, 17 of whom are professionals. Since it began operation, INBOPIA has carried out socioeconomic studies on artisan activities; it has launched a nationwide registration campaign for all artisans in the country; it has participated in international fairs to promote export of Bolivian handicrafts; and it has helped to organize nine artisan cooperatives with the assistance of IDB. INBOPIA's programs for the next five years will concentrate on strengthening its operation in the small industrial sector and particularly on increasing its involvement with the handicraft trade.  - 12 - E. Project Area 2.51 The project area (Map IBRD 12907) is in the department of La Paz, northeast of Lake Titicaca, in the upper part of the Suches river drainage basin. The Suches river forms the boundary between Bolivia and Peru and marks the western boundary of the project area. The eastern boundary, for the most part, coincides with the Andes range. The project area contains portions of the Franz Tamayo and Saavedra Provinces and covers about 300,000 ha of extensive plains with an average elevation of about 14,000 feet. The southern part of the project area varies from high altitude rolling grassy hillocks and stringer meadows to steep mountain slopes that go down into narrow river valleys. The bottom lands of these rivers, and occasionally the adjacent steep slopes, are cultivated. Overall, soils are best suited to grazing lands. 2.52 The climate is generally cool, with marked differences between day and night temperatures. The average annual temperature is approxi- mately 8 0C, varying from an average winter night temperature of 6 below the freezing point to 280 above zero centigrade during daytime in the summer. Night frosts can be expected throughout the year. The combina- tion of high altitude, clear unpolluted skies and relative proximity to the equator results in a high incidence of solar radiation (para 2.27). Average annual rainfall is reported between 400 and 800 mm, with the larger part falling from November through March. 2.53 Livestock is the principal agricultural activity in the project area, which supports about 150,000 alpacas, approximately 25,000 llamas and 600 vicunas. Cultivated areas are extremely sparse and restricted to the southern fringes of the project area where cultivated forage and some food crops (barley, onions, potatoes, and flat beans) are grown. Other than range-livestock activities, there is virtually no alternative economic activity. Handicraft items are produced but generally do not play a signifi- cant role in the money economy. Employment opportunities are limited to the COMBOFLA buying stations and some retail establishments. 2.54 About 3,000 families live in the project area, 2,000 of whom would benefit directly from the livestock development program. Communities are based on the ancient Aymara social organization characterized by extended families. There is a long history of community programs among these people as well as traditions of common land ownership and joint efforts for civil and religious activities. Communal living and land ownership patterns especially favor livestock development based on farmer groups. 2.55 Women play a predominant role in economic activities, but the living conditions of typical housewives in the project area are extremely harsh and the rewards very limited. They work hard and die at the relati- vely young average age of 45. Young girls are assigned to herding alpacas, spinning, hauling water over long distances, collecting dung for cooking fuel, washing dishes, and sweeping the house yards. Most marry at the age of 15. The women's work schedule is governed by the requirements of the  - 13 - various agricultural seasons -- shearing alpaca/llama; collecting the fleece; washing, spinning and selling it; herding animals; and visiting fairs. During slacks in the agricultural cycle, women do spinning and knitting and make handicraft items to supplement the income derived from sales of alpacas and their fleece. 2.56 To date, the project area has received very little development assistance and the target population would be the poorest of the rural poor in the Altiplano. Social and physical infrastructure are almost non-existent. The road network in the project area consists of dirt roads and tracks, which are usually in poor condition. The roads receive occasional maintenance from the National Roads Service (SNC) but are almost impassable during the rainy season (January-March) and during the winter months (July and August). 2.57 The health status of the population in the project area is poor. In 1976, there were two outbreaks of exanthematic typhus, and, in the same year, an epidemic of measles or whooping cough (data are not sufficient to determine which of the two diseases was involved) killed 33 children and two adults. The only accessible health facility for people living in the northern part of the project area is a post located in the Peruvian village of Cojata, a three-hour walk, and there is a medical post in Charazani, about 30 km from Ulla Ulla, located along the eastern boundary of the project area. The building was upgraded to a health center hospital last year but it still has not been equipped. There is one medical doctor but no auxiliary personnel. Personal hygiene practices are almost non-existent. Most com- munities get their water supplies from open ditches, which are polluted since they are unprotected, and there are no waste disposal facilities. 2.58 Education facilities in the project area are poor and inadequate. Classrooms are damp and cold, roofs usually leak, rooms are improperly ventilated and poorly illuminated, and there is a lack of adequate drinking water facilities and pit privies. In addition most schools are inadequately furnished, lack basic teaching aid materials and equipment, and teachers use Peruvian textbooks in many courses because of unavailability of locally produced teaching materials. The courses taught in the project area also have little relevance to the student's environmental and eventual work needs, being biased toward urban and academic courses. Attendance rates are low, dropout rates are very high, and the ratio of over-aged students with respect to average-aged students is relatively high by comparison with other regions. Due to the poor education system, the majority of graduates from local schools are as ill-prepared to contribute to the welfare of their communities as their counterparts who never attended schools. 2.59 There are no agricultural services in the project area. The last time an extension agent visited the area was two years ago.  - 14 - III. THE PROJECT A. Brief Description 3.01 The proposed project would provide financing for a comprehensive integrated development over a five-year investment period. The overall objective of the project would be to promote an orderly development of the alpaca/llama agro-industry; to conserve and develop vicuna resources; and to improve the economic and social conditions of about 3,000 families in the project area. An additional 3,400 rural families would benefit from the development of the wool handicraft activity under the project. The project, with the Ingavi Rural Development Project (Loan 1211-BO), would also provide the basis for a long-range program to develop other regions of the Altiplano. 3.02 Under the project, alpaca and llama production (crude and processed hair) would be increased by improving feed base, quality of animal breed, and range and herd management practices; providing trading posts and storage facilities; and improving marketing and processing systems for alpaca and llama fiber. A research program would improve development of alpaca and llama breeds and expand and strengthen the conservation program for vicunas. The project would provide technical and veterinary services and credit for on-farm investments and herd development. It would also make provision for a pricing mechanism to give farmers and artisans incentives for increasing fiber production and handicraft items, and for reducing the illegal flow of alpaca fiber into Peru. In addition, the wool handicraft industry would receive credit and technical assistance, and living conditions would be improved in the project area through provision of health and education centers, drinking water and waste disposal facilities, and improved roads. 3.03 The proposed project would also include several innovative features. Through a technical assistance component, the project would finance develop- ment of a llama dehairing technololgy to increase llama fiber production and to utilize more fully the 2.2 million llamas now available in Bolivia. It would also finance the exploitation of solar energy, an important natural resource in the Altiplano, for use in the rural areas of the region. In addi- tion, concerted efforts would be directed toward improving the lot of women in the project area through technical assistance to develop basic skills and to increase productivity. Finally, the project would have substantial impact on institution building. 3.04 The proposed IDA credit and Bank loan would be made to the Government, and the National Institution for the Development of Wool (INFOL), the newly created institution under the auspices of the Ministry of Peasant Affairs and Agriculture and the Ministry of Commerce and Industry, would be responsible for project execution. The Agricultural and Social Infrastructure Division (ASI) of INFOL would be directly responsible for project administration and management in Ulla Ulla. For the handicraft, solar energy, and physical infrastructure components (roads, health, education, and water and waste disposal facilities), INFOL would enter into operational agreements with each respective participating agency.  - 15 - B. Detailed Features Livestock Development (Alpaca/Llama/Vicuna) 3.05 Experiment Station. Experiment Station facilities, including a commercial farm, would encompass an area of about 4,000 ha. The Experiment Station would be provided with laboratory equipment and facilities for re- search on low-cost production systems and on parasitology, bacteriology, biology, pasture, and animal nutrition as they relate to alpacas and llamas. The Experiment Station would include a 20-ha irrigation scheme to produce forage for the Experiment Station's use and a supply of grass seeds for farmers to utilize in the project area. Also, the irrigation scheme would be used to determine the technical and economic feasibility of using irrigation to increase the carrying capacity of range land since about 8,000 ha of land can be irrigated in the project area (Annex 1). In the initial period, the Experiment Station, would utilize the results already obtained from basic and applied research on alpaca, particularly at the La Raya Experiment Station in P eru. 3.06 The communities in the project area have contributed 4,000 ha of land for the necessary facilities. Of this, about 1,500 ha would be utilized for the Experiment Station and the remaining 2,500 ha for the commercial farm. 3.07 Commercial Farm. A commercial farm would be established for the implementation of improved techniques currently available as well as those developed at the Experiment Station to gain farmers' confidence in the develop- ment program (Annex 1). The commercial farm would employ a farming system compatible with that existing in the project area and would include about 2,500 ha of range land, operating with about 1,500 alpacas and about 370 lfamas (para 4.21). The farm would operate as a commercial enterprise and would serve as a demonstration unit, adopting improved range and animal husbandry practices. It would maintain separate accounts and adopt sound management practices. Profits of the commercial farm would be shared by the communities which contributed land to the Government for establishment of the facilities. At full development, i.e., after 10 years, INFOL would transfer the commercial farm to the donor communities for operation as a cooperative enterprise. Assurances on the above were obtained during negotiations. Assur- ances were also obtained that INFOL would submit to IDA/Bank by January 1, 1982, a proposal outlining the terms and conditions under which the commer- cial farm would be transferred to the communities who contributed land. 3.08 On-farm Investments and Herd Development. Herd development and increased fiber production would be achieved within the context of tradi- tional patterns of farm activities and forms of cooperation in the project area. Sub-loans would be made to individual farmers or groups of farmers to improve traditional shearing techniques and fiber handling and classifying practices, and also for construction of facilities for implementing a sound  - 16 - animal program including improved animal husbandry and range management practices. Major investment items would include spray-bath facilities, holding corrals, shearing sheds, fiber classification and storage sheds, mechanical shearing equipment, drugs, animals and fences. Minor investment items would include medical kits, hand shears, scales, fiber classifying tables, and identification tags (Annex 2). 3.09 Farmers would participate either individually or as members of a farmer group. The smallest farm development model would include 100 alpacas, which is few enough to be herded easily by one person, and no fences would be required. Pasture rotation would be accomplished by marking the pasturing areas with movable landmarks. The only investment item would be hand shears, and medicines for the animals would be the only cash operating cost. Farmer groups would vary in size, with membership ranging from five to 55 families. Such communal farms would be developed on land presently operated in common. Herd size of each farmer group would depend on farmer participation and vary accordingly. Investment items would include a holding corral, shearing platform, hand shears, tools, shearing table, identifying tags, fences, drugs, and male replacements for the first year. In all cases (Models 2, 3 and 4, Annex 2), shearing would be done annually, and animal husbandry practices such as breeding and calving in addition to parasite control would be carried out according to a prescribed scheduled (Annex 2). 3.10 Extension Services. Technical services would be provided to farmers in improved technology for animal husbandry, in improved herd and range management practices, improved shearing techniques, and in preparation and implementation of farm development plans. In order to improve the over- all effectiveness of the extension system and communications between exten- sion personnel and the target group, local cadres would be selected and trained in animal husbandry and range management practices (Annex 1). 3.11 Veterinary services would also be provided to project beneficiaries. Part of the assistance would be in the form of training in simple procedures for control and prevention of internal and external parasites and first aid and other practices as part of the overall herd management program. The veterinary services would be provided free of charge; however, any medicines required would be paid by the project beneficiaries. 3.12 Vicuna Conservation and Development. The project would provide funds to strengthen the present protection scheme for vicunas, train guards and introduce research and experimentation activities designed to establish a systematic vicuna management program in the Ulla Ulla Reserve and throughout Bolivia. Six additional guards would be recruited and trained, and the proj- ect would also provide accommodation facilities for guards, new observation posts, additional vehicles, and other necessary equipment (Annex 3). Wool Collection, Storage and Processing 3.13 Gathering System. The collection network would be enlarged and improved to cover all the producing areas. Facilities would be expanded by renting larger storage rooms, and five new posts would be built (one main  - 17 - and four secondary) and adequately staffed. All gathering posts would be provided with adequate furniture and office equipment, and vehicles would be supplied to facilitate the flow of alpaca/llama/sheep--raw material to La Paz (Annex 4). 3.14 Storage Facilities. A warehouse would be built in El Alto near La Paz, close to the processing plant, to facilitate the seasonal collection of sheep wool and alpaca and llama fiber. It would be equipped with two passenger vehicles, three hydraulic wool pressers, two forklift trucks and furniture and office equipment. It would have a total staff of 16 persons. 3.15 Processing Plant. The project would finance a new spinning plant in La Paz with a total annual capacity of 595 m tons of yarn on a three-shift basis or 300 m tons on a two-shift basis. The plant would be supplied with all necessary machinery and equipment, which would include a scouring unit for the processing of 1,800 m tons of sheep wool for the Bolivian wool mills. The project would make provision for consultant services to provide technical know-how and to implement all the mill control programs as well as to set up a training program for plant personnel. Handicraft 3.16 The project would provide credit and technical assistance to help about 3,400 small rural and urban artisan families in the Departments of La Paz and Cochabamba to increase production and exports of typical handicraft items. The handicrafts component would consist of: (a) a US$2.0 million lending program to finance the capital requirements of small artisans working with alpaca/llama/sheep wool; (b) a US$1.0 million technical assistance program to help INBOPIA organize artisan production and marketing groups, finance the cost of quality control and standards, promote exports of Bolivian handicrafts by preparing a national catalogue of handicraft and participating in international fairs, monitor radio broadcasting programs, supervise the training program of the National Manpower Development Service (FOMO) for the participating artisans, and coordinate with the State Bank (BE) the imple- mentation of the credit component; and (c) a US$100,000 purchasing fund to enable INBOPIA to buy and sell, on a modest scale, some of the handicraft articles produced by artisan organizations in order to ensure competitive market prices (Annex 5). Roads 3.17 Construction and improvements of roads would be required to ensure flow of goods and services to and from the project area and the access of ASI personnel to farmer groups throughout the project area, particularly during the rainy season (January-March) and during winter months (July and August). Works under the project would thus include construction and improve- ment of about 54 km of all-weather roads in the project area (Annex 6). The National Roads Service (SNC) would implement the program, which would be completed in 18 months. The project would also finance purchase and operation of equipment for project roads and for their maintenance during and after the implementation period.  - 18 - Health Facilities 3.18 A health facilities network would be established to provide minimal health services in the project area (Annex 7). Existing communities would be organized into "group units" for delivery of health care services, and a micro-health post would be installed in each village (totalling 30) as part of the health system. Each post would be equipped with a first aid kit con- taining basic drugs for treatment of the most common ailments in the community. In addition, a medical post with six beds, attached to the project facilities in Ulla Ulla, would be constructed. Also, the health facility at Charazani would be equipped as a medical post. With six beds for delivering ambulatory and hospital care, this facility would serve a population of over 16,000 in the surrounding areas. The newly created health facility in Achachi, about 150 km from Ulla Ulla, would be the main referral hospital for the project area. Total manpower requirement for the health system would be two physicians, two auxiliary nurses and 30 community health workers. The community health workers would be trained by the Department of Public Health (DPH) of the University of San Andres. Water Supply and Waste Disposal Facilities 3.19 Potable water supply and waste disposal facilities would be provided to about 2,000 families in the project area. About 1,200 pumps and 1,000 pit privies would be installed over the project period (Annex 8). Education Facilities 3.20 The project would construct 25 new classrooms and renovate two exist- ing ones. It would also replace the intermediate school of Ulla Ulla with a new school to accommodate 50 students. Houses would be built for teachers, and textbooks and learning materials would be provided. Provision would also be made for a teachers' training program (Annex 9). Women's Participation 3.21 The proposed component would assist about 2,000 women living in the project area to improve their health and nutrition, home care practices, and education. Funds would be provided for the construction of five Mothers' Club Centers in strategic locations and for the recruitment and training of talented local women to become promotion agents. The five centers would be provided with adequate furniture and equipment. Women would also receive training in handicraft skills and marketing (Annex 10). Technical Assistance 3.22 Llama Fiber Dehairing Research. Inasmuch as purchased dehairing processing technology could be applied almost immediately, the project would initially make provision for the Government and INFOL to initiate negotia- tions for the purchase of dehairing technology and submit a proposal for IDA/Bank consideration not later than June 30, 1978. Should the Government  - 19 - su,ccessfully negotiate purchase of appropriate technology, acceptable to IDA/Bank, any costs in excess of allocations for the development of llama deihairing technology under the project would be assumed by the Government. Assurances to this effect were obtained during negotiations. 3.23 In the event that the dehairing technology cannot be purchased by the Bolivian Government, a research program would be established within the country for the development of a Bolivian technology and the services of a well established and specialized research organization would be contracted. The project would provide for a pilot processing plant equipped with mostly (about 76%) used textile machinery and equipment, a complete fiber testing laboratory equipped with up-to-date instruments, and a qualified and expe- riLenced research staff (Annex 11). Used textile machinery and equipment would minimize investment costs while satisfactorily meeting the relatively short- term needs of the research program. The research facilities would be located next to the proposed alpaca/llama spinning plant and the research program would be carried out over three and a half years. After the completion of the research program, the textile machinery and equipment would be used by INFOL for research purposes. Assurances were obtained during negotiations that the Government would support the research program with adequate funds in the event that research is carried beyond the three and one-half year period. 3.24 Solar Energy. Since solar energy is a potentially usable resource in the Altiplano, the project would strengthen local facilities and expertise by providing financing for purchase of equipment and tools for the workshop presently used by the Physic Research Institute (IDIF) of the University of San Andres and funds for the development of simple, low-cost energy collect- ion and utilization devices for use in the Altiplano. It would also provide scholarships for training abroad and for the services of a solar energy expert to assist IDIF in developing and testing solar devices that would be economically competitive with conventional technologies and readily acceptable in the rural areas (Annex 11). Project Administration 3.25 The project would provide financial support to INFOL, which would be responsible for project execution (Annex 12). Administration costs would include salaries of INFOL staff, overhead costs of INFOL and incremental administration costs of other agencies. C. Cost Estimates 3.26 The total cost of the project is estimated at about US$24 million, of which US$9.0 million, or 38%, represents the foreign exchange component. Investment cost phasing of the project is detailed in Annex 13. The project costs include provision for 254 man-months of consultant services at an estimated cost of US$1.2 million. The physical contingency has been cal- culated at 10% of base cost on investment items. The price contingency has been calculated on base cost plus physical contingency as of the end  - 20 - of 1977 at the following rates: 12% for 1978-80 and 10% for 1981/82 of the local currency; and 7.5% for 1978/79 and 7% for 1980/81/82 of the foreign exchange component, which.is line with the Bank guidelines. Project costs estimates are in Annex 14 and are summarized as follows: Foreign % of ---------$b '000-------- --------US$'000-------- Exchange Baseline Local Foreign Total Local Foreign Total % Cost Productive Investment Commercial farm 1,186 1,294 2,480 59 65 124 52 1 Collection, storage and processing 41,978 55,220 97,198 2,099 2,761 4,860 57 28 Credit to farmers and communities 12,600 17,400 30,000 630 870 1,500 58 9 Handicraft credit 34,000 6,000 40,000 1,700 300 27000 15 11 Sub-total 89,764 79,914 169,678 4,488 3,996 8,484 47 49 Productive Support Project facilities 1/ 51,547 17,142 68,689 2,577 857 3,434 25 20 Vicuna conservation program 1,109 235 1,344 55 12 67 18 _ FOMO (training) 2,894 496 3,390 145 25 170 15 1 Roads 10,464 6,242 16,706 523 312 835 37 5 Llama dehairing 2,901 15,313 18,214 145 766 911 84 5 Solar energy 420 2,580 3,000 21 129 150 86 1 Sub-total 69,335 42,008 111,343 3,466 2,101 5,567 38 32 Social Infrastructure Health 6,373 1,753 8,126 319 87 406 22 2 Water supply and waste disposal 6,489 1,921 8,410 324 96 420 23 3 Education 7,500 3,640 11,140 375 182 557 33 3 Women's participation 1,050 150 1,200 52 8 60 13 - Sub-total 21,412 7,464 28,876 1,070 373 1,443 26 8 Administration INBOPIA 8,453 8,501 16,954 423 425 848 50 5 INFOL 15,842 3,719 19,561 792 186 978 19 6 Sub-total 24,295 12,220 36,515 1,215 611 1,826 33 11 Total baseline cost 204,806 141,606 346,412 10,239 7,081 17,320 41 100 Contingencies: Physical 7,106 9,321 16,427 355 466 821 57 - Price 87,570 30,565 118,135 4,379 1,528 5,907 26 _ Total project cost 299,482 181,492 480,974 14,973 9,075 24,048 38 139 1/ Including experiment station and technical services. September 6, 1977  - 21 - D. Financing 3.27 The IDA credit (US$9 million) and the Bank loan (US$9 million) for the project would finance US$18 million, equivalent to 75% of the total project costs, with the remainder of funds (US$6 million) to be provided by the Government and the European Community. The proposed financing plan is as follows: Project Financing US$'000 IDA/Bank Government - Total Amount % Amount % Amount % Productive Investment Commercial farm 83 67 41 33 124 100 Collection, storage and processing 4,053 83 807 17 4,860 100 Credit to farmers and communities 1,005 67 495 33 1,500 100 Handicraft credit 1,340 67 660 33 2,000 100 Sub-total 6,481 76 2,003 24 8,484 100 Productive Support Project facilities 2/ 2,391 70 1,043 30 3,434 100 Vicuna conservation program 47 70 20 30 67 100 FOMO (training) 117 69 53 31 170 100 Roads 659 79 176 21 835 100 Llama dehairing 830 91 81 9 911 100 Solar energy 120 80 30 20 150 100 Sub-total 4,164 75 1,403 25 5,567 100 Social Infrastructure Health 277 68 129 32 406 100 Water supply and waste disposal 282 67 138 33 420 100 Education 375 67 182 33 557 100 Women's participation 40 67 20 33 60 100 Sub-total 974 68 469 32 1,443 100 Administration INBOPIA 665 78 183 22 848 100 INFOL 699 71 279 29 978 100 Sub-total 1,364 75 462 25 1,826 100 Total baseline cost 12,983 75 4,337 25 17,320 100 Contingencies 5,017 75 1,711 25 6,728 100 Total project cost 18,000 75 6,048 25 24,048 100 VL Including a grant equivalent to US$2 million from the European Community to finance local expenditures. 2/ Including experiment station and technical services.  - 22 - 3.28 The IDA/Bank funds would cover 100% of the foreign exchange costs (US$9 million) and 60%, or US$9.0 million, of local costs. Local cost financing is justified in Bolivia in view of the country's poverty and its intensive efforts to mobilize domestic savings and also because of the importance of the project to the Government's overall strategy in engendering development in the Altiplano. The Commission of the European Community has agreed to participate in the project and will provide a grant equivalent to about US$2 million to finance local expenditures. The Government would contribute about 17% (US$4.0 million) of the total project costs. The bene- ficiaries would not make any financial contribution; however, they would supply labor in kind to project works (on-farm development and water supply and waste disposal facilities) valued at US$160,000 at market prices, which is not included in the cost or financing tables. Also, the beneficiaries would contribute about 4,000 ha for the establishment of project facilities. 3.29 The Government would be the borrower and would bear the foreign exchange risk. The IDA credit and Bank loan would be at standard terms for Bolivia. Similar to the on-lending procedures under the Ingavi Rural Develop- ment Project (Loan 1211-BO), proceeds of the credit and loan, as well as the Government counterpart funds, would be channeled through the Central Bank to INFOL and other participating agencies. Project funds would be made available by the Government as a grant except for the credit program (US$3.5 million) for livestock and handicraft activities; funds (US$4.9 million) for the investment costs of processing plant and collection and storage facilities, including incremental working capital; and funds (US$124,000) for the invest- ment costs and first year operating costs of the commercial farm. For the processing plant, including collection and storage facilities, about US$4.9 million would be lent to INFOL for 15 years with five years of grace at 12% interest by the Government, and, likewise, US$124,000 would be lent to INFOL by the Government for 14 years with four years of grace at no interest charge. It would be a condition of effectiveness that the Financing Agree- ment between the Government and INFOL had been executed. Funds would be disbursed from the Central Bank project accounts only on authorization from INFOL, except in the case of BAB and the State Bank (BE), where funds would be disbursed against evidence of disbursement by BAB and BE on sub-loans to project beneficiaries (para 4.17). The Central Bank would receive 1/4% on outstanding sub-loan amounts as compensation for its services. Funds accruing in the project account from the credit program would be available for further lending and for similar purposes. Assurances on the above were obtained during negotiations. E. Procurement 3.30 New equipment for the processing plant (US$2.5 million, excluding contingency), road construction and maintenance equipment (US$300,000, exclud- ing contingencies) and vehicles (US$261,000, excluding contingencies) would be  - 23 - awarded through international competitive bidding according to Bank procedures. Since some equipment for llama dehairing research facilities would be purchased second-hand (US$153,000), procurement would be through negotiations acceptable to the Bank. For international competitive bidding, INFOL would consolidate t'he requirements of the participating agencies and issue the calls for tenders. All tender packages for laboratory equipment, commercial farm equipment, and equipment for schools, health and project administration, water and waste disposal facilities, solar energy and handicrafts (US$1.0 million, excluding contingency) in excess of US$100,000 equivalent would be procured through international competitive bidding according to Bank procedures. Furniture and office equipment (US$190,000, excluding contingency) would be procured through local competitive bidding according to local procedures satisfactory to the Bank. Procurement of most handicraft and farm inputs would be carried out by farmers through normal commercial channels because of the size and timing of individual purchases. Road work (US$0.8 million, excluding contingencies) would be undertaken by SNC on force account. Civil works (US$2.3 million, excluding contingency) for health centers, schools, trading posts and storage facilities, processing plant, dehairing research facilities, and project facilities in Ulla Ulla would be carried out through local competitive bidding, acceptable to IDA/Bank. F. Disbursement 3.31 The IDA/Bank would disburse over a period of five years: (a) 100% of foreign expenditures for the purchase of vehicles (US$261,000) and equipment (US$2,900,000); (b) 100% of foreign expenditures for consultants' services and overseas training; (c) 68% of local expenditures for the purchase of equipment and material; (d) 68% of local expenditures for civil works facilities; and (e) 68% of local expenditures for solar energy, handicrafts, dehairing research, education, health and project administration. The figures in (a) above do not include the Bank's share of the price contingencies which amount to US$5.0 million. 3.32 Disbursement of funds for vehicles, all equipment, civil works and consultants, and overseas training would be made against normal documentation. Disbursement of remaining expenditures, including civil works for roads by force account, would be made against certificates of expenditures, the docu- mLentation for which would not be submitted for review, but would be retained by the borrower and made available for inspection by IDA/Bank during the course of project supervision. A schedule of estimated disbursements is given in Annex 15 and the expected project cash flows are given in Annex 16.  - 24 - IV. ORGANIZATION AND MANAGEMENT 4.01 The newly created INFOL would be responsible for project implementa- tion (Annex 17). INFOL would have its own organization, administration, and funds. The Board of Directors would be composed of one representative from the Ministry of Peasant Affairs and Agriculture (rotating chairman), Ministry of Commerce and Industry (rotating chairman), the Ministry of Planning and Coordination, the Ministry of Finance, the Bolivian Institute for Agricultural Technology (IBTA), FOTRAMA and INBOPIA; two delegates from private marketing firms dealing with handicrafts; a representative from small artisan asso- ciations; and the general manager of INFOL. In addition to reviewing policy matters, the Board would appoint key staff of INFOL; approve annual develop- ment programs, budgets, and work plans; and ensure effective coordination and implementation of development programs in the sub-sector (Annex 12). 4.02 INFOL's general manager has been appointed. He would be responsible to the Board of Directors for day-to-day execution of the proposed project. He would be supported by a deputy manager and a small core of highly qualified professionals: five division chiefs, two economists, one financial analyst, one statistician, one veterinarian, credit and pasture experts, and administra- tive and support staff. Assurances on the above were obtained during negotia- tions. An internationally recruited expert in administration and management would be hired for 24 months to assist the general manager in coordinating the institute's activities and in project management. An assurance was obtained that the administrative and management expert would be employed by July 1, 1978 on terms and conditions satisfactory to IDA/Bank. Assurances were also obtained that the Government would provide INFOL with necessary staff and adequate incentives. In addition, an assurance was obtained that any replacement of INFOL's general manager and ASI's chief would be subject to IDA/Bank approval. 4.03 INFOL would have five divisions: Planning and Monitoring (PM), Marketing and Processing (COMPRO), Agricultural Credit and Extension (ACE), Administration in La Paz, and Agricultural and Social Infrastructure (ASI) in Ulla Ulla. ACE would prepare and monitor investment programs and promote credit among farmers in Oruro and Potosi that would complement ASI's develop- ment activities in Ulla Ulla under the project. ACE would also be respon- sible for coordinating courses with the local universities relating to alpaca/ llama and sheep development and for promoting training programs at the La Raya Experiment Station in Peru. 4.04 INFOL's PM would collect data and prepare annual wool production forecasts and estimates of demand for fleece and yarn, and, on the basis of such information, would establish quotas for textile and handicraft users and formulate minimum selling and purchasing prices for fleece and yarn. It would also prepare marketing information and trade bulletins. INFOL would also be required to establish a pricing mechanism that would serve as an incentive to producers and artisans to increase production and ensure a  - 25 - steady and timely supply of raw materials to the processing plant and yarn to artisans. Guaranteed minimum prices would, inter alia, reflect farm produc- tion costs, collection and storage costs, and processing plant operation costs including a reasonable profit margin. Actual farmgate prices would be set in line with prices paid in Peru. In order to support this price guarantee scheme, a stabilization fund would be set up and supported initially by Government's contribution, and subsequently, by profits of the new processing plant (Annex 4). Assurances were obtained during negotiations that the Government would submit a proposal to the Bank for comments by October 31, 1978 on the pricing mechanism and the stabilization fund and outlining how the program would be carried out. PM would also monitor the overall progress of the project and other development programs as well as preparation of new projects being implemented by INFOL. An assurance was obtained during negotiations that all requests for construc- tion of new wool processing plants or expansion of existing capacity would be approved by the Government only after consultations with INFOL. 4.05 INFOL's COMPRO would take over existing COMBOFLA facilities and assume full responsibility for the collection, sorting, storage, processing and selling of fleece and yarn to artisans and industrial users. Assurances were obtained during negotiations that INFOL would contract the services of a well established and specialized research organization on terms and condi- tions acceptable to the Bank by July 1, 1978 to carry out the research program of llama dehairing. It would, however, not engage in handicraft activities, and would submit a proposal to IDA/Bank by September 1, 1978, outlining how workers at the Pulacayo processing plant would be adequately compensated when the plant's operation is terminated on completion of the new processing plant., Assurances to this effect were obtained during negotiations. Assurances were also obtained during negotiations that INFOL would supply FOTRAMA with the necessary alpaca fiber to meet its annual requirement subject to a ceiling of 50 m tons equivalent. COMPRO would also be responsible for the development of llama dehairing technology, export promotion and for establishing and maintain- ing an efficient grading and quality control system. Assurances were obtained that INFOL would contract the services of a specialized consulting firm for 43 man-weeks and a textile expert for 12 man-weeks on terms and conditions acceptable to IDA/Bank by January 1, 1979 to provide technical know-how for operating the plant, to establish grading norms and fiber pricing mechanism as well as to set up a training program for plant personnel (para 3.15). COMBOFLA's outstanding debt to USAID which now stands at US$1 million would be paid by the Government in order that INFOL would be clear of obligation0 4.06 ASI, with headquarters in Ulla Ulla, would have five units: the Commercial Farm; the Experiment Station and Vicuna Reserve; Credit and Extension; Monitoring; Administration, and an ad hoc committee (para 4.08) which would advise ASI's chief and be actively involved in the implementation of the Ulla Ulla Development Project (Annex 12). Given the remoteness of the project area from the main centers of population and the harshness of living conditions in the area, the compensation program for the staff in Ulla Ulla would be made considerably attractive. An assurance was obtained that the Government would provide the staff with adequate incentives and that it would provide adequate funds and staff to maintain the Experiment Station after project completion.  - 26 - 4.07 ASI's chief would have overall authority and responsibility for execution of the livestock component of the project, reporting directly to INFOL's general manager. ASI would also be responsible for implementation and coordination of the women's participation program (para 3.21). For the research program, ASI would be assisted by specialists in pasture and forage (18 months) and experts in animal breeding and production (12 months). Assurances were obtained during negotiations that the former would be employed for six months per year and the latter for three months per annum, all over a three-year period. Ad Hoc Technical Committee 4.08 An ad hoc committee would be established in the project area to func- tion at an advisory level on matters relating to programs undertaken by the project, annual investment plans, and any outstanding issues which might arise between the participating farmers and project management. The chief of ASI would be chairman of the committee, which would have as members the unit chiefs of ASI, plus two representatives of project beneficiaries and two women from the project area who would be elected delegates serving one-year terms. An assurance to this effect was obtained at negotiations. Project Evaluation and Monitoring 4.09 A Monitoring Unit would be set up within ASI to conduct a continuous study of project activities and to evaluate project performance. This unit would have a staff of two professionals: one agricultural economist and an anthropologist sociologist. For the social infrastructure components, the Monitoring Unit would coordinate data collection with each of the partici- pating agencies responsible for each of the respective components. Informa- tion collected to fill data gaps would provide a basis for management decisions during implementation of the proposed project as well as in future projects in the Altiplano. Data collection (technical, economic, financial and socio- logical) would also be directed towards providing project management with information on how successful the chosen strategy was in achieving basic project objectives. In addition, it would monitor sub-loans made to farmers and artisans and would evaluate periodically the impact of the credit program and training. For the handicraft component, BE, in cooperation with INBOPIA, would prepare progress reports indicating the number of sub-loans approved, commitments, disbursements, and cancellation, both by amounts and by geographic regions. INFOL would send quarterly reports to IDA/Bank highlighting the progress and operating results of the project. Assurances were obtained during negotiations that the Monitoring Unit would be established by April 1, 1978 and that quarterly reports would be sent to IDA/Bank within two months of the end of each quarter. Participating Institutions 4.10 INFOL would enter into operational agreements with INBOPIA for the handicrafts component; SNC for the road program; MPSSP for the health compo- nent and for the water supply and waste disposal system; Ministry of Education  - 27 - for the education component; IDIF for the solar energy program; and the Wild- life and National Parks Division for the vicuna conservation and development program. BAB and BE, under subsidiary agreements with Banco Central, would act as financial agents for the credit components. The signing of an agree- ment with each entity, satisfactory to IDA/Bank, would be a condition of disbursement for each respective component. 4.11 Handicraft. INBOPIA would be primarily responsible for the handi- craft component and would enter into a contractual arrangement with BE and the National Manpower Development Service (FOMO) for implementation of the lending program, training and radio broadcasting in Spanish, Aymara and Quechua. An assurance to this effect was obtained during negotiations. INBOPIA would contract an expert on organization and management (24 months), an expert in marketing and fair organization (24 months), and short-term consultants in textile engineering and design (six months) to provide support to INBOPIA on all aspects relating to the handicraft component. An assurance was obtained during negotiations that the experts would be employed by July 1, 1978 and the short-term consultants by January 1, 1979 on terms and conditions satisfactory to IDA/Bank. 4.12 Roads. SNC would implement the road program under the direction of the ASI, which would advise SNC on the priorities for construction and review the detailed work program prepared by SNC. SNC would conduct field investigations, prepare engineering plans and design and cost estimates, operate equipment financed under the project and supply skilled labor to carry out the work program. Annual maintenance of project roads would be carried out by SNC by force account. Assurances were obtained during negotia- tions that the Government would maintain all roads in the project area during and after the project period and that equipment purchased under the project would be utilized by SNC for maintenance of project area roads only. 4.13 Health and Water Supply. MPSSP would be responsible for the con- struction of health facilities, procurement of equipment, and administration cf health facilities, and the Department of Public Health of the University cif San Andres (DPH), under an operational agreement with MPSSP, would be responsible for implementing the training, monitoring, supervision and evalua- tion aspects of the health system. Assurances were obtained on the above cluring negotiations. Also, an assurance was obtained that the Government would provide the necessary staff with adequate incentives and would maintain health facilities after the project period. Also, IPSSP would be responsible f:or installing the hand-pump wells and pit privies, with beneficiaries pro- vriding the labor for excavation works. MPSSP would supervise the operation of wells and maintain them, and the beneficiaries would bear the costs of main- tenance. It would also supervise the maintenance of the pit privies by beneficiaries. Assurances were obtained that MPSSP would carry out detailed investigations to determine priority areas to be served and availability of aquifers and prepare a plan of operation before purchasing pumps. 4.14 Education. The main responsibility for the implementation of t:he education component would be delegated to a specialist who would be contracted locally by the Project Unit managing the Education and Voca- tional Training Project (Loan 1404-BO) and seconded to INFOL. The Project  - 28 - Unit would prepare the work program and monitor the progress of the project with the assistance of the specialist. Assurances were obtained during negotiations that the specialist would be recruited by the Project Unit within three months of loan signing on terms and conditions acceptable to IDA/Bank. Assurances were also obtained that the Government would provide adequate budgetary allocations for the maintenance and repair of all buildings, furniture and equipment provided under the project. 4.15 Solar Energy. IDIF would implement the solar energy program. Demonstration of the practical uses of solar energy devices would be carried out jointly in selected areas in the Altiplano by ASI and IDIF. INFOL would contract a solar energy expert to assist with the research program, particularly in developing and testing simple and low-cost solar energy devices for heating, cooking, pumping, drying and greenhouse agriculture. An assurance was obtained that the solar energy expert would be hired by January 1, 1979 on terms and conditions satisfactory to IDA/Bank. 4.16 Vicuna Conservation. The chief of the unit responsible for the Experiment Station in Ulla Ulla would be in charge of the daily operations of the vicuna conservation and development program, coordinating work with the Wildlife and National Parks Division. INFOL would also take the neces- sary measures to exchange information and experts in this field with Peru, Chile and Argentina. It is highly unlikely, however, that the protection program can be implemented successfully in Bolivia unless the 10-year morato- rium which expires in 1979 on all killing, marketing and exporting of vicunas' skin or fleece is extended beyond 1979. Assurances were obtained during negotiations that the Government would discuss this matter with Peru, Chile and Argentina and would support the extension of the moratorium beyond 1979. Lending Policies and Procedures 4.17 On-farm investment and herd development credit would be channeled through BAB according to on-going procedures, which have proven satisfactory. The lending program for the handicraft component would be managed by the Artisan Section (Schedule A) within BE. 4.18 Sub-loan maturities for alpaca herd development would not exceed 10 years, with grace periods up to four years. Likewise, sub-loan maturities for handicraft production would not exceed six years, with grace periods up to 12 months. For sub-loans for alpaca herd development, security would be in the form of chattel mortgages on animals. For handicraft, security would be in the form of machinery and equipment for capital investments and raw materials and finished products for working capital. The interest rate on sub-loans would be 12%, which is in keeping with the Government's interest rate policy for agricultural development projects and in line with the rates BAB is charging small farmers under IDA Credits 261-BO and 561-BO and Bank Loan 1211-BO (Schedule A).  - 29 - 4.19 ASI would prepare farm investment plans and loan applications for alpaca herd development and would carry out technical and financial analyses of sub-loan applications. Sub-loan applications would be forwarded to BAB for disbursement of funds after approval by ASI's chief. ASI would super- vise the collection of sub-loans, with BAB handling the funds. Further, ASI would assist individual farmers and farmer groups in the implementation of the farm development plans. The Government would assume the financial risk and BAB would receive a margin of 2% on outstanding sub-loan balances for its participation. In order to carry out its responsibility, BAB would establish an office at ASI facilities in the project area. Assurances to this effect were obtained during negotiations. 4.20 INBOPIA would provide technical assistance to artisans in preparing investment plans and loan requests for handicrafts activity. BE would be responsible for the technical analysis of each sub-loan and it has agreed to process and approve applications from individual artisans within seven days of the date of receipt and within 15 days for group applications. Following approval, BE would supervise the implementation of each invest- ment plan. For the lending program, BE would assume the financial risk and would receive a margin of 3-3/4% on outstanding sub-loan balances (Schedule A). Funds accruing in the project account (Central Bank) from repayment of all sub-loans would be established as a revolving fund that would be made available for further lending for similar purposes. Assurances were obtained on the lending'terms and conditions listed in Schedule A during negotiations. Alpacas for Experiment Station and Commercial Farm 4.21 The Experiment Station and commercial farm require about 2,500 alpacas for the research, extension and production program envisaged. There are two sources of supply -- one within the project area and the Central Altiplano and the other in Peru, which has about 3 million animals. Obtaining the animals from Peru would ensure better quality, including more females. Also, the La Raya Research Station in Peru has indicated its willingness to provide about 1,500 alpacas to Bolivia in exchange for llamas, provided the Peruvian law prohibiting export of the animal can be waived. Assurances were cbtained during negotiations that INFOL, not later than April 1, 1978, would furnish to IDA/Bank a satisfactory proposal for the purchase of alpacas for the Experiment Station and the Commercial Farm. Accounts and Auditing 4.22 INFOL would maintain a separate project account, with sub-accounts for each project component. Detailed accounting procedures would be estab- lished for recording all transactions relating to the project. Similarly, participating institutions responsible for implementing a project component would also maintain separate project accounts. Assurances were obtained curing negotiations that INFOL would have its accounts and financial state- ments, including the project accounts, audited by independent auditors, satisfactory to IDA/Bank, according to procedures acceptable to IDA/Bank, and that the audited financial statements and the auditor's report would be f'orwarded to IDA/Bank within six months of the close of INFOL's fiscal year.  - 30 - V. PRODUCTION, MARKETING AND PRICES, AND PRODUCER BENEFITS Production 5.01 The project would account for substantial production. Average annual value of incremental production of fiber collected would amount to $b 31.9 million (US$1.6 million), including US$1.4 million of alpaca fiber. These fibers would be processed into yarns amounting to about $b 88.6 million, or US$4.4 million, including US$3.8 million of alpaca yarn, which, in turn, would generate incremental sales of $b 129.3 million (US$6.4 million) of handicraft products. Incremental value of adequately scoured wool would amount to about $b 7.2 million (US$360,000). Although total collection of sheep wool is not expected to increase substantially, better scouring would allow the Bolivian mills to use local wool in the production of finer yarns, and thereby reduce the industry's dependency on imported quality yarns and tops. Alpaca meat consumption, which is confined primarily to the Altiplano, would increase from the present level of 75 m tons to 543 m tons at full development. Also, about 38,000 breeding alpacas would be sold locally during the development period. 5.02 The project's incremental production is summarized below: Incremental Production Production Full /1 1976 Year 5 Year 10 Development Alpaca Herd Total number of head 300,000 13,763 61,586 82,810 Alpaca fiber (m tons) 132 26 133 330 Llama Fiber Collected (m tons) Without dehairing technology 55 85 95 112 With dehairing technology 55 175 1,100 1,100 Yarns (m tons) Alpaca 45 21 86 190 Llama Without dehairing - 50 54 60 With dehairing - 92 460 355 Acrylic - 122 80 - Handicraft Products Value (US$'000) 4,000* 6,400 6,400 6,400 * Estimates. /1 Full development under the livestock credit component would be reached by year 15, handicraft credit component by year 5, and the collection and processing component by year 17.  - 31 - Marketing and Prices 5.03 Marketing. Under the improved gathering system (para 3.13), INFOL would be responsible for almost all the fiber collection, as well as the sale of yarn to artisans and industrial users. The Planning and Monitoring Divi- sion (PM) of INFOL would collect data and prepare annual wool production forecasts and estimates of demand for fiber and yarn, and, on the basis of such information, would establish quotas for textile and handicraft users. 5.04 Bolivia has developed a tourist and export market of artisanal products; however, the bulk of the handicraft items would be marketed locally. Bolivian export legislation discourages the export of raw mate- rials, imposing a tax of 25% on unprocessed textile raw materials. The domestic tourist market for these artisanal products is good and is expected to remain attractive if appropriate product adaptation and market develop- ment efforts are undertaken. Additionally, the export potential for alpaca/ llama products is high, since they are available in Bolivia and Peru only, and world demand is such that present supplies (mainly from Peru) are not sufficient. 5.05 Prices. The current farmgate prices of alpaca fiber are $b 90 per kg (US$4.5) for white and an average of $b 56 per kg (US$2.8) for colored. In Peru prices are usually 15% to 25% higher for white wool and 20% to 30% higher for colored wool. The selling price of alpaca yarn is currently US$12.5 per kg, while in Peru the ex-factory price of alpaca yarn is about US$19 per kg for yarns of about the same quality. INFOL would establish a pricing mechanism, allowing prices of yarns to be adjusted to reflect production cost, and, likewise, farmgate prices to be adjusted to follow the Peruvian prices. Pioducer Benefits 5.06 Income of beneficiaries from the enterprises to be financed under the project would increase significantly, as shown below, providing sufficient incentive to project beneficiaries to participate in the investment program.  - 32 - Farmers' Cash Income With Project Investment Without at Full /1 Cost Project Development Per Family __US__------ US$ per family ----------------- Livestock Production Model 1 (100-alpaca herd, 2 families) 73 825 10 Model 2 (400-alpaca herd, 5 families) 93 997 669 Model 3 (1,000-alpaca herd, 12 families) 98 1,038 625 Model 4 (5,000-alpaca herd, 55 families) 106 1,114 655 Handicraft Production Model 1, one family 974 1,833 275 Model 2, group of 30 artisans 314 512 200 /1 Full development under livestock production would be reached by year 12 and handicraft production by year 7. 5.07 Farmers' cash income includes remuneration of family labor; however, it does not include extra benefits of home consumption of fiber for family clothes, but its value, about US$10 per family, is negligible. In addition, the collection, storage and processing units would generate average annual net profits after tax, debt service and depreciation of US$233,000 during debt repayment and US$1.9 million afterwards. The commercial farm in Ulla Ulla would yield a profit of about US$27,500 at full development (year 12). 5.08 The financial rates of return on investments are summarized below: Financial Rate of Return No. of Sub-loans (%) Livestock Production Model 1 (100-alpaca herd) above 100 440 Model 2 (400-alpaca herd) 40 260 Model 3 (1,000-alpaca herd) 35 32 Model 4 (5,000-alpaca herd) 34 4 Collection, Storage and Processing 29 1 Handicraft Production Model 1 (1 family) above 100 680 Model 2 (30 artisans) above 100 90  - 33 - The financial rates of return on the livestock models are high because the value of fiber production more than doubles the first year that shearing is practiced every year instead of every second year, as well as because of immediate revenues from animal sales. The high rates may also be attributed to improvements in marketing and extension services and to adoption of im- proved farming rather than to the amount of the initial investment. The rates of return on the handicraft models are also high, which may be attri- buted to the small investments required since handicraft actually is labor intensive and to the immediate return on the incremental working capital. VI. BENEFITS AND JUSTIFICATION 6.01 The project is designed to reach the Altiplano rural poor, who until now have received only sporadic and limited assistance for economic and social advancement. Together with the Ingavi Project (Loan 1211-BO), the proposed project would provide the basis for long-range development of the Altiplano. Initially, the project would provide assistance to families living in the Ulla Ulla region of the Altiplano where Bolivia's poverty is most severe and widespread and it would promote the development of the wool industry, which, with agriculture, forms the backbone of the rural sector of the Altiplano. The relatively high investment costs, particularly of social infrastructure components under the project, are necessary conditions for economic develop- ment in the project area as well as for the development of the wool industry, which has implications beyond the project area. 6.02 The wool textile industry as a whole would benefit from the project through improvement of research, extension and farming systems at the produc- tion level; improvement and expansion of marketing infrastructure; moderniza- tion of the processing facilities; and development of llama dehairing tech- nology. Establishment of an effective research/extension infrastructure in the project area would have substantial impact on alpaca/llama fiber production and utilization of resources. Annual incremental production of alpaca at full development would be about 330 m tons, and yarn production would amount to 250 m tons, including 190 m tons of alpaca yarn. Development of the llama fiber dehairing technology would increase llama fiber production significantly. A conservative estimate places potential llama fiber production after dehair- ing at about 800 m tons annually. Improvement in the marketing facilities and the establishment of an effective pricing mechanism would drastically reduce the flow of alpaca raw material into Peru, which is currently estimated at 40% of total production in the project area. 6.03 The handicraft industry, which is a vital source of supplementary income and employment for about 200,000 poor rural and urban families, as well as of supplemental foreign exchange, would also benefit from the project through provision of credit and technical assistance to about 3,400 small rural and artisan families. At full development, the annual incremental value of handicraft items is estimated at US$6.4 million. Under project conditions, a typical artisan family with three of its members actively engaged in making alpaca/llama/sheep wool-based handicraft items could earn a cash family income of about US$1,800.  - 34 - 6.04 Under the project about 2,500 farm families would participate directly in the livestock development program. Beneficiaries in the project area (about 2,000) are in the poverty group, and, under improved conditions, it is expected that the average farm family income at full development (year 12) would increase from less than US$100 to US$896. The establishment of centers and provision of training programs for women in the project area would improve basic skills and productivity, thereby increasing the participation of women in the development process. The health and welfare of the 3,000 families living in the project area would also improve as a result of better roads, health services, education, and domestic water supplies and waste disposal facilities at an investment cost of US$759 per family. Additional external benefits would also be received by persons living outside the project area through use of roads and health facilities. 6.05 The vicuna conservation and development program would increase the herd size of vicuna, which is presently an endangered species, to a level sufficient to permit commercial exploitation of its high-value product. Likewise, exploitation of solar energy, which is an important resource in the Altiplano, and the development of simple, low-cost solar energy-using devices would complement the non-commercial energy sources and would meet the critically needed energy requirements of the rural poor in the Altiplano. 6.06 Also, the project would be directly responsible for the employment of 290 persons and would substantially reduce underemployment of beneficiaries in the project area and of artisans in the rural areas. In addition, the project would have substantial impact on institution building. INFOL, the newly created institution for regulating the growth of the wool textile industry, and INBOPIA, for the development of the handicraft industry, would be strengthened under the project. 6.07 The overall economic rate of return of the project is 25%, calcu- lated on the basis of costs relating to livestock production; project unit facilities; collection, storage and processing of raw materials; roads; administration costs of INFOL; handicraft production; incremental adminis- trative costs of INBOPIA; and artisans' training program (FOMO). Benefits taken into account include those from livestock development, commercial farm, collection system, processing plant, and development of the handicraft indus- try. The economic rate of return is 18% for the livestock development component, the cost of which is US$5.1 million; 30% for wool collection; storage and processing, the cost of which is US$4.9 million; and 70% for the handicraft component, the cost of which is US$3.0 million. If the benefits of the llama dehairing technology are included, then the overall economic rate of return of the project increases from 25 to 32% (Annex 18). 6.08 Finally, the proposed project, with the Ingavi Rural Development Project (Loan 1211-BO), would provide the basis for a long-range program to develop other areas of the Altiplano. Similar projects could be carried out in other areas within the Altiplano without placing too much of a burden on Government finances. The average annual Government contribution during the implementation period and after project completion would be less than 1% of the annual public capital expenditures.  - 35 - Project Risk 6.09 Unlike the Ingavi Rural Development Project (Loan 1211-BO), climatic variation would not be a critical factor inasmuch as the proposed project focuses on livestock rather than agricultural crops. In view of COMBOFLA's weaknesses and since the proposed project would initiate, for the first time in Bolivia, a comprehensive development program, there is need for the estab- lishment of a multi-disciplinary organizational structure cutting across existing institutional lines.. The creation of INFOL would ensure an orderly development of the wool-textile industry. 6.10 Various components under the project exhibit strong complementarity and the benefits generated by the unified infusion of these inter-related components in a single package far exceeds those of piecemeal implementation of the components. Recognizing that the implementation of some components may pose some unwarranted risks, the project has included technical assistance and attractive remuneration in order to attract highly qualified staff and thus, hopefully, reduce the apparent risk of increasing delays from occurring. 6.11 It is only realistic to expect that, during implementation, delays and problems are likely to occur which are completely different than those foreseen during project preparation and appraisal. The likelihood of such occurrences is particularly enhanced by the fact that the project contains a Large number of unique components, many of which have never been tested before by the Bank under field conditions in Bolivia or elsewhere. In view of these uncertainties, the project would have to be monitored exceedingly closely and modifications may have to be introduced quickly during the implementationi of the project, as is the case with the Ingavi Rural Development project. The Bolivian Government is fully aware of these uncertainties but is giving the highest priority to the implementation of the project and considers the Bank's support of crucial importance. Ecological Impact 6.12 The proposed project is expected to have a positive environmental impact. Improvement of herd and range management practices would lead to a better balance between animal resources and the carrying capacity of the land, and thereby reduce soil erosion. Provision of sanitation facilities would reduce environmental contamination. Improved health care services, housing conditions, water supply and personal hygiene practices would improve ecolo- gical conditions and protect beneficiaries from harmful elements in the environment. The vicuna conservation and development program is designed to protect this endangered species by improving the balance between vicuna popu- lation and its natural habitat. Fiscal Impact 6.13 For the productive investment component of the project, investment costs would be recovered through the credit mechanism, and operating costs would be partially financed through credit and partially paid directly by the beneficiaries and INFOL. Other cash costs relating to productive support  - 36 - and social infrastructure components and administration would not be re- covered. The primary fiscal impact would arise from taxation of profits of the processing plant, with average annual revenue amounting to US$163,000. INFOL's processing plant would yield average annual net earnings of US$233,000 during the plant's 15-year debt repayment period and US$1.9 million there- after to the Government. A secondary area of fiscal impact would be revenues from net earnings of artisans but the magnitude would be insignificant (US$10,000 per annum). The Government's annual contribution after project completion would amount to US$0.8 million. Considering the above earnings generated by the project to the Government, the net annual contribution would not place any strain on Government's annual public capital expenditure budget. VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 During negotiations, assurances were obtained from the Government that: (a) profits of the commercial farm would be shared by the communities which contributed land to the Government for establishment of the project facilities, and, at full development, i.e., after 10 years, INFOL would transfer the commercial farm to the donor communities for operation as a cooperative enterprise; to this end INFOL would submit to IDA/Bank by January 1, 1982, a proposal outlining the terms and conditions under which the commercial farm would be transferred to the communities who contributed land (para 3.07); (b) the Government and INFOL would initiate negotiations for the purchase of dehairing technology and submit a proposal for Bank consideration not later than June 30, 1978, and, should the Government negotiate purchase of appropriate technology, acceptable to IDA/Bank, any costs in excess of allocations for the development of llama dehairing technology under the project would be assumed by the Government (para 3.22); (c) the Government and INFOL would support the research program for llama dehairing with adequate funds in the event that research is carried beyond the three and one-half year period (para 3.23); (d) funds -accruing in the project account from the credit program would be available for further lending and for similar purposes (para 3.29);  - 37 - (e) any replacement of INFOL's general manager and ASI's chief would be subject to IDA/Bank approval (para 4.02); (f) the Government and INFOL would submit a proposal to IDA/Bank by October 31, 1978 for comments on the pricing mechanism and the stabilization fund and outlining how the program would be carried out (para 4.04); (g) all requests for construction of new wool processing plants or expansion of existing capacity would be approved by the Government only after consultations with INFOL (para 4.04); (h) INFOL would not engage in handicraft activities and would submit a proposal to IDA/Bank by September 1, 1978, outlining how workers at the Pulacayo processing plant would be ade- quately compensated when this plant's operation is terminated on completion of the new processing plant (para 4.05); (i) INFOL would supply FOTRAMA with the necessary alpaca fiber to meet its annual requirement subject to a ceiling of 50 m tons equivalent (para 4.05); (j) INFOL would establish an ad hoc committee in the project area, composed of the Chief of ASI, unit chiefs of ASI, plus two representatives of project beneficiaries and two women from the project area who would be elected delegates serving one-year terms to function at an advisory level on matters relating to programs undertaken by the project, annual investment plans, and any outstanding issues which might arise between the participating farmers and project management (para 4.08); (k) INFOL would establish the project Monitoring Unit by April 1, 1978 and quarterly progress reports would be sent to IDA/Bank within two months of the end of each quarter (para 4.09); (1) INBOPIA would enter into a contractual arrangement with the State Bank (BE) and FOMO for implementation of the lending program, training and radio broadcasting relating to the handicraft component (para 4.11); (m) the Government would maintain all roads in the project area during and after the project period and that equipment purchased under the project would be utilized by SNC for maintenance of project area roads only (para 4.12); (n) DPH, under an operational agreement with MPSSP, would be responsible for implementing the training, monitoring, supervision and evaluation aspects of the health system (para 4.13);  - 38 - (o) the Government would provide the necessary staff with adequate incentives and would maintain health facilities after the project completion period (para 4.13); (p) for the water supply and waste disposal facilities, MPSSP would carry out detailed investigations to determine priority areas to be served and availability of aquifers and prepare a plan of operation before purchasing pumps (para 4.13); (q) a specialist would be recruited for the education program within three months of loan signing on terms and condi- tions acceptable to IDA/Bank, and the Government would provide adequate budgetary allocations for the maintenance and repair of all buildings, furniture and equipment provided under the project (para 4.14); (r) the consultants to be contracted by INFOL would be employed under terms and conditions satisfactory to IDA/Bank in the time frame specified in paras 4.02, 4.05, 4.07, 4.11 and 4.15; (s) the Government would support the extension of the moratorium on all killing, marketing and exporting of vicunas' skin or fleece beyond 1979 (para 4.16); (t) the Government would cause BAB to establish an office at the project facilities in Ulla Ulla (para 4.19); (u) INFOL would provide sub-loans to project beneficiaries according to the lending terms and conditions listed in Schedule A and funds accruing in the project account from repayments of all sub-loans would be made available for further lending for similar purposes (para 4.20); (v) INFOL, not later than April 1, 1978, would furnish to IDA/Bank a satisfactory proposal for the purchase of alpacas for the Experiment Station and Commercial Farm (para 4.21); and (w) INFOL would have its accounts and financial statements, including the project accounts, audited by independent auditors, satisfactory to IDA/Bank, according to procedures acceptable to IDA/Bank, and the audited financial statements and the auditors' report would be forwarded to IDA/Bank within six months of the close of INFOL's fiscal year (para 4.22). 7.02 It would be a condition of effectiveness that the Financing Agree- ment had been executed on behalf of the Government and INFOL.  - 39 - 7.03 A condition of disbursement for each respective component of the project would be that INFOL would enter into agreements with participating agencies, satisfactory to IDA/Bank, and that Banco Central and BAB and BE had signed subsidiary agreements (para 4.10). 7.04 With the assurances obtained, the project is suitable for an IDA credit of US$9 million and a Bank loan of US$9 million at standard terms for Bolivia. December 27, 1977   - 40 - Schedule A BOLIVIA ULLA nLLA DEVELOPMENT PROJECT Lending Terms and Conditions Lending Policies and Procedures 1. On-farm investments and herd development credit would be channeled through the Agricultural Bank of Bolivia (BAB) and the lending program for the handicraft component would be managed by the Artisan Section within the State Bank (BE). 2. On-Farm Investments and Herd Development. About 70% of the total credit for alpaca herd development would be earmarked for lending in the project area and the remaining 30% in the Central Altiplano. In selecting sub- borrowers priority would be given to farmers who live on a farm and engage in raising alpacas and have agreed to accept ASI's supervision of farm develop- pment. 3. Sub-loans would be made to improve the traditional shearing techniques and the fiber handling and classifying practices, and also for construction of facilities for implementing a sound animal health program including improved animal husbandry and range management practices. Major'investment items would include spray-bath facilities, holding corrals, shearing sheds, fiber classifi- cation and storage sheds, mechanical shearing equipment, fences, drugs and live animals. Minor investment items would include medical kits, hand shears, scales, fiber classifying tables and identification tags. 4. ASI would carry out technical and financial analyses of sub-loan appli- cations. The extension staff would prepare farm investment plans and loan re- quests. When considering applications for sub-loans, special attention would be given to forage availability, the need to introduce new animal husbandry and range management methods to substitute or improve the traditional practices, the availability of technical assistance and assurance of marketing channels for the proposed fiber and pelt production. 5. Sub-loan applications would be forwarded to BAB for disbursement of funds after approval of ASI's chief. ASI would assist individual farmers and farmer groups in the implementation of the farm development plans and would authorize disbursements for the Agricultural Bank (BAB) as the implementation stages of the plans were completed. Also, ASI in collaboration with the farmers would maintain financial and technical records of activities for selected farm operations for use in measuring project impact. 6. Handicraft. BE with its 35 district offices in rural areas and eight regional offices would facilitate the credit program. The program would give priority to making sub-loans to individuals or groups of rural artisans although urban artisans and shops involved in the production of alpaca/llama/sheep wool would be considered. Priority for lending would be given to the Departments of La Paz and Cochabamba.which account for the bulk of artisan activity.  I  - 41 - Schedule A 7. Sub-loans would be for the purchase of raw materials and for the purchase oL knitting and weaving machinery and for the establishment of small shops for production of handicraft items. The maximum amount any individual artisan would be eligible to borrow under this program would be US$3,000 equiva- lent. Groups of artisans would be entitled to an amount not in excess of US$100,000 equivalent per group, association or cooperative. Authority to approve sub-loan applications up to US$5,000 equivalent would rest with each district office, while applications for between US$5,000 and US$20,000 equiv- alent would require approval by the regional offices. Approval for sub-loans about US$20,000 equivalent would be granted by the headquarters office in La Paz. Collaterals for capital investment would consist of the machinery and equipment of the sub-borrower, and for the working capital it would consist of the raw materials and finished goods. 8. Procedures for sub-loan application and approval would be simplified without lowering the evaluation quality of each application. Each applicant would complete a simple application form which would be obtained either from INBOPIA or BE. Applications from groups of artisans would be required to pre- sent standard evidence of their legal status. INBOPIA would provide technical assistance to artisans in preparing investment plans and loan requests. BE has agreed that it would approve applications received from individual artisans not later than seven days from the date of receipt and not later than 15 days for group applications. Following approval, BE would supervise the implemen- tation of each investment plan. Sub-loans to Farmers and Artisans 9. (a) Sub-loans to farmers, farmer groups and artisans would carry an interest rate of 12% on the outstanding sub-loan balances; (b) Contributions to investment cost by sub-borrowers would be in the form of labor in kind, and cash contributions on voluntary basis; (c) Maturities and grace periods would not exceed the following: Type of Development Maturity Grace Period