Colombia - Third Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE 1.2Y ReportNo. 2491-CO STAFF APPRAISAL REPORT COLOMBIA THIRD AGRICULTURAL CREDIT PROJECT - INCORA June 6, 1979 Regional Projects Department Latin America and Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (average for year 1978 and used in this report) Currency Unit = Colombian Peso (Col$) US$1 = Col$ 39.3 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS (see next page) GOVERNMENT OF COLOMBIA FISCAL YEAR January 1 to December 31  COLOMBIA FOR OFFICIAL USE ONLY THIRD AGRICULTURAL CREDIT PROJECT - INCORA Glossary of Abbreviations BG Banco Ganadero - Livestock Bank BOR Banco de la Republica - Bank of the Republic (Central Bank) CAJA Caja de Credito Agrario, Industrial y Minero - Agricultural, Industrial and Mining Credit Bank CECORA Central de Cooperativas de la Reforma Agraria - Union of Agrarian Reform Cooperatives DAFO Division de Auditoria Financiera y Operativa (Contraloria General) - Financial and Operative Audit Division FEDECAFE Federacion Nacional de Cafeteros de Colombia - National Federation of Coffee Growers of Colombia FFAP Fondo Financiero Agropecuario - Agricultural Financing Fund ICA Instituto Colombiano Agropecuario - Colombian Agricultural Institute IDB Banco Inter-Americano de Desarrollo - Inter-American Development Bank IDEMA Instituto de Mercadeo Agropecuario - Institute of Agricultural Marketing INCORA Instituto Colombiano de la Reforma Agraria - Colombian Institute for Agrarian Reform IRDP Programa de Desarrollo Rural Integrado - Integrated Rural Development Program MB Junta Monetaria - Monetary Board PAN Plan Nacional de Alimentacion y Nutricion - National Food and Nutrition Plan PMEU Unidad de Monitoria y Evaluacion del Proyecto - Project Monitoring and Evaluation Unit SAC Subgerencia de Asentamientos Campesinos (INCORA) - Division of Agrarian Settlements SENA Servicio Nacionale de Aprendizaje - National Apprenticeship Service This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.   COLOMBIA THIRD AGRICULTURAL CREDIT PROJECT - INCORA STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. BACKGROUND ............................................ 1 A. The Agricultural Sector .......................... 5 B. The Banking System and Agricultural Credit ....... 5 C. Performance Under the On-going INCORA Projects ... 8 II. THE PROJECT AREAS AND THE EXECUTING AGENCY .... ........ 10 A. The Project Areas ................................ 10 B. The Executing Agency ............................. 12 III. THE PROJECT ...................... ..................... 15 A. Introduction ..................................... 15 B. Brief Description ...... .......................... 15 C. Detailed Features ..... ........................... 16 D. Project Costs ...... .............................. 18 E. Financing ........................................ 19 F. Procurement ...................................... 20 G. Disbursements .................................... 21 TV. PROJECT IMPLEMENTATION ................................ 22 A. Organization and Management .......... .. .......... 22 B. Lending Policies and Procedures ......... ......... 25 C. Accounting and Auditing ........... .. ............. 27 D. Progress Reporting, Monitoring and Evaluation .... 29 V. ILLUSTRATIVE INVESTMENT MODELS: SPECIFICATIONS AND ASSUMPTIONS ........................................... 30 A. General ................. 30 B. Production Coefficients .......................... 30 C. Illustrative Investment Models .... ............... 31 This report is based on the findings of an appraisal mission which visited Colombia during November/December 1978. The mission comprised Messrs. G. Rioseco (Mission Leader), F. Portilla, J. Yaron, J. Intrator, and Ms. D. Babelon (Bank), and R. Gallagher (Consultant).  TABLE OF CONTENTS (Continued) Page No. VI. PRODUCTION, MARKETS AND FINANCIAL ANALYSIS ............. 34 A. Production ........................................ 34 B. Markets, Marketing and Prices .34 C. Producers' Benefits and Financial Rates of Return 35 D. Financial Projections .37 VII. ECONOMIC BENEFITS AND JUSTIFICATION .38 A. Benefits and Justification . .38 B. Economic Rate of Return and Sensivity Analysis 39 C. Project Risks ..43 D. Environmental Impact ..43 VIII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION 43 ANNEXES 1. Bank Lending to the Agricultural Sector in Colombia .46 2. INCORA's Accounting and Financial Management .50 3. Supporting Tables T.1 - Agricultural Sector Credit and GDP .55 T.2 -INCORA Regionalization ..56 T.3 - Selection of Project Areas and Beneficiaries .57 T.4 - Detailed Summary of Project Areas .58 T.5 - Project Areas: Summary of Beneficiaries, Land Use and Tenure Type .59 T.6 -INCORA Financial Statements . .60 T.7 - INCORA's Credit Activities 1975-77 .61 T.8 - Project Technical Support Costs .62 T.9 - Phasing of Lending and Investment .. 63 T.10 - INCORA's Technical and Support Staff in the Project Areas .64 T.11 - Illustrative Farm Model No. 1: Non-irrigated Crops - Individual Farm, 21 ha (1 family) .65 T.12 - Illustrative Farm Model No. 2: Crops, Partly Irrigated - Empresa Comunitaria, 210 ha (10 families) ..66 T.13 - Illustrative Farm Model No. 3: Dual-purpose Cattle - Empresa Comunitaria, 142 ha (5 families) .67 T.14 - Illustrative Farm Model No. 4: Beef Cattle Breeding - Empresa Comunitaria, 320 ha (8 families) ....................................... 68 T.15 - Activity Budget No. 1: Crops, 15 ha - Investment Costs ................................... 69 T.16 - Activity Budget No. 1: Crops, 15 ha - Costs, Benefits and Financial Rate of Return .70  TABLE OF CONTENTS (Continued) PaRe No. ANNEXES (Continued) 3. Supporting Tables (Continued) T.17 - Activity Budget No. 1: Crops, 15 ha - Cash Flow Projections .................................... ... 71 T.18 - Activity Budget No. 2: Crops, 150 ha - (10 families) - Investment Costs .............. .... 72 T.19 - Activity Budget No. 2: Crops, 150 ha - (10 families) - Costs, Benefits and Financial Rate of Return .................................... 73 T.20 - Activity Budget No. 2: Crops, 150 ha - (10 families) - Cash Flow Projections ............. 74 T.21 - Activity Budget No. 3: Dual-Purpose Cattle, 127 ha (5 families) - Investment Costs ............ 75 T.22 - Activity Budget No. 3: Dual-Purpose Cattle, 127 ha (5 families) - Costs, Benefits and Financial Rate of Return .......................... 76 T.23 - Activity Budget No. 3: Dual-Purpose Cattle, 127 ha (5 families) - Cash Flow Projections ....... 77 T.24 - Activity Budget No. 4: Beef Cattle Breeding, 300 ha (8 families) - Investment Costs .. .......... 78 T.25 - Activity Budget No. 4: Beef Cattle Breeding, 300 ha (8 families) - Costs, Benefits and Financial Rate of Return ..... ..................... 79 T.26 - Activity Budget No. 4: Beef Cattle Breeding, 300 ha (8 families) - Cash Flow Projections ....... 80 T.27 - Activity Budget No. 5: Pigs (9 sows) - Cost Benefit Analysis . . ........... 81 T.28 - Activity Budget No. 5: Pigs (9 sows) - Cash Flow Projections ............... 82 T.29 - Activity Budget No. 6: Poultry (45 hens) - Cost Benefit Analysis ..... ......................... 83 T.30 - Activity Budget No. 6: Poultry (45 hens) - Cash Flow Projections ..... ........................ 84 T.31 - Activity Budget No. 7: Apiculture (10 hives) - Cost Benefit Analysis ..... ........................ 85 T.32 - Activity Budget No. 7: Apiculture (10 hives) - Cash Flow Projections ..... ........................ 86 T.33 - Financial and Economic Prices ................... .... 87 T.34 - Project Cash Flow (INCORA) ..... ..................... 88 4. Related Documents and Data Available in Project File ....... 89 MAP IBRD 14212 - Project Areas   COLOMB IA THIRD AGRICULTURAL CREDIT PROJECT - INCORA I. BACKGROUND A. The Agricultural 'Sector Agriculture in the Economy 1.01 Over the last five years (1973-77), total GDP (in 1970 prices) in- creased at an annual average rate of 5.4%, whereas growth of the agricultural sector, highly erratic, averaged an annual rate of 4.0% in the same period. Performance during this period was somewhat improved compared with the 1960-70 period, in which the sector's GDP grew at an average of 3.5% per annum and total GDP by 5.2% per annum. The agricultural sector share of GDP has decreased from about 34% in 1960 to an average of 28% in the 1975-77 period, with 14% contributed by the crop subsector, 10% by the livestock subsector, and 4% by the fishing, hunting and forestry subsectors (Annex 3, Table 1). Of an estimated population of about 25.0 million in 1977, nearly 9 million, or 37%, live in rural areas, and 30% of the economically active labor force is engaged in the agricultural sector. Average GDP per capita in Colombia is about US$710 (1977), disguising a skewed income distribution and important differences between urban and rural areas. 1.02 Considerable efforts have been made in Colombia to diversify exports, and non-traditional exports have grown continuously, representing an average of 44% of total merchandise exports during the 1975-77 period compared with 27% in 1967. During the 1975-77 period, agricultural sector exports averaged about $1.340 million, representing 73% of the total merchandise exports of Colombia. Export performance, however, is highly influenced by increases in coffee prices, and, although the volume of coffee exports decreased by about 46% between 1975 and 1977, the value of coffee exports more than doubled, accounting for nearly all of the increase of value of exports of the economy. In addition to coffee, representing 76% of the sector's total exports, main exports in order of importance are: cotton, bananas and plantain, livestock (beef and cattle), sugar, rice, flowers and tobacco. The agricultural sector has a highly favorable balance of trade, with total food imports averaging about 11% of total exports. Apart from wheat, representing 32% of total food imports, and temperate fruits, main imports which could be replaced by domestic production are vegetable oils, feed and food grains and milk. 1.03 Aggregate domestic demand for food products in Colombia has grown rapidly (3.8% p.a. during 1970-75), and in recent years has nearly equaled the growth in output of the sector. However, considering the export demand, the agricultural sector has not been able to produce adequate supplies at stable consumer prices, which has led to rapi-d increases in food prices relative to non-food items since 1970. Given the fact that almost half of the consumer's total expenditures are for food, these food price increases have been the major inflationary factor in the country.  -2- Land Resources and Uses 1.04 An exceptional regional diversity in altitudes (from sea level to 5,800 m), soils and climates (from tropical to alpine) enables Colombia to produce a wide range of agricultural commodities. Out of a total area of 114 million ha, the agricultural census of 1970/71 showed that only 31 million ha, or 27% of the total, were occupied by the existing 1.2 million farm units -- about 5.0 million ha were cropped; 17.5 million ha were in pastures; and 8.5 million ha were fallow or unused. 1.05 There are six main farming systems in Colombia: (a) large-scale extensive ranching on the lowlands of the Caribbean Andean valleys; 80% of the 22.5 million head of cattle in 1974 were found in those regions; (b) medium- and large-scale mechanized iarming in the inter- Andean valleys; this type has been expanding steadily and mainly produces cotton, soybeans, oiLl palm and sugarcane; (c) small- and medium-scale farming in the inter-Andean valleys; this type has also been expanding st:eadily and produces mainly cotton, with coffee as the main cash crop; (d) farming by organized settlements of small farmers on land acquired and reclaimed by the Government, mainly in the Caribbean lowlands, but also in the Amazon basin; (e) farming by spontaneous colonization settlers on up to I million ha a year in tropical rainforests or in the Eastern Plains; and (f) high-altitude, small-scale farming (less than 20 ha) in the Andean highlands. In these densely populated areas, the average farm size is 4 ha. These farms are often on poor soils and steep slopes and produce mostly for family subsistence, although surpluses are marketed. Land Tenure and Rural Incomes 1.06 Colombian regions are extremely heterogeneous in terms of altitude, climate and soils. The diversity of conditions of the Andean highlands, the lowlands and valleys provides Colombia with a wide range of agricultural production possibilities, which has led to diverse types of farms. According to the 1970/71 census, small-scale farms of less than 10 ha accounted for 13% of a total 1.2 million farm units and 7% of the 31 million ha in farms; overall, some 83% of all farmers had less than 20 ha and operated only 13% of the farmland. In addition, 200,000 rural families dependent on agri- culture were landless. Income distribution in the sector is closely related  - 3 - to the distribution of land. In 1976, 55% of the rural population had incomes below the relative poverty income level as defined by the Bank (US$153 per capita in 1977 dollars). Given the high rural-urban migration rates over the last years and the increase in real wages in rural areas, rural unemploy- ment has decreased to an estimated 15% for 1977. 1.07 Since 1961, the Colombian Institute for Agrarian Reform (INCORA) has been involved in programs of distribution of public land (4.9 million ha as of June 1978) and redistribution of unused private land (0.7 million ha) benefitting a total of about 200,000 families. INCORA's activities are associated, to varying degrees, with investments in land reclamation and infrastructure and the provision of supervised credit and technical assistance. However, most of the land distributed so far has been assigned to families already occupying the land. INCORA's land titling activities are limited mostly to distributing titles to small-scale farmers on public land in coloni- zation areas. In recent years INCORA, and particularly its land acquisition program, has been subject to considerable criticism and political resistance. As a result land acquisition through both the expropriation of land and termination of private ownership has been at a standstill since 1974. Bene- ficiaries of INCORA constitute the target group of the proposed project. Production and Support Services 1.08 Marketing. Marketing of agricultural products is one of the main bottlenecks for agricultural development. The public sector role in marketing primarily involves: (a) control and direct intervention, and (b) planning and regulating. The main institutions that intervene in the marketplace are the Institute of Agricultural Marketing (IDEMA) and the Agricultural, Industrial and Mining Credit Bank (CAJA). IDEMA intervention takes the form of purchases through price support schemes, sales, imports and maintenance of regulatory stocks of basic foods, while CAJA intervenes in the sale of farm inputs. The National Price Superintendency controls retail prices of selected products. In the area of planning and regulating, the Government has created, or assisted in the creation of, several mixed economy companies. Among these are the Union of Agrarian Reform Cooperatives (CECORA), wholesale and farmers markets, and other enterprises marketing perishables and non-perishable agricultural products, all of which work in the area of credit, information, storage and distribution, information, training, and the like to reduce costs and improve the marketing system. Because of IDEMA's weak performance, however, the Government's market stabilization policies have only a marginal impact and agricultural prices undergo wide fluctuations, with marketing margins remaining at relatively high levels. 1.09 Research, Extension and Technical Assistance. The main institutions responsible for research and technical assistanc:e are the Colombian Agricultural Institute (ICA) and the National Institute for Natural Renewable Resources and the Environment. Other institutions involved in technical assistance or farmers' training are INCORA, the National Federation of Coffee Growers of Colombia (FEDECAFE), the National Apprenticeship Service (SENA) and the  Departmental Secretariats of Agriculture. This multiplicity of entities involved in extension work and the lack of coordination among them has seriously limited efficiency, but recent efforts, particularly under the Integrated Rural Development Program (IRDP), partially financed by the Canadian International Development Agency, Inter-American Development Bank (IDB) and the Bank (Loan 1352-CO), has led to substantial improvement. 1.10 Current agricultural credit legislation requires adequate provision of technical assistance to sub-borrowers; consequently, there is a high demand for agricultural extension services. Total professionaL and technical staff of the various Government and private institutions providing technical assistance was about 4,100 in 1976. Besides INCORA, ICA is the largest extension agency in the country, providing most of the technical assistance to small farmers (under 10 ha). It is also responsible for registering and monitoring the technical assistance provided by about 3,000 private agricultural extension agents. In the banking sector, CAJA and the Livestock Bank (BG) maintain their own staffs to provide technical assistance to their borrowers, with CAJA also relying on extension services provided by INCORA and ICA. Among the producer associations in the agricultural sector, FEDECAFE employs the largest number of extension staff. Rice and cotton growers also receive considerable help from their federations, which extend new technology to their members. Government Development Strategy 1.11 The main objectives of Colombia's development strate!gy, as stated in the 1975-78 National Development Plan, are to raise the incomes and standards of living of the marginal sectors of the society, particularly by reducing the income gap between urban and rural areas and by improving nutrition, and to secure higher export earnings. In line with the above objectives, top priority has been given to the development of the agricul- tural sector and to investments in rural infrastructure. Productivity, employment and incomes of the existing small farmers wouLld be increased ,through the implementation of integrated rural development programs, including the provision of minimum technology packages, supporting services and basic rural infrastructure. Land redistribution would be carried out only in response to local circumstances in areas with both a high pressure on land and unequal distribution, but it is not regarded as the primary means for reducing rural poverty. The modern agricultural sector receives attention in two respects -- as the main source of foreign exchange earnings and as a source of foodstuff not produced by the traditional sector but essential to the implementation of the National Food and Nutrition Plan (PAN). Additional credit resources and export incentives would be directed at products in which Colombia is believed to have a comparative advantage on international markets. The proposed project would fit closely into these development objectives by promoting increases in production, employment, and rural incomes, and by integrating small-scale farmers into modern procluc- tion systems. 1.12 PAN is implemented through two programs. One is the Nutrition Program, which includes a set of integrated and mutually reinforcing actions in the field of processing, consumption and improved biological use of nutri- tive foods. This program is being implemented with assistance from UNDP,  - 5 - USAID and the Bank (Integrated Nutritional Improvement Project Loan 1583-CO) and indirectly through the Second Agricultural Credit Project (Loan 1357-CO), which finances the production of food required for the Nutrition Program. The other program is the IRDP, a comprehensive integrated program of assistance focused on actual and perceived needs in specific regions where rural poverty is widespread. Priority is given to developing small-scale farmer production- oriented programs, associated with improvements to supporting and social services and infrastructure, and to establishing a coordinated institutional structure to provide assistance to the target population. 1.13 A new Government took office in August 1978 and, while the National Development Plan objectives remain valid, indications are that more emphasis is being placed on production aspects to serve as a solution to social problems, which are perceived especially in terms of employment creation. Growth of the industrial sector and rural development are considered to be complementary, with a considerable emphasis on agro-industries. Especially with a view to reducing rural/urban migration, the new Government confirmed the importance it attaches to IRDP and PAN and to providing assistance through INCORA to existing beneficiaries of the agrarian reform/colonization programs. The proposed project has been approved by the National Council for Economic Social Policy and it is scheduled for the second semester of 1979. B. The Banking System and Agricultural Credit 1.14 Monetary and banking policy is determiLned by the Monetary Board (MB), chaired by the Minister of Finance and Public Credit, which regulates loans and deposits, compulsory investment, and rediscounting. The Minister of Agriculture and the General Manager of the Bank of the Republic (BOR) are members of MB. .1.15 The policies of MB are implemented by BOR, which, in addition to performing the functions of a Central Bank, administers the special funds that have been established by the Government with both internal and external resources through which credit can be channeled to specific sectors according to Government priorities. Of particular importance to the agricultural and agro-industry sectors are Agricultural Financing Fund (FFAP), Fund for Private Investment, and Industrial Financing Fund. The FFAP is managed by BOR's Agricultural Credit Department. Recently, BOR has established a new fund, Guarantee Fund for Agricultural Credit, with proceeds realized from recovery of loans granted with USAID assistance. The fund, expected to be operational before mid-1979, will provide a partial guarantee to banking institutions for loans to small farmers. 1.16 The major financial intermediaries in the private sector are 28 com- mercial banks and an increasing number of development finance companies, the latter specializing in medium- and long-term loans and equity financing. Institutions of mixed ownership are responsible for agricultural credit: CAJA, which provides the largest share of the country's total credit for crop and  livestock production; the Agricultural Development and Export Finance Corporation, which finances agricultural development, processing and exports; BG, which is engaged principally in livestock finance, and the Banco Cafetero. Although not a bank, INCORA has, since 1963, been a significant agent in channeling credit to agriculture, particularly to small farmers. 1.17 During the 1975-77 period, total institutional credit (new loans) to the agricultural sector increased, in nominal terms, by 80%, from US$368 million in 1975 to US$662 milion in 1977. Total outstanding portfolio to the agricultural sector was about US$360 million at the end of 1977, representing about 20% of the total outstanding credit. Main sources of agricultural credit are FFAP resources, through various financial intermediaries (39%), and CAJA (33%) (Annex 3, Table 1). 1.18 Recent developments in the financial sector have been dominated by an accumulation of international reserves induced by higher coffee prices on world markets. Monetary policy has been directed at attempting to curb the rate of domestic credit expansion so as to neutralize the potential inflation- ary impact of sharply increased earnings. Although the credit policy pursued by BOR offsets a significant part of the increase in coffee export earnings, it was not sufficient to prevent a rapid expansion of the currency issue over the past years. This brought about relatively high rates of inflation, and rates of interest from the main sources of institutional credit to the agri- cultural sector lagged behind the general price increases, which resulted in an overall shortage of funds for the sector and credit rationing by the finan- cial intermediaries. To adjust for this situation, BOR decided (in December 1978) to increase FFAP lending rates, and a similar action was taken recently by CAJA (April 1979). The current nominal on-lending rates of interest from the main sources of credit to the agricultural sector are as follows:  -7- Medium and Short Term Long Term FFAP General Agriculture 18 18 Subsistence Crops /a 12 - General Livestock 18 18 Cattle for Fattening 21 - Dairy Cattle - 15-17 CAJA Ordinary Resources 16-22 /b 16-22 /b Second Window 27 - IRDP (Loan 1352-CO) 14-18 /b 14-18 /b Develoment Loan Fund (USAID) /c 14-18 /b 14-18 /b To INCORA Beneficiaries 14 14 BG Own Resources (IDB/USAID) /c - 13 Revolving Fund (BG/INCORA) /c - 15 INCORA Supervised Credit (USAID) /c 13 12 Planned Credit (IDB) /c 15 15 Caqueta (Loan 1118-CO) 15 20 Cordoba (Loan 1163-CO) 16 16 Land Sales to Beneficiaries - 2-4 /a To increase production priority of food crops contemplated under the PAN Program (para 1.11). All farmers borrowing FFAP resources for industrial crop production are required to plant varying amounts of subsistence crops. /b Depending on the value of total assets. /c Roll-over funds from previous projects or programs. 1.19 As can be seen on the table, nominal interest rates for the agricul- tural sector range from 12% per annum to 27% per annum, depending on the type of institution, sub-borrower, and activities financed. However, effective interest rates differ further due to the method of calculation and collection. Current interest rates on FFAP resources are collected at the beginning of each quarter unless the term of the loan includes a grace period, in which case it is collected at the end of each quarter throughout the term of the loan. Similar procedures are utilized in CAJA's lending to medium- and large- scale farmers and private financial intermediaries. On all agricultural loans, individual borrowers are required to pay an annual amount equivalent to 1% of their outstanding loan balance for life insurance while large agricultural borrowers (assets, including land, in excess of Col$500,000) have to pay an additional levy of 1% per annum on their outstanding loan balance toward a national Small Farmer Technical Assistance Fund handled by ICA.  -8- C. Performance Under the On-Going INCORA Projects 1.20 Since 1966, the Bank has made 10 loans, totaling US$230.6 million to Colombia for agricultural development. INCORA has been the executing agency for six: Atlantico I Irrigation (Loan 502-CO); First Agricultural Credit (Loan 624-CO); Caqueta Land Colonization - Phase I (Loan 739-CO); Second Atlantico Development (Loan 849-CO); Caqueta II -- Rural Settlement (Loan 1118-CO): and Cordoba II - Agricultural Development (Loan 1163-CO). 1.21 Loans 502-CO, 624-CO and 739-CO, totaling US$34.1 million, have been completed, and the rest, totaling US$42.7 million, are on-going. PPARs have been prepared for Loans 502-CO and 624-CO and a PCR for Loan 739-CO. Overall performance of INCORA as executing agency has been satisfactory (Annex 1). Second Atlantico Development Project (Loan 849-CO) 1.22 The project, which became effective in November 1972, comprises the second stage of INCORA's agrarian reform and development program in the Atlantico Department initiated under Loan 502-CO. The loan, originally for US$5 million, was reduced to US$2.2 million in January 1977, with readjusted total project costs being US$4.3 million. The project would assist in the completion of INCORA's flood control and drainage program in the project area, a total of 12,400 ha for crop production and 4,600 ha for dairy production. The project consists of the design and construction of three main drains and associated subsidiary drains, 52 km of roads and project buildings; purchase equipment; acquisition, preparation and allocation of land to about 1,800 farmers; and provision of seasonal and long-term credit to dairy farmers and agricultural research, training and extension. 1.23 The project performance has been disappointing and little progress has been made. Recently on February 29, 1979, INCORA, with Government support has indicated that it will allocate the necessary resources to this project. Caqueta II - Rural Settlement Project (Loan 1118-CO) 1.24 This project, which is the continuation of the completed Caqueta I Land Colonization Project (Loan 739-CO), became effective in April 1976. Total Bank financing is US$19.5 million, out of US$44.7 million total project costs. The project, which is helping small-scale farmers who Live under hard- ship conditions, includes: (a) a credit program of about: 3,200 long-term subloans for livestock purchase by settlers and 800 medium-term subloans for cattle fattening; and (b) an infrastructure component inc:luding construction of about 200 km of penetration roads and maintenance during implementation of about 1,000 km in the project area; construction of 30 primary schools, two health centers and 10 health posts; improvement of water and sewerage systems; and a forestr3 and erosion control component. The project infrastructure is expected to benefit about 12,000 settlers in the area. 1.25 Execution of the works undertaken is very good, but overall imple- mentation is slow because INCORA has permanent liquidity problems. A revised implementation schedule prepared by INCORA indicates that, provided adequate  - 9 - local counterpart funds are made available, project funds would be committed by the end of 1980. However, due to delays in implementation and unexpectedly high rates of inflation, about US$7.6 million in additional counterpart funds will be required to complete the productive and social infrastructure compo- nents envisaged at appraisal. Cordoba Second Agricultural Development Project (Loan 1163-CO) 1.26 Effective since March 1976, the Bank loan finances US$21 million out of a total of US$35.7 million in project cost. The project includes the rehab- ilitation and completion of a 40,000-ha drainage system, on-farm development on 20,000 ha; medium- and long-term credit to small farmers for on-farm devel- opment, and purchases of machinery and livestock; and a program to improve infrastructure for education, health services, village water supply and elec- trification. The project would benefit about 3,800 rural families. 1.27 Initial implementation problems due to the reorganization of INCORA and the transfer of the civil works to HIMAT have been resolved and satisfac- tory progress has been made during 1978 in the implementation of the works for drainage, flood protection, roads and bridges. According to HIMAT, the remaining civil works should be completed by the end of 1980; however, a continued escalation of construction costs is causing cost overruns of about 60% of the original estimates. With the exception of rural electrification, which has been completed, progress in the implementation of the remaining social infrastructure components (education, health and water supply) has been slow. The main reason for the poor performance of these components is the precarious financial situation of INCORA. Also, the absence of sufficient counterpart funds is seriously affecting the credit component of the project: during 1978 INCORA approved subloan applications equivalent to 35% of the total amount programmed for that year. Summary and Conclusions 1.28 On balance, INCORA's performance during the implementation of the previous Bank projects (Annex 1) was satisfactory; however, during recent years (1976-78), INCORA's capabilities as executing agency for Bank-financed projects have deteriorated steadily and the institution has been unable to implement on-going projects on time or to comply with important loan condi- tions. The underlying reason for INCORA's problems is the lack of political commitment by the previous administration; also, INCORA's activities have been subject to a great deal of political debate and criticism during recent years. The past administration was not able, or willing, to identify clearly which activities should continue and which should be stopped and thus obtain poli- tical decisions on INCORA's future. Therefore, INCORA has been unable to adjust efficiently from land reform activities, which apparently no longer carry any political priority, to activities which are not politically conten- tious, such as the consolidation of past efforts in land reform and continua- tion of its colonization program. The new Government which took office in August 1978 gives better support to INCORA's activities than the previous one, but much remains to be done.  - 10 - 1.29 From the institutional point of view, the main problems that have persistently affected on-going projects are related to the weaknesses of project management, INCORA's financial situation, and a shortage of Government counterpart funds for the projects. Although all on-going projects are expe- riencing delays in implementation, the shortage of counterpart funds in the credit components, whether included in the project (Loans 1118-CO and 1163-CO) or to be provided through INCORA's credit lines (Loan 849-CO), is critically affecting beneficiaries and the materialization of the on-going projects' expected benefits. To improve the negative impact of the above problems, the proposed project, oriented exclusively to the adequate provision of credit to the existing INCORA beneficiaries, requires: (a) the appointment of a project coordinator, with a rank equivalent to assistant to the General Manager of INCORA, to be responsible for implementation of the proposed and on-going Bank projects (para 4.01); (b) the establishment of an adequately funded revolving fund for the operation of the lending component of the project (para 4.05); (c) important changes in INCORA's financial and management information system (paras 4.13 to 4.17); and (d) the timely provision of adequate counterpart funds, which would increase INCORA's equity (para 6.08). II. THE PROJECT AREAS AND THE EXECUTING AGENCY A. The Project Areas 2.01 There are about 200,000 small-scale farmers throughout Colombia who have received land from INCORA or have benefitted from the titling activities of this agency. However, total potential beneficiaries of technical assis- tance and credit, defined as land reform/colonization farmers that can be assisted effectively by INCORA with its existing organization, staff and infra- structure in the 20 INCORA administrative regions (Annex 3, Table 2), is currently estimated at about 52,000 farm families. 2.02 Project activities would be concentrated initially in 12 of the 20 INCORA administrative regions (Annex 3, Tables 3 and 4). Selection was based on the availability of basic infrastructure, the potential productivity and satisfactory degree of stability-mobility of target families living in the areas, and presence of adequate facilities for the delivery of technical assistance. Areas were excluded partially or totally if they were: (a) currently benefitting from on-going projects such as Atlantico, Caqueta, Cordoba and IRDP areas (Loans 849-CO, 1118-CO, 1163-CO and 1352-CO), or were areas for which specific projects were being prepared such as Arauca (IDB) and El Retorno Land Settlement (IBRD); (b) adequately financed with roll-over funds from completed projects or that could be assisted satisfactorily with INCORA's own resources;  - 11 - (c) required relatively small amount of resources and could be assisted by either INCORA resources or through IRDP, CAJA and BG; (d) colonization areas which could not be developed effectively without relatively large investments in infrastructure, requiring specific development projects; or (e) inhabited by farmers with large amounts in arrears and persis- tently bad repayment records. 2.03 On the basis of the criteria described in the previous paragraph, a total of about 15,000 families, with a total land area of 447,000 ha, were selected as potential beneficiaries under the proposed project (Annex 3, Table 5). Of this total, 12,500 families are agrarian reform beneficiaries including 5,500 families operating in 537 collective farming operations (empresas comunitarias), 7,000 individual farmers, and 2,500 settlers (colonos). Out of the total farm land (447,000 ha) in the selected project area, 423,000 ha are suitable for agricultural production. Of these, 63% are currently being utilized for livestock grazing, 15% is under crops, and 22% is fallow. 2.04 Mixed farming with emphasis in extensive livestock operations and the production for subsistence purposes of both crops and minor species (mainly pigs and poultry) predominates among the proposed project beneficiaries. Productivity is generally low because of poor soils and little or no use of improved inputs. By definition, most of the land reform/colonization benefi- ciaries are relatively new farmers, with limited managerial experience and without an adequate productive base other than land. Therefore, their demand for investment credit, including short-term seasonal credit and technical assistance, is relatively high compared to other farming subsectors. The absence of sufficient investment resources, in addition to reducing the impact of an otherwise adequate level of technical assistance from INCORA, does not allow for the sustained development of the intended project beneficiaries. As an average, during the 1975-77 period, lending through INCORA in the 12 project areas totalled US$8 million, benefitting 6,000 families, represent- ing only 40% of the total potential INCORA beneficiaries in the areas. Average subloan size per beneficiary was US$1,300, or US$43 per ha. Medium- and long- term investments, however (60% of the total), are equivalent to about US$26 per ha. 2.05 Although situated in the tropics, the project areas present a wide range of eco-climatic conditions which allow the development of almost all types of crops. Temperatures range from annual averages of 14 0C to 280C and rainfall, from 600 mm to 2,500 mm. Soils in the project areas are mainly of volcanic origin, with various degrees of erosion, and the rest of the soils are of marine origin. In general, except for Meta and Casanare, the areas selected for the project have a good basic infrastructure. Farms are well served by all-weather dirt roads linked to main paved roads leading to nearby markets. There is also an adequate marketing infrastructure and supply of agricultural inputs throughout the project areas.  - 12 - B. The Executing Agency Background 2.06 The Colombian Institute for Agrarian Reform (INCORA) would be the executing agency of the proposed project. INCORA is an autonomous government institution established under Agrarian Reform Law 135 of 1961 to reform the agrarian social structure of Colombia. In pursuit of its objectives, INCORA initially concentrated its efforts on land reform. However, because comple- mentary investments were not being provided by other institutions and, in the later years, because of strong political resistance to its land reform activi- ties, INCORA was induced to diversify its operations considerably. The broad range of activities undertaken involves: (a) land acquisition on behalf of the National Agrarian Fund through the various processes of purchase and expropriation; (b) issuance of titles and land distribution to beneficiaries; (c) land settlement projects; (d) land and water development projects, includ- ing provision of physical (irrigation, drainage, road works) and social (houses, schools, health centers, rural electrification and potable water) infrastruc- ture; (e) supervised credit operations for agrarian reform beneficiaries and other small farmers; (f) technical assistance and extension services; (g) pro- motion and management of cooperatives; and (h) promotion of and support of empresas comunitarias. 2.07 INCORA's performance has been mixed and this institution has been unable to significantly alter land ownership patterns. P'urchase and expropria- tion of good farming land, while never at a high level, has declined substan- tially in recent years. However, as of March 1978, INCORA had distributed about 640,000 ha of expropriated land benefitting 30,740 families, transferred 4.9 million ha of public land to 176,000 families, and issued 5,000 titles to sharecroppers and tenants for a total of 70,000 ha. In addition, INCORA has assisted the establishment of 20 small-scale farmer cooperatives with a total *of 17,710 members, and 1,270 empresas comunitarias with a membership of 12,400 families cultivating 250,000 ha. INCORA's land reform and titling activities as of March 1978, are summarized below: No. Ha Status of Land Distributed by INCORA 1962-78 Definite titles 15,201 359,602 Assignment contracts 8,976 160,813 Beneficiaries in process of legalization 6,563 122,073 Subtotal 30,740 642,488 State Land Distribution 176,200 4,901,000 Total 206 ,940 5,543,488  - 13 - 2.08 INCORA's activities have never been free of controversy (para 1.28) and in recent years it has been subject to severe budgetary constraints, and, therefore, INCORA's land acquisition through both the expropriation of land and elimination of private ownership have come to a standstill since 1974. Operations, Management and Financial Situation 2.09 INCORA's Board, chaired by the Minister of Agriculture, is made up of 17 members including: the General Manager of CAJA; representatives of farmers' federations; the Army; the Church; the Congress; the House of Representatives; and agricultural institutions. The General Manager of INCORA is appointed by the President of the Republic. INCORA is organized along functional lines and divided into four main departments: Administration, Land Settlement, Legal, and Planning, all of them reporting directly to the General Manager. There are 20 regional offices (Projectos) responsible for executing INCORA's programs at regional level and all have identical organizational structure, including the three operational departments: Administrative, Land Settlement and Legal. How- ever, most of the decision-making and planning is concentrated in INCORA's office in Bogota. INCORA staff, as of September 30, 1978, totalled 3,242 employees 620 (19%) of whom were located at the head office and the balance at the 20 regional offices. 2.10 INCORA's equity on December 31, 1977 was about Col$4,100 million equivalent to 57% of its total liabilities and equity (Annex 3, Table 6). Due to its financial structure, the overall weighted average cost of capital was only 2.4% to 4.0% of total liabilities and equity during the last three years. As of December 31, 1977, the nominal rate of interest on its lending was between 12% and 15% p.a., but because of a serious arrears problems and cash basis account- ing, interest collected has never exceeded 9% to 10% per annum on its average loan portfolio. 2.11 Arrears are one of the main problems affecting INCORA performance. -Total arrears as of December 1977 according to INCORA accounts were equivalent to 17% of its total loan portfolio (Col$1,899 million). However, a corrected arrears rate, comparing arrears of 1977 with repayment of principal scheduled to be repaid during the same year, gives an arrears ratio of no less than 24% per annum. Provision for doubtful debts reached 5.2% (Col$ 99.0 million) of total loan portfolio on December 31, 1977, but whether or not this will be adequate will be answered by the review and analysis of the arrears situation scheduled to take place in 1979. This exercise will include the analysis of debts that can be rescheduled and collected in the future and those to be written off as unrecoverable. 2.12 Government allocations represented about 80% of INCORA's income in 1977, the balance being interest earned on loan portfolio and on Government bonds. Administrative costs, mainly payroll (Col$ 550 million in 1977), constituted by far the largest expenditure item, averaging about 50% of total INCORA cost over the last three years. The high administrative costs are due mainly to a relatively small average amount of loans, agricultural extension activities, and the legal and administrative work related to  - 14 - the settlement and redistribution of land. In each of the last three years, INCORA has suffered deficits, at least some of which occurred as a result of Government failure to transfer the funds allocated in its budget to INCORA. 2.13 Gross return on INCORA's assets (Col$ 7,130 million), excluding Government's budgetary allocations, over the last three years, ranged between 3.6% per annum and 3.9% per annum. However, more than 45% (Col.$ 3,100 million) of INCORA's assets do not currently generate any income and thE: investments in roads and social infrastructure such as hospitals, health posts and schools never will. Other investments, representing 25% of its total assets, such as Col$ 1,500 million invested in development of irrigation and drainage districts, and Col$ 300 million of land sales to agrarian reform beneficiaries is not being collected by INCORA (Annex 2). 2.14 INCORA, being a development agency transferring government resources to small-scale farmers, cannot be expected to be financially viable, and government budgetary allocations are required permanently to cover INCORA's operational deficits. However, INCORA's financial situation and developmental activities can benefit greatly from improvements on its financial management and accounting system. Details of the required improvements and recommenda- tions are given in paragraphs 4.13 to 4.17 and in Annex 2. INCORA Credit Activities 2.15 Most of INCORA's beneficiaries have access to no other credit facili- ties than those provided through INCORA. In addition to the difficulties normally associated with lending to small-scale farmers, access of INCORA beneficiaries to other lending institutions is restricted as a consequence of their legal status and socio-economic condition, neither of which correspond to the requirements or provide the guarantees normally required by the banking sector. 2.16 According to existing banking operational policies, INCORA bene- ficiaries without a definite title to the land are considered temporary occupants only, with cultivation rights to the land. Therefore, they are entitled to obtain only short-term credit (mainly from CAJA), which, due to the relatively small amount of credit on a per ha basis, normalLy has to be supplemented by INCORA. On the other hand, INCORA titles are not considered clear titles due to the restrictions attached (land cannot be rented, mortgaged or sold without INCORA's authorization); therefore, holders have limited access to long-term credit. In addition, agrarian reform beneficiaries and settlers more rich in terms of assets than income have insufficient: resources to make their required cash contribution to investments. 2.17 INCORA is not a financial institution and thus it has no credit access to refinancing facilities; its lending activities are financed mainly through the recuperation of previous loans under projects partially financed by IDB, IBRD, and USAID, and, to a small extent, with Government budgetary allocations. Currently, INCORA's own resources are handled through four lines of credit: two are roll-over funds from completed projects - supervised (USAID) and planned (IBRD); the Livestock Revolving Fund (INCORA/BG); and  - 15 - resources of the ongoing Caqueta and Cordoba projects. Since INCORA is not a bank, its resources, with the exception of the Livestock Revolving Fund, are handled through a fideicomiso agreement by CAJA, which acts as a disbursement agent and receives a commission of 1% per annum on outstanding portfolio. The Livestock Revolving Fund, financed by BG and INCORA, is utilized exclusively for long-term livestock lending to INCORA beneficiaries. BG operates without the guarantee of INCORA and is responsible for selection of beneficiaries and provision of technical assistance and supervision. BG pays 9% per annum on INCORA's share of outstanding portfolio. Additional funds are channelled to INCORA beneficiaries through CAJA, which lends its own resources under INCORA's guarantee. 2.18 The credit and technical assistance activities of INCORA are handled by the manager in charge of the Department of Land Settlement (Subgerencia de Asentamientos Campesinos). Staff of this department totals 1,350 persons, 1,270 of whom are located in INCORA's 20 regional offices; total staff in the proposed project areas is 534, 429 of whom are professionals and mid-level technicians. INCORA is experienced in handling its credit programs, considering that (a) it engages in the provision of credit only to small farmers at the initial stage of their development; and (b) it assumes much of the burden of providing technical assistance to participants in both its own and guaranteed credit programs. 2.19 During the 1975-77 period, total credit to INCORA beneficiaries averaged about Col$ 610 million (US$15.5 million), benefitting 9,770 families with an average subloan size of US$1,600 per family (Annex 3, Table 7); 68% of total lending was provided by INCORA and the balance, 32%, by CAJA with INCORA's guarantee. On balance, total credit to INCORA beneficiaries in nominal terms has increased slightly over the period but in real terms, credit availability has decreased by 25%. As of June 30, 1978, total outstanding portfolio was Col$ 2,060 million (US$52.4 million), benefitting a total of 36,876 families. III. THE PROJECT A. Introduction 3.01 The Government of Colombia has requested the Bank to help finance an increase in INCORA's lending activities to its land reform/colonization beneficiaries. The proposed project is based on a report which was prepared by INCORA with the assistance of the FAO/Bank Cooperative Program and submitted to the Bank in November 1978. Appraisal was in November/December 1978. B. Brief Description 3.02 The main objective of the project would be to increase income and employment of about 7,620 land reform/colonization families (Annex 3, Table 5) through the provision of credit and technical assistance and supervision.  - 16 - The project would concentrate initially on 12 of the 20 INCORA regions (para 2.02). The main thrust of the project would be directed at assisting INCORA's beneficiaries 1/ in developing their farms to a point at which they would become self-sustaining viable farmers who will eventually "graduate" from INCORA assistance, thereby making it possible for INCORA to extend its assistance to other beneficiaries. 3.03 To accomplish its objectives, the project would provide supervised credit for on-farm development, including short-term incremental working capital; the development of small agroindustries; and technical assistance, including consultant services, training programs for INCORA field staff and beneficiaries, and vehicles and equipment for staff providing assistance and for the monitoring and evaluation unit. 3.04 The proposed project would be committed over a four-year period. Subloans would be disbursed by INCORA over a period of five years, with Bank disbursements extending over five and one-half years. Tbe proposed loan would be made to INCORA, with the guarantee of the Government of Colombia, which would also assume the foreign exchange risk. The executing agency would be INCORA. Total project costs, including price contingencies, are estimated to be US$50.0 million, the imported component of which is estimated to be US$17.5 million, or 35% of the total investment. C. Detailed Features On-farm Development 3.05 The project would finance technically and financially viable farm investment plans. Any farm activities, including subsistence production, with the exception of the development of coffee and cattle fattening operations for which there are resources available elsewhere, would be eligible for financing under the project. Farm investment models, representing the best approximation to farm activities within the widely scattered project areas, have been prepared but financing would not be restricted to the activities presented as they should be considered only illustrative. 3.06 Investments in crop production are likely to be for the development of both commercial and subsistence crops ("pancoger"), while investments in livestock would be mainly for the development of dual-purpose cattle, and, to a lesser extent, for the development of beef breeding operations. Specifically, to accomplish project objectives, it is envisaged that the project would finance: (a) on-farm irrigation, drainage and land leveling works (9,000 ha); (b) plan- tation of cocoa and sugarcane for the production of non-centrifuged sugar 1/ The term "INCORA beneficiaries" will be utilized hereafter to identify the small-scale farmer subsector that represents INCORA's first service responsibility. This subsector includes agrarian reform beneficiaries, settlers (spontaneous or assisted) and small farmers, regardless of whether or not they have received land or have been settled by INCORA.  - 17 - (13,000 ha); (c) the purchase of tractors and equipment (90 units), combines (25 units) and irrigation equipment (45 units); (d) the purchase of beef and dual-purpose cattle (20,000 animal units) and minor species such as pigs and poultry; (e) the improvement and development of new pastures (163,000 ha); (f) the development of annual crops such as irrigated rice, corn, sorghum and cassava (34,600 ha); and (g) seasonal inputs such as improved seeds, fertili- zers, pesticides and herbicides and hired labor. 3.07 About 4,900 subloans to individual or collective farm operations would be committed over a four-year period, benefitting a total of approxi- mately 7,600 farm families. The table on page 36 summarizes average invest- ment per beneficiary. Small Agroindustries 3.08 INCORA jointly with the Interamerican Institute of Agricultural Science has identified about 60 empresas comunitarias that have already reached a level of development, in terms of production and management, that would allow them to readily implement small agroindustries engaged in grain storage and drying, vegetable freezing and dehydration facilities, rice milling, processing of non-centrifugated sugar, milk collection points and cheese-making plants. In addition, it is envisaged that the increases of production generated by the project would create additional needs for invest- ments in agroindustries. Therefore, a total of US$2.2 million has been allocated for these purposes. The specific investments to be financed under this category would be reviewed by the Bank on a case-by-case basis, provided, however, that adequate technical assistance and supervision were available through INCORA or under contract with other institutions. Technical Assistance 3.09 The project would include financing for consultant services and foreign training for local technicians. It is estimated that about 24 man- months of consultant services would be provided over the five-year implementa- tion period to assist in establishing and operating an evaluation and monitoring system to assess project impact and to provide training to INCORA technicians (para 4.20). The total cost of consulting services has been estimated at US$116,000, or an average gross cost per man-month of about US$4,800. Additional funds would be provided to finance short-term overseas training for about 12 professionals and local short study tours and on-the-job training of about 340 technicians and project beneficiaries. Finally, the project would finance the vehicles and equipment required to provide technical assistance to project beneficiaries and for the monitoring and evaluation unit. Details of investments in technical assistance are given in Annex 3, Table 8.  - 18 - D. Project Costs 3.10 Total project costs, including price contingencies, are estimated at US$50 million, of which the proposed Bank loan would finance 40%, or US$20 million, net of import duties and taxes. Project baseline costs have been estimated on the basis of prices in November/December 1978. Price contingen- cies are based on the phasing of investments over a five-year period (Annex 3, Table 9) and on the assumption that commitments would start in October 1979. Price increases for the imported component are expected to be 6% per annum during the implementation period of the project, while annual domestic price increases would be about 16% for 1979, 14% for 1980 and 12% thereafter. Project costs by component are summarized in the following table: Foreign Exchange Baseline Local Foreign Total Component Costs -----(US$'000) /a------ --------(%) -------- On-farm Development Medium- and long-term investments 14,990 8,800 23,790 37 57 Incremental working capital 9,990 3,150 13,140 24 32 Sub-total 24,980 11,950 36,930 32 89 Small Agroindustries 1,220 1,000 2,220 45 5 Sub-total lending 26,200 12,950 39,150 33 94 Technical Assistance Technical assistance and training 690 1,300 1,990 65 5 Project administration 100 20 120 14 - Monitoring and evaluation 70 140 210 64 - Sub-total 860 1,460 2,320) 63 6 Total baseline cost 27,060 14,410 41,470 35 100 Price contingencies 5,460 3,070 8,530 36 21 Total project costs 32,520 17,480 50,000 35 121 /a US$1 = Col$ 39.3 (for conversion to Col$). Note: Figures in this table have been rounded.  - 19 - E. Financing 3.11 Financing of the project would be shared in the following amounts and proportions: (US$ million) Total Sub-borrowers INCORA Bank Investment Project Components Amount % Amount % Amount % Amount % On-farm development 4.9 13 17.4 47 14.6 40 36.9 100 Small agroindustries 0.3 15 0.9 41 1.0 45 2.2 100 Sub-total 5.2 13 18.3 47 15.6 40 39.1 100 Technical assistance - - 0.9 37 1.4 63 2.3 100 Total baseline cost 5.2 13 19.2 46 17.0 41 41.4 100 Price contingencies 0.2 2 5.4 63 3.0 35 8.6 100 Total project cost 5.4 11 24.6 49 20.0 40 50.0 100 3.12 The proposed Bank loan of US$20 million would finance the 35% for- eign exchange cost of the project (US$17.5 million) and a further 5% for local currency expenditures (US$2.5 million), net of import duties and taxes. Local currency financing is recommended because of the relatively low foreign exchange content of the project and also in order to bring Bank financing under the proposed project more in line with other on-going Bank projects for agricultural development in Colombia. 1/ Furthermore, the proposed financing scheme would give the Bank more meaningful participation in project implementa- tion, emphasize the importance attached by the Bank to an adequate level of assistance to INCORA's beneficiaries, and assist in achieving important institutional objectives of the project. 3.13 Project beneficiaries would finance US$5.4 million, representing about 11% of the total project cost, and an estimated US$24.6 million, equiva- lent to 49% of total project cost, would be financed by the Government through INCORA. Therefore, the project would require Government to increase its budgetary allocations by Col$ 747.4 million, exclusive of contingencies, to INCORA, as indicated in paragraph 6.08. The annual cost to INCORA after comple- tion of the project would continue at about the Year 5 level (US$110,000 per year). Assurances on the above financing arrangements were obtained during negotiations. 1/ Bank's share of total financing under on-going prjects is as follows; Atlantico (Loan 849-CO), 47%; Caqueta (Loan 1118-CO), 53%; Cordoba (Loan 1163-CO), 59%; Integrated Rural Development (Loan 1352-CO), 40%; and Second Agricultural Credit (Loan 1357-CO), 39%.  - 20 - (US$ million) INCORA Bank Total Lending Amount % Amount % Amount _ On-farm development 17.4 54 14.6 46 32.0 100 Small agroindustries 0.9 47 1.0 53 1.9 100 Total baseline cost 18.3 54 15.6 46 33.9 100 3.14 The Bank loan would be made to INCORA at the Bank lending rate prevailing at the time of loan approval, for a term of 17 years, including four years of grace. The Government of Colomb:ia would guarantee the loan and it would also bear the foreign exchange risk. Counterpart funds, US$19.2 million (or US$24.6 million, including price contingencies) would be provided by the Government to INCORA (para 6.08). Funds for on-farm lending would be disbursed by INCORA through a revolving fund to be established as a separate bank account by INCORA (para 4.05). Funds for technical assistance would be disbursed directly by INCORA. F. Procurement 3.15 The purchase of on-farm investment items required under the proposed project would be procured over a five-year period by aboul: 7,600 small-scale farmers. Inputs, small equipment, tools, machinery and tractors and small on-farm civil works, would be varied and not suitable for procurement through local or international competitive bidding. Therefore, sub-borrowers would purchase their requirements through local established commercial channels, including rural and farmers' cooperatives, representing a broad spectrum of international suppliers. 3.16 Vehicles required for technical assistance (US$1.6 million) would be procured in group orders over a two-year period under international coulpe- titive bidding according to Bank procedures. The remaining expenditures undler the technical assistance component of the project (US$180,000) are not suitable for competitive bidding: consultant and training expenditures (US$175,000 equivalent) would be financed on terms and conditions acceptable to the Bank; equipment for the monitoring unit (US$5,000 equivalent) would be procured through local shopping. Foreign firms are adequately represented in Colombia and there is a good network of competitive suppliers of agricultural inputs; facilities for maintenance of machinery and equipment are also adequate. All inputs and most machinery and equipment for the proposed investments are exempt from the 6% sales tax and subject, on a selective basis, to a maximum of 30% import duty. There are no import restrictions that could affect purchases through existing local channels. Assurances wera obtained during negotiations that the above procurement procedures would be followed.  - 21 - G. Disbursements 3.17 The Bank would disburse over a period of five and one-half years: (a) 46% of the amounts disbursed for farm development sub- loans, for a total value of US$15.6 million; (b) 46% of the amounts disbursed for agroindustry subloans, for a total value of US$1.1 million; (c) 100% of the total cost of consultant services and over- seas training, for a total value of US$300,000; and (d) 100% of foreign expenditures for vehicles and equipment required by the project, or 76% of local expenditures if locally procured, for a total of US$1.5 million. The above values include US$1.5 million of the US$3.0 million price contin- gencies; the balance of US$1.5 million would initially be unallocated. 3.18 The Bank would reimburse, through a revolving fund (para 4.05), for subloans against statements of expenditures, which would be certified by INCORA. Supporting documentation for these expenditures would not be sub- mitted to the Bank, but would be retained by INCORA for review during the course of Bank supervision missions. All other disbursements would be sup- ported by standard documentation. The specific disbursement procedures and reporting requirements were agreed upon with the borrower during negotiations. 3.19 The estimated schedule of Bank disbursements, assuming that the date of effectiveness of the proposed loan would be no later than August 1979, would be as follows: (US$ million) Bank FY 1980 1981 1982 1983 1984 1985 FY semester 1 2 1 2 1 2 1 2 1 2 1 Disbursements during semester 0.8 2.0 2.2 2.2 3.0 3.0 2.9 2.9 0.4 0.3 0.3 Cumulative 0.8 2.8 5.0 7.2 10.2 13.2 16.1 19.0 19.4 19.7 20.0  - 22 - IV. PROJECT IMPLEMENTATION A. Organization and Managemenit 4.01 INCORA would be the borrower and executing agency, with its General Manager serving as official representative in dealing with the Bank in all technical and financial matters related to the project. Responsibility for overall project implementation, coordination and supervision would be borne by a qualified professional to be appointed by INCORA on a full-time basis as project coordinator with a rank equivalent to assistant to the General Manager. The project coordinator would also, within six months of project effectiveness, assume full responsibility for the coordination and supervision of the imple- mentation of on-going Bank projects under Loans 849-CO, 1118-CCO and 1163-CO. The appointment of the project coordinator was a condition of presentation of the proposed project to the Loan Committee. The specific duties and responsi- bilities of the project coordinator were discussed with the borrower during negotiations and an assurance was obtained that, during the implementation period of the project, these functions, duties and responsibilities would not be changed without prior Bank approval. 4.02 While the main duty of the project coordinator would be to assist in implementating operational policies and procedures required for the execution of both the proposed project and the ongoing Bank projects, he would also colla- borate and assist the manager of the Division cf Agrarian Settlements (SAC) in the development and preparation of training programs for INCORA field staff and project beneficiaries; prepare terms of reference for the consultant for the Project Monitoring and Evaluation Unit (PMEU) (para 4.20); assist in the design of the system to be utilized for monitoring and evaluation of the project's progress and impact; standardize procedures; centralize processing of on-going monitoring efforts (Loans 849-CO, 1118-CO and 1163-CO); and secure, through INCORA's management, whatever additional resources are required for effective implementation of the on-going Bank projects. Finally, he would be directly responsible for preparation of periodic reports on the project's financial and physical progress for timely submission to INCORA's General Manager and to the Bank. Assurances on the above were obtained during negotiations. Project Execution 4.03 Field implementation of the project wDuld be the joint responsibil- ity of the project coordinator and the manager of the SAC division through INCORA's regional offices in the 12 project areas (Map IBE'D 14212). Techni- cal assistance, including selection of sub-borrowers, preparation of farm investment plans, and supervision of the investments woulcd be provided by INCORA field staff in the project areas (Annex 3, Table 10). In general, INCORA field technicians have a thorough knowledge of beneficiaries' needs and requirements and their overall experience and expertise ir, crop and livestock production is satisfactory. Nevertheless, INCORA would prepare and carry out a selective training program for technicians to allow them to: (a) become  - 23 - more familiar with ICA's technological packages for the different types of agriculture and livestock operations practiced in the project areas; and (b) update farm management techniques and thus be able to provide production- oriented assistance more in line with the current situation and financial needs of INCORA beneficiaries. It is estimated that by Year 5 of the project, assuming that each technician can provide adequate technical assistance and supervision to about 10 empresas comunitarias and cooperatives or to 40 indi- vidual farmers, 145 out of INCORA's 429 field technicians would be working full time with project beneficiaries. Therefore, the staff is considered adequate to cover present INCORA activities and the incremental activities generated by the project. However, INCORA would assign, during Year 1 of the project, four agricultural engineers to reinforce the technical assistance and supervision capabilities of mid-level technicians in the project areas. Assurances were obtained during negotiations that: (a) the maximum ratio of technicians to individual subloans, calculated on a per project area basis, would not exceed the ratio of 1:40 during the implementation period of the project; and (b) upon completion of the project, INCORA would maintain an adequate level of technical assistance to project sub-borrowers. 4.04 The proceeds of the loan and the local counterpart funds for the lending program, US$33.9 million (Col$1,332.3 million), would be channeled to beneficiaries through CAJA's branch offices in the project areas (Map IBRD 14212). Since 1965, most of INCORA's lending to agrarian reform/ colonization beneficiaries has been implemented through fideicomiso or guarantee agreements with CAJA (para 2.17); therefore, no coordination problems are anticipated. INCORA and CAJA would enter into a specific subsidiary agreement for lending under the project, whereby CAJA would act as the banking agent for the project, being responsible for disbursements, subloan collections and the general administration of the project funds and accounts, while INCORA, in addition to providing technical assistance and supervision, would be responsible for subloan approvals and for bearing the credit risk. However, to encourage CAJA to take a more active role in collecting subloans than it presently does, the system of paying a flat commission of 1% per annum on outstanding balances to CAJA would be reviewed and possibly modified to give CAJA a commission based partly on outstanding portfolio and partly on subloan collections. Similarly, in order to improve project implementation, the coordination and flow of information between CAJA and INCORA at both the project area and the central office levels would be reviewed. Signing of a subsidiary agreement between INCORA and CAJA, on terms and conditions satisfactory to the Bank, would be a condition of effectiveness of the proposed loan. 4.05 Project funds for the lending program would be managed by INCORA through a revolving fund that it would establish as a separate bank account. The revolving fund would be utilized exclusively in the implementation of the project lending program; therefore, the inflow of the project would consist of counterpart resources, and the proceeds of the Bank loan. The revolving fund would start up with an initial amount of US$2.0 million (Col$78.6 million), estimated to cover the needs of the lending program during the first three to four months of the five-year implementation period of the project. INCORA's initial contribution would be US$1,080,000 equivalent. The Bank contribution to the lending program would be disbursed as follows:  - 24 - (a) the first Bank disbursement, a contribution to the start-up of the lending program, US$920,000 equivalent, would be made upon receipt of adequate documentation indicating that the revolving fund, with INCORA's initial contribution (US$1,080,000 equivalent), had been established; (b) subsequent Bank disbursements to the revolving fund would be made against certified statements of expenditures indicating that the counterpart funds, 54% of total disbursements, will be transferred by the Government to INCORA and deposited in the revolving fund within 30 days of the receipt of the reimburse- ment request; and (c) during the latter stages of the implementation period of the project, the Bank contribution to the revolving fund would be reduced to adjust disbursements until project completion. As disbursements are made from the revolving fund, INCORA would make periodic reimbursement requests to the Government and to the Bank. In any event, requests for reimbursement would be made by INCORA before the revolving fund reaches a level equivalent to US$400,000. INCORA would, until completion of the project, maintain a separate account and use all amounts received from project beneficiaries, which are not needed for repayment of principal, payment of interest and other charges under the loan, for additional lending for agricultural and agroindustrial development. It would be a condition of loan effectiveness that a revolving fund, on terms and conditions satisfactory to the Bank, had been established and that an initial amount, acceptable to the Bank (US$1,080,000 equivalent), had been deposited by INCORA. In addition, assurances were obtained during negotiations that the procedures, terms and conditions of the operation of the revolving fund would not be changed or waived without prior Bank approval. However, at the request of the borrower, the Government or the Bank, policies and procedures of the revolving fund would be reviewed to adjust its operation and/or size to the needs of the project. 4.06 CAJA's geographical coverage is considered adequate for project needs, and the existing operational agreements between INCORA and CAJA have been proven satisfactory. However, in the framework of facilitating the future access of INCORA beneficiaries to banks other than CAJA, consideration would be given to allowing other banks to participate in project lending operations should they so desire. Terms and conditions of such other bank participation in the project would be subject to specific agreements between INCORA and the intended banks, which would require prior approval by the Bank before becoming effective. An assurance on the above was obtained during negotiations. Technical Assistance and Training 4.07 One expert on monitoring and evaluation would be hired to serve in INCORA on a full-time basis during the first year and on a part-time basis from Years 2 to 5, for a total of 24 man/months (Annex 3, Table 8). The expert would be responsible for establishing monitoring and evaluation procedures, and for initial operation of the system (para 4.21) as well as  - 25 - for training INCORA staff in monitoring and evaluation techniques. In addition, the project would provide for short-term overseas training and study tours for the directors of the 12 project areas included in the project. The presenta- tion to the Bank of a specific overseas training program would be conditions for disbursement of the Bank funds for these purposes. 4.08 It is envisaged that about 122 agronomists and veterinarians and 168 economists, sociologists and other mid-level technicians would attend to short-term seminars in their respective fields of expertise, including train- ing in agricultural planning, transfer of technology, and rural development. Short-term courses and extended assistance would also be provided to project beneficiaries. For the above purposes, INCORA would enter into or update operating agreements with ICA for training ot university-level technicians; with SENA for training mid-level technicians and project beneficiaries; and with CECORA for managerial and specialized technical assistance and training to empresas comunitarias and cooperatives. Assurances on the above were obtained during negotiations. B. Lending Policies and Procedures 4.09 The proposed project would channel credit to INCORA's beneficiaries, namely, agrarian reform beneficiaries, operating either as individual farmers or as members of some form of collective farming operation (empresas comuni- tarias, cooperativas, and the like), with no limits in terms of land area per family or value of assets, and to settlers (colonos), with farm size of less than 200 ha. No project subloans would be made to: (a) agrarian reform/coloni- zation beneficiaries who have subloans in arrears with CAJA, INCORA or any other institution; or (b) a farmer with a total indebtedness exceeding Col$500,000 (US$12,700), including previous subloans and the intended subloan under the project, but excluding INCORA subloans for the purchase of land and infrastruc- ture (house, irrigation and drainage). Maximum lending per beneficiary under the project would be Col$500,000; thus, maximum lending for collective farming operations would be equal to the above amount times the number of beneficiaries of the collective. Subloans amounting to less than Col$500,000 would be approved by Loan Committees in the project areas, while those between Col$500,000 and Col$1,000,000 (US$25,000) would require approval by the Loan Committee at the Bogota office. Subloans exceeding Col$1,000,000 would re- quire approval by INCORA's Executive Committee, and subloans exceeding Col$4,000,000 (US$100,000) would be submitted to the Bank for approval. To accommodate the project lending program, INCORA would need to raise its existing subloan approval ceilings at the project area level, Col$200,000, to Col$500,000. Assurances were obtained at negotiations that the above approval procedures would be applied and that lending limits would be enforced. 4.10 Subloans to project beneficiaries, made on the basis of technically and financially sound farm investment plans would finance up to 90% of the total medium- and long-term requirements of the investment plan. As in the on-going Bank loan for small farmer's credit in Colombia (Loan 1352-CO),  - 26 - short-term credit required to finance seasonal costs related to the investment plan would be financed in the following maximum percentages: (a) first-time sub-borrowers under the project, 95%; (b) second-time sub-borrowers under the project, 90%; and (c) third-time sub-borrowers under the project, 85%. Beneficiaries' contribution to investments would be financed in the form of family labor and/or cash. No financing under the project would be permitted for cattle fattening operations or coffee plantations. Total lending for beef cattle and/or milking would not exceed ,75% of the total investment plan, and the maximum number of cattle financed under the project would not exceed 25 cows and one bull (or its equivalent in animal units) per-beneficiary. Furthermore, the total number of cattle financed on a per-beneficiary (family) basis would be limited so as not to exceed, including existing cattle owned by beneficiaries, a total of 25 cows per family. Subloans for the development of small agroindustries would be made on the basis of feasibility studies, which the Bank would review, prior to their approval. 4.11 Subloan repayment terms would reflect the capacity of the sub- borrowers to repay, as estimated in the cash flow projections of the invest- ment plans. Subloans for crop investments would be for a maximum period of 10 years, including a grace period of up to three years. Subloans for livestock development would be for a maximum period of 13 years, including a grace period of up to four years. Short-term seasonal credit would be repaid within one year of subloan disbursement. Interest on the outstanding balances would be payable at the end of each period, at a rate of not less than 16% per annum, plLs 1% per annum for life insurance. It is envisaged that, over the five-year disbursement period of the project, the proposed lending rate would be positive. Domestic inflation in Colombia increased from 20% p.a. in 1976/77 to 35% p.a. in 1977/78, decreasing to 17% p.a. in 1978/79. Inflation is projected to increase at an annual rate of 16% for 1979, 14% for 1980 and 12% thereafter. The above lending rate would be consistent and generally in line with the lending rates currently utilized for similar purposes and beneficiaries by CAJA and under Loan 1352-CO (para 1.18). Assurances were obtained during negotiations that: (a) the terms and conditions specified in this and the preceding paragraph would be implemented by INCORA; and (b) by September 1, 1979, INCORA would submit to the Bank for comments a revised credit manual of INCORA's supervised credit line, incorporating the operational policies and procedures to be utilized for lending under the proposed project as specified above. 4.12 In order to bring some coherence to the interest rate structure between essentially similar farmer categories and to prevent future differ- ences between the rate of interest paid by INCORA's beneficiaries and farmers assisted by other institutions and/or credit lines, a link would be estab- lished between the interest rate utilized in INCORA's lending and those util- ized by the main sources of credit for the agricultural sector in Colombia (FFAP and CAJA). In line with the above, the interest rate to be utilized under the project would be maintained with a difference not more than two percentage points to the average nominal rate of interest utilized by FFAP for medium- and long-term credit for agriculture (currently 18% per annum), provided, however, that the resulting rates would be no higher than CAJA's average lending rates for small-scale farmers (currently 16%). Through the  - 27 - years, INCORA has developed various credit schemes utilizing local and foreign resources, and these have caused unwarranted differences in interest rates and lending conditions for INCORA beneficiaries, in turn leading to unnecessary complexity in lending procedures and in the accounting system. To correct this situation, assurances were obtained during negotiations that: (a) the rate of interest to be utilized under the project would be linked to the rates utilized for comparable purposes and beneficiaries by FFAP; and (b) by July 1, 1980 the rates of interest and lending conditions for INCORA's own resources would be standardized to those to be utilized under the proposed project and that such standardization would be extended to the rates utilized under Loans 1118-CO and 1163-CO. C. Accounting and Auditing 4.13 INCORA continues to have serious problems in its accounting and financial administration. The main problems are that: (a) the comptroller's function is not centralized but dispersed among INCORA's various organizational units; (b) the managerial accounting and reporting system is inadequate, with reports for decision-making purposes being ill-designed or not in existence at all; (c) the application of "Generally Accepted Accounting Principles" is far from satisfactory, especially in regard to profit and loss measurement, presentation of assets and liabilities, classification of the accounting system, and failure to utilize the same codes for accounting and budgetary purposes. 4.14 As an autonomous public entity, INCORA is required to maintain the accounting procedures prescribed by the Contraloria General where the main emphasis is placed on authorizations to spend, procedures and observance of budget appropriation limits. Thus, while complying with the Contraloria General's requirements, the system differs from the classification utilized in the INCORA budget; also, neither the budget nor the financial statements provide an adequate separation between capital and operational costs. In addition, INCORA's cash accounting system does not permit sound analysis of INCORA's operational results. In summary, the accounting system registers and reports according to official standards but it has no flexibility to report according to the objective managerial needs of INCORA. Indicative of the above problems is the failure of INCORA to present to the Bank separate project accounts for on-going Bank projects, Loans 849-CO, 1118-CO and 1163-CO. 4.15 A by-product of the problems described in the preceding paragraphs is that, in the absence of a single reliable source of information, the various INCORA organizational units, in their search for measurements of their acti- vities, products and cost, initiate and carry out quantified reports. These, however, are often unreliable, contradict other reports, and do not necessarily agree with information provided by the accounting system on the same subject. Also, the flow of information from the computer unit to the top management is insufficient and managerial reports are inadequate. Therefore, for the proposed project implementation purposes as well as for the rest of INCORA's activities, a substantial reorganization of INCORA's accounting and management information system would be required. For these purposes, INCORA would hire  - 28 - the consultants on financial aspects and management information systems provided for under the Cordoba Second Land Development Project (Loan 1163--CO). It was a condition of presentation of the proposed project to the Loan Cogmmittee that the consultants had been selected and approved by the Bank. Specific emphasis would be placed on the adequate utiliLzation of INCORA's existing computer facilities, and the consultants should be able, in a relatively short period of time, to centralize all INCORA's acc:ounts and statistical information in the computer system. Given the wide geographical coverage and the nature of the proposed project, and, therefore, the amount of information required for adequate control, supervision and monitoring of the activities financed under the project, all financial and statistical data related to project implementation would be handled through the computer. 4.16 INCORA would present, for Bank consideration, not later than January 1, 1980, a report containing a detailed timetable of activities and priorities of the study to be undertaken by the financial and management consultants. Similarly, INCORA would submit for Bank consideration: (a) not later than January 1, 1980, the computer system to be utilized under the project; and (b) every six months, a progress report of the consultants' activities and the timetable for implementing the consultants recommendations. Assurances on the above points were obtained at negotiations. 4.17 Some immediate changes in the accounting systern of INCORA would be made without waiting for the consultants' conclusions (Annex 2). The purpose of these changes is to overcome the basic disadvantages of the current account- ing classification and to provide INCORA's management, as well as outside analysts, with a clearer picture of INCORA's financial situation. The receipt of objective evidence by the Bank that action had been taken by INCORA to modify its accounting procedures and financial statements was a condition of pre- sentation of the proposed project to the Loan Committee. An assurance that these procedures would be maintained during the implementation period of the project were obtained during negotiations. 4.18 INCORA would maintain separate project accounts, along the lines of the acccounts recently established for the on-going projects (Loans 1113-CO, and 1163-CO), in accordance with sound accounting principles consistently applied. Records and documentation relating to all financial transactions under the project would be kept by INCORA and be made available for ins- pection by the Bank during the course of supervzision missions. The project accounts and related financial statements would be audited annually in accord- ance with generally accepted auditing standards by independent auditors acceptable to the Bank. As required by current legislation, the Financial and Operative Audit Division (DAFO) of the Comptroller General of the Republic is responsible for the external auditing of INCORA. 4.19 The audit requirements for the project accounts, including the auditing of a sample of statements of expenditures and of subloans, would be determined after consultations between the Bank, INCORA and DAFO. Audited comparative financial statements and notes prepared from the project accounting records of INCORA would include the balance sheet, a statement of income and expenses, and a statement of the source and application of funds, together with the opinion of the DAFO. Supplementary data on operations, financial position  - 29 - and scope of work carried out by the auditors and such other additional informa- tion as the Bank might from time to time request would also be provided. All audit reports and statements would be submitted to the Bank not later than four months after the end of each fiscal year. Assurances on this point and those in the preceding paragraph were obtained at negotiations. A condition of presentation of the proposed project to the Loan Committee was that INCORA had sent, for Bank consideration, separate project accounts for Loans 1118-CO and 1163-CO. D. Progress Reporting, Monitoring and Evaluation 4.20 INCORA, through the project coordinator, would establish and main- tain a system for monitoring the progress of the project and to evaluate the impact of both on-farm investments and technical services provided to sub-borrowers. For this purpose, a Project Monitoring and Evaluation Unit (PMEU) (partially financed with Bank funds), directly responsible to the project coordinator, would be established within INCORA. In addition, INCORA would appoint one officer at each of the 12 regional offices to be responsible part time for monitoring and evaluation activities at the field level. The field officers would collect, on a continuing basis, production, marketing and financial data, including information on sub-borrowers' performance in credit use and recovery and extension, all of which would be sent to the PMEU, where it would be assembled and analyzed and a consolidated report prepared for submission periodically to INCORA's management and field officers and on an annual basis to the Bank. In addition, an annual selective impact evaluation survey of the project would be carried out, starting in Year 2 of the project. These surveys would provide an assessment of the overall social and economic impact of components with respect to project targets and to the effectiveness of achieving the basic objectives of the components. 4.21 Under this system, adequate records of on-farm investments, purchases of inputs, sales, inputs and outputs, prices, and employment would be kept to provide detailed information on operational, administrative and manage- ment costs of the project. It would also make possible an assessment of the progress of activities compared to planned schedules, including the area in production, yield data, technology utilized and any other external events which might affect yields or progress of the project. Assurances were obtained at negotiations that: (a) a consultant in monitoring and evaluation techniques would be hired, on terms and conditions satisfactory to the Bank, not later than December 1, 1979; (b) an adequately staffed Project Monitoring and Evaluation Unit would be maintained; (c) the monitoring and evaluation pro- cedures outlined would be carried out; (d) annual reports on monitoring would be sent to the Bank within two months of the end of each 12-month period; (e) quarterly progress reports on the project's financial implementa- tion would be sent to the Bank within two months of the end of each quarter; and (f) a draft project completion report would be prepared by INCORA no later than four months after the project investments have been completed.  - 30 - V. ILLUSTRATIVE INVESTMENT MODELS: SPECIFICATIONS AND ASSUMPTIONS A. General 5.01 Investments under the project would take place over a large geogra- phical area involving differences in soils, climate, markets, supply of inputs and communication infrastructure, and, thus, a wide range of production patterns. As a result, actual and projected crop yields and technical coefficients for livestock production would vary greatly in the 12 project areas. For the purpose of project budgeting and calculation of possible rates of return, farm activity budgets, representing the most frequent productive activities to be developed by potential beneficiaries, were prepared. Afterwards, the activity budgets were transformed into illustrative farm investment models to account for the fact that most of the farmers under the project would borrow only for the development of their commercial activities, while continuing with varying combinations of crops and livestock for subsistence purposes, as is currently practiced by INCORA's beneficiaries in the project areas (Annex 3, Tables 11 to 32). 5.02 Overall, the production coefficients utilized in the illustrative farm models reflect a rather conservative approach to increases of productiv- ity and to changes in cropping patterns of INCORA's beneficiaries. It is envisaged that production increases would come mainly through gradual intro- duction of proven mid-technology packages, adequate technical assistance and timely provision of credit. Production patterns are envisaged to change as a gradually increasing emphasis is placed on production for commercial purposes and on crop activities rather than on extensive livestock operations as practiced now. In livestock enterprises, emphasis would be on dual-purpose cattle and milk production. Also, livestock farmers would be encouraged to introduce minor species and crops to their farming activities. B. Production Coefficients 5.03 Yields and other technical assumptions utilized in the illustrative farm investment models are based on the current situation and productivity on comparable farms, both before and after development, of INCORA beneficiaries in the project areas. Current and projected production coefficients utilized in the analysis, together with comparative data at national and regional levels, are as follows:  - 31 - Yields Utilized National Yields in the Models Traditional Commercial With Project Average Sector Sector Without At Full (1976/78) (1976) (1976) Project Development /a