Honduras - Second Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2691-HO STAFF APPRAISAL REPORT SECOND AGRICULTURAL CREDIT PROJECT HONDURAS March 21, 1980 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and inay be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT (at the time of appraisal and used in this report) Currency Unit Honduran Lempira (L) L.2.00 US$1.00 L.1.00 US$0.50 L.1,000 US$500 L.1,000,000 US$500,000 WEIGHTS AND MEASURES Metric System and 1 quintal (q) = 45.4 kilogram (kg) 22.0 q 1 metric ton (m ton) 1 banana box = 18.2 kg 55 banana boxes I 1 m ton 1 manzana = 0.69 hectare (ha) GLOSSARY OF ABBREVIATIONS (see next page) GOVERNMENT OF HONDURAS FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY HONDURAS SECOND AGRICULTURAL CREDIT PROJECT GLOSSARY OF ABBREVIATIONS BANAFOM Banco Nacional de Fomento -National Development Bank BCH Banco Central de Honduras -Central Bank of Honduras BCIE Banco Centroamericano de Integracion Economica -Central American Bank for Economic Integration CATIE Centro Agronomico Tropical de Investigacion y Ensenanza -Center for Research and Training in Tropical Agriculture COHEBANA Corporacion Hondurena del Banano -Honduran Banana Corporation COBDEFOR Corporacion Hondurena de Desarrollo Forestal -Honduran Forestry Development Corporation CONSUPLANE Consejo Superior de Planificacion Economica -Council for Economic Planning CPA Comision de Politica Agricola -Agricultural Policy Commission IHMA Instituto Hondureno de Mercadeo Agricola -Honduran Agricultural Marketing Institute INA Instituto Nacional Agrario -National Agrarian Institute MRN Ministerio de Recursos Naturales -Ministry of Natural Resources PB Participating Bank PRODERO Proyecto de Desarrollo Rural de Occidente -Western Rural Development Project PU Project Unit of BCH This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenst may not otherwise be disclosed without World Bank authorization.   HONDURAS SECOND AGRICULTURAL CREDIT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. BACKGROUND ............................................. 1 A. The Agricultural Sector . . ......................... 1 B. Banana and Plantain Development ................... 6 C. Forestry Development ...... ..................... 7 D. Bank/IDA Involvement in the Sector .............. .. 9 II. AGRICULTURAL CREDIT ......................... . . 10 A. Role in the Agricultural Sector .. ................. 10 B. Public Credit Policy .......................... 6 11 C. Credit Institutions .............. .. ............... 12 III. THE PROJECT ............................................ 14 A. Introduction ...................................... 14 B. Brief Description ................................. 14 C. Detailed Features ................................. 15 D. Project Cost ...................................... 19 E. Financing ....... .................................. 20 F. Procurement ....................................... 22 G. Disbursement ...................................... 23 IV. PROJECT IMPLEMENTATION ..............................e. 25 A. Organization and Management .................... O.. 25 B. Operation and Maintenance and Land Acquisition .... 26 C. Training ......... ................................. 27 D. Lending Policies and Procedures .... ............... 28 E. Accounts and Auditing .......... ................... 31 F. Monitoring and Reporting .......................... 32 V. PRODUCTION ............................................. 33 A. Technical Assumptions ............ .. ............... 33 B. Specifications of Illustrative Investment Models .. 34 C. Inputs and Outputs ...... .......................... 36 This report is based on the findings of an appraisal mission which visited Honduras during March/April 1979. The mission comprised Messrs. J.A.N. Wallis (Mission Leader) and M.H. Fairless (Bank), and 0. Castilla, F. Connor, J. Landers and A. Mazel (Consultants). Messrs. A. Corcostegui and H. Wagner assisted in the preparation of this document.  TABLE OF CONTENTS (Continued) Page No. VI. MARKETS AND FINANCIAL ANALYSIS .............. .. 38 A. Markets, 'Marketing and Prices ...... . 38 B. Fiscal Impact and Cost Recovery . .................. 0 C. Farm Incomes and Financial Analysis ....... ....... 41 VIIr BENEFITS AND ECONOMIC ANALYSIS ,........ 44 A. Economic Benefits and Project Effects ............. 44 B. Economic Analysis and Sensitivity Analysis ........ 44 C. Project Risks and Environmental Impact .......... . . 46 VIII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION ........ 47 SCHEDULE A - Lending and Operating Policies and Procedures ........ 50 ANNEXES 1. Terms of Reference for Project Director and Consultant Services . ........,.......................... 56 2. Supporting Tables: Table 1 - Agricultural Sector Contribution to GDP ......... 2 - Agricultural Sector Contribution to Mferchandise Trade ............................. 3 - Land Availability and Utilization: 1975-1977 ... 4 - Number and Areas of Farms in 1974 ............... 5 - Consolidated Balances of the Banking System ..... 6 - The Project Unit: Incremental Costs of Administration and Training ................... 7 - Phasing of Project Investments .................. 8 - Phasing of Commitments by Central Bank and Bank Group .................................... 9 - Cash Flow for Lending Program ................... 10 - Sugarcane Investment Model: Investment Costs ... 11 - Sugarcane Investment Model: Sales and Operating Costs .... 12 - Sugarcane Investment Model: Cost-Benefit Analysis and Financial Rate of Return ......... 13 - Sugarcane Investment Model: Cash Flow Projection (for a 20-member cooperative) ...... 14 - Sugarcane Investment Model: Cash Flow Projection (independent farmer) ............... 15 - Rice Investment Model: Investment Costs ........ 16 - Rice Investment Model: Sales and Operating Costs 17 - Rice Investment Model: Cost-Benefit Analysis and Financial Rate of Return .................. 18 - Rice Investment Model: Cash Flow Projection (for a 10-member cooperative) ................. 19 - Rice Investment Model: Cash Flow Projection (independent farmer) ..........................  TABLE OF CONTENTS (Continued) ANNEXES Page No. 2. Supporting Tables (Continued) Table 20 - Livestock Investment Model: Investment Costs ... 78 21 - Livestock Investment Model: Herd Development Projections ...... ............ ................. 79 22 - Livestock Investment Model: Gross Production Value Projections ............................. 80 23 - Livestock Investment Model: Sales and Operating Costs ........................... .............. 81 24 - Livestock Investment Model: Cost-Benefit Analysis and Financial Rate of Return ......... 82 25 - Livestock Investment Model: Cash Flow Projection (for a four-member cooperative) .............. . 83 26 - Livestock Investment Model: Cash Flow Projection (independent farmer) ......................... 84 27 - Central Project Administration for Banana and Plantain Development: Investment Costs ....... 85 28 - Central Project Administration for Banana and Plantain Development: Operating Costs ... .... 86 29 - Banana Investment Model: Investment Costs ...... 87 30 - Banana Investment Model: Sales and Operating costs ..... . .................................... 88 31 - Banana Investment Model: Cost-Benefit Analysis and Financial Rate of Return .................. 89 32 - Banana Investment Model: Cash Flow Projection (for an 80-member cooperative) ................ 90 33 - Plantain Investment Model: Investment Costs .... 91 34 - Plantain Investment Model: Sales and Operating Costs ......................................... 92 35 - Plantain Investment Model: Cost-Benefit Analysis and Financial Rate of Return ......... 93 36 - Plantain Investment Model: Cash Flow Projection. 94 37 - Forestry Component: Investment Costs . ......... 95 38 - Forestry Component: Operating Costs .... ........ 96 39 - Forestry Component: Financial Analysis ......... 97 40 - Forestry Component: Economic Analysis .... ...... 98 41 - Financial and Economic Prices for Farm Products 99 42 - Economic Analysis of the Whole Project (at farm level) ............................... 101 3. Selected Data and Documents in the Project File .... ......... 102 MAPS IBRD - 14337 Rainfall and Land Development Projects Under Study IBRD - 14338 Land Use Potential IBRD - 14339 Forests and Forest Industries IBRD - 14340 Agrarian Reform Groups (Asentamientos), Farm Credit Offices and Grain Storage Facilities IBRD - 14362 Transportation and Relief   HONDURAS SECOND AGRICULTURAL CREDIT PROJECT I. BACKGROUND A. The Agricultural Sector The Role of Agriculture in the National Economy 1.01 Agriculture is the most important economic activity in Honduras. It contributes about one-third of the Gross Domestic Product (Annex 2, Table 1) and 16% of Government revenue, provides employment for 63% (1977) of the economically active population and generates about 81% of export earnings (Annex 2, Table 2). In the early 1970s, the annual growth of the sector was only 2% as a result of adverse weather and the withdrawal of Honduras from the Central American Common Market. Hurricane Fifi (1974) led to a decline of 9% in the output of 1974 in relation to the previous year and, with the effects of a drought, caused a further drop of 6% in 1975. However, during 1976 and 1977 output increased at an annual rate of 5%. 1.02 During 1973-77, crops accounted for 67% of the value added in the agricultural sector, livestock, including poultry, for 19%; forestry for 13%; and fisheries, beekeeping and hunting, the balance. There were major produc- tion variations for individual crops, although the proportion of the contri- bution of the crop subsector to the total value added in agriculture varied little. Banana output dropped in 1975 following Hurricane Fifi to less than 60% of the output in 1973, a slight recuperation was made in 1976 and further increases were recorded in 1977 and 1978 but output was still below the pre- hurricane period. There were substantial production increases from 1973-77 in export crops such as coffee (9%), sugarcane (23%) and tobacco (63%) and, to a lesser degree, in the three main food crops (maize, beans and rice). 1.03 The trade balance in agriculture is favorable and increased from an average US$200 million during 1973-77 to US$411 million in 1978 (estimated data). Bananas, coffee, lumber and meat accounted for 69% of total export value from 1973 to 1977 while imports of food, agricultural inputs and capital goods represented 17% of total imports during the same period. Until the early 1970s, the sector was able to supply the food needs of the country and even enabled the export of some food staples such as maize, beans and rice. This has recently changed, as food imports have increased at an average annual rate of 60%. Food imports accounted for about 9% of total import value during 1973-77, the items that were usually most significant being maize, rice, vegetable oils and milk (Annex 2, Table 2). Rural Population, Income and Employment 1.04 Of the country's population, estimated at 3.3 million (1977) and increasing at a rate of 3.3% per annum (1970-77), 68% is rural. The country has a low demographic density (29 persons/km ) overall, but most of the population is concentrated in the northwestern part of the country where the soil and infrastructure are better than elsewhere.  - 2 - 1.05 Average GNP per capita is about US$480 (World Bank Atlas method- ology, 1978), but a survey in 1967 showed then that the poorest 40% was almost entirely rural, earned incomes that were about one-fifth of the national average, and received only 7% as the4ir share of total income. Employment in agriculture in Honduras is highly seasonal and under-employment is pronounced although labor shortages can occur during harvest periods. Almost 80% of the agricultural labor force is engaged in growing food crops for subsistence. Although wage legislation stipulates a minimum daily rate, which was L 3 per day in December 1978. actual wages range widely both above and below this value, depending on local conditions of demand and supply. Opportunities for off-farm employment are restricted. 1.06 The daily calorie intake of the lowest income group is estimated to be 70% of minimum requirements for a normal life. Health standards are poor and anemia, malaria and intestinal infections are common. In rural areas, public water supply is rare and sewerage systems are either non-existent or insanitary. Natural Resources 1.07 Honduras has a land area of 112,000 km and is divided into five geographic regions. In central and western Honduras, the terrain is mountain- ous and used mainly for timber, cattle and growing coffee under shade. The Northeastern coastal plain has a humid tropical climate, poor soils and a very low population density, being used mostly for extensive cattle raising. The Southern coastal plain has a long dry season and only limited water resources. The central valleys have relatively fertile soils with moderate supplies of water. The northwestern valleys and coastal plain hold the most productive soils and it is here that the important banana plantations are located; the major limitations to production are flooding and inadequate soil drainage (Map IBRD 14338). Away from the coasts, rainfall is poorly distributed (Map IBRD 14337). Temperatures are even throughout the year, being modified only by altitude. 1.08 The cultivated land, including pastures, totals some 1.8 million ha but, apart from in the valleys, soils are generally shallow and with serious deficiencies of nitrogen and phosphorous. A further million hectares is classified as grassland and cultivable land (Annex 2, Table 3). About 7.0 million ha is forest (Map IBRD 14339) of which some 4.0 million ha are broad- leaf forests, 2.7 million ha are coniferous and 0.3 million ha are mangroves and swamps. Broadleaf forests are mostly tropical hardwoods, often located in areas of difficult access; pine forests have better commercial possibilities. 1.09 The agricultural sector shows a dichotomy in its productive and social structure. The low average yields in the subsistence crops are a result of low technology production by small-scale farmers. Furthermore, farmers lack adequate market incentives and facilities. On the other hand, export oriented or industrial crops such as bananas, tobacco, sugar- cane, cotton and coffee, employ comparatively high technology production systems and have organizations that regulate and support both production and marketing.  1.10 Although irrigation is often used for crops such as bananas and sugarcane and, to a lesser degree, for tobacco, cotton and vegetable crops, it is still far below its potential. Most irrigation has been by unregulated diversion of surface waters, although there is some use of groundwater in the Choluteca and Sula Valleys. The Bank Group is financing a groundwater study of the Choluteca basin (Credit 628-HO), a study of part of the Guayape Valley (Loans 1341/1342T-HO) and, in association with UNDP, a comprehensive study of the Aguan Valley (Loan 1576-HO). The new Unit of Hydrological Resources within the Ministry of Natural Resources (MRN) requires closer coordination with both the Ministry of Public Works and the National Agrarian Institute (INA) and an appropriate law to regulate water use is necessary before the implementation of irrigation projects can be undertaken effectively. 1.11 Although the natural resource endowment of Honduras is limited and not easy to exploit, the technical possibilities for raising agricul- tural output still appear to be substantial. The available technology has, however, not been widely disseminated. Cropping practices are traditional with little use of modern inputs. Estimates from the Council for Economic Planning (CONSUPLANE) suggest that the physical return to improved techniques that are already known can be very significant: Potential Yield Increases with Improved Practices Maize 66 Rice 141 Beans 72 Sugarcane 51 Tobacco 178 Coffee 68 Potatoes 484 Land Use and Distribution 1.12 Another possible means for raising agricultural output would be through shifting land from lower to higher value farm enterprises such as from low-producing grassland to crops such as sugarcane and rice. The Agri- cultural Census of 1974 showed there were 2.6 million ha under agricultural use in Honduras in that year, while later estimates have ranged as high as 2.9 million ha. However, in 1979 CONSUPLANE estimated that there were then 2.8 million ha of farmland, 48% of which were used for cattle grazing, 18% for seasonal crops, 8% for permanent crops, and the balance of 26% lying fallow (Annex 2, Table 3). A comparison between land that is actually used for agri- cultural purposes and land that is believed to be of potential agricultural use suggests that only 28% of the land which is suitable for annual crops is now used for this purpose. The comparable figure for perennial crops is 18%. These estimates suggest that considerable opportunities exist for increasing the intensity of land use.  1.13 At the time of the 1974 Agricultural Census, there were some 195,000 farms of which 78% were of 10 ha or less yet occupied only 17% of the agricul- turally used land (Annex 2, Table 4). The social pressure for effective land reform in the first half of the 1970s provoked a series of land invasions of privately owned land, creating concern among farmers and disrupting the production process. The Government has given the subject of land reform con- siderable attention and enacted special agrarian reform laws in 1972 and 1975. The first interim law proved difficult to enforce and led to considerable uncertainty. The second law (Decree Law 170 of December 30, 1974; La Gaceta No. 21.482, January 28,1975) was more effective as a framework for the orderly transfer of land ownership. During 1977/78, the tense situation eased somewhat as INA's authority in land reform matters was more clearly defined. By the end of 1978, INA had distributed 203,833 ha to a total of 35,586 families organized into 1,240 groups distributed as shown on Map IBRD 14340. It is expected that the majority of the small-scale farmers to be benefited through the proposed project would be members of these or future groups. The Government is aware of the difficulties involved in small-scale farmer development and recognizes that the various programs undertaken so far have achieved only moderate success. One of the reasons for this has been the lack of coordina- tion between the various public institutions that operate in the agricultural sector. Institutional Framework 1.14 The principal agricultural planning body is the Agricultural Policy Commission (CPA) which has replaced the previous planning group known as the Agricultural Coordinating Committee. This new committee, which has its own high-level secretariat, and only became fully operational early in 1979, consists of five members: the Ministers of Natural Resources, Finance and Economy and the Directors of INA and CONSUPLANE. Previous responsibility for public services to agriculture had been fragmented among different agencies and duplication of effort is still common. Excessive centralization and shortage of professionally trained people are further constraints. However, better techniques of administration are being considered in many Government agencies with the support of US$25 million recently provided by USAID. 1.15 MRN, the National Development Bank (BANAFOM) and INA have primary responsibility for agricultural and rural development. MRN is responsible for animal health, plant quarantine, research and extension, some input services such as machinery rental and the preparation of specific projects. MRN has been reorganized and is receiving support under the First Agricultural Credit Project (Credit 628-HO), but still has a weak extension service that requires further expansion and training. BANAFOM is in the process of a thorough reorganization and is discussed further in paragraph 2.10. INA, whose main responsibility is the implementation of the Agrarian Reform Program, acquires land and trains and provides guidance to settlers in operating their group farms until they achieve full cooperative status and gain title to the land. INA also has extension services and nurseries for cacao and citrus trees. Other organizations perform significant agricultural activities in more specific fields, such as the Honduran Banana Corporation (COHBANA), the Honduran Forestry Development Corporation (COHDEFOR) and the Central Bank of Honduras (BCH) through the Project Unit (PU).  1.16 Agricultural research is generally deficient and detailed technical recommendations are not available for all crops. The main crops that are currently under research by MRN are maize, rice and beans. Facilities are very basic and only limited progress can be expected. The Pan-American Agricultural School, which has received funds from Credit 628-HO under the ongoing Agricultural Credit Project, undertakes mostly livestock research programs including pigs and poultry, while the banana companies have adequate research programs for bananas, sorghum and groundnuts and have worked under a contract for MRN on rice, soybeans and plantains. 1.17 Extension services are coordinated through MRN and most agents are working with the agrarian reform groups (asentamientos) set up by INA. The main task of these agents, however, is to produce farm plans for BANAFOM's use in its credit program. Back-up services in plant pathology, entomology, soils and fertilizer tests and publications are not yet fully satisfactory. 1.18 Most farm inputs are imported and sold to farmers through commercial companies, with those for industrial crops often being distributed by the crop processing plants themselves. The sales section of BANAFOM supplies some inputs for small- and medium-scale farmers, and coffee and cotton cooperatives have been effective in providing farm input distribution channels to their members. The supply and use of inputs for the integrated production and marketing of bananas, sugarcane, cotton, citrus, pineapple, tobacco and coffee are also adequate. Some seed is now multiplied in Honduras, but much is still of low quality; there is no seed legislation or seed certification service. However, MRN distributes some improved seed through sales agents and intends to set up a seeds laboratory that will be partially financed from Credit 628-HO. 1.19 The production and marketing of bananas, coffee, cotton, tobacco and sugarcane is well integrated vertically and has so far been handled mainly by the private sector. Most other commodities, such as 50% of the basic grains that are marketed, some 90% of the vegetables and a high proportion of live- stock and dairy products, are sold at municipal markets. The recently formed Honduran Agricultural Marketing Institute (IHMA) is responsible for stabiliz- ing and supporting prices of agricultural products. So far IHMA has intervened in the marketing of four basic grains: maize, rice, beans and sorghum. Beef is marketed through two channels: one for export, mostly to the U.S., and the other for the domestic market through local abattoirs that often have inade- quate standards of hygiene. A new abattoir has recently been inaugurated in Tegucigalpa that was financed from Credit 628-HO. Pork is usually produced by small-scale farmers for domestic consumption, while poultry output has increased recently through the development of large integrated production and marketing firms. The Government controls the consumer price of milk but not the farmgate price. Pasteurizing plants are underutilized and much of the fluid milk that is consumed is sold, unpasteurized, by street vendors. Milk imports have increased significantly, probably because of the lack of incentives to dairy producers. A national livestock survey, with special emphasis on product marketing, is to be financed from Credit 628-HO. Public Policy for the Sector 1.20 In its second five year plan (1979-1983), the Government states th-at: (a) state intervention in agricultural development will be oriented toward promotion, support, regulation and control, rather than active  - 6 - involvement in production; (b) greater attention than in the past will be directed towards the small-scale, independent farmer and a thorough analysis of past results of supporting settlements of group farmers will be under- taken; and (c) determined efforts will be made to integrate the different public entities related to the sector to avoid unnecessary duplication of work. One of the main goals of the plan is to attain production levels of basic food grains that would allow self-sufficiency and small surpluses for export. To assist on-going settlements, land titling processess will be accelerated and Regional Agricultural Committees strengthened to help settlers in the management of their settlements. Priority will be given to future settlements that already have some level of infrastructure, including under- populated, existing settlements in the Aguan Valley and the banana areas that are to be rehabilitated. COHDEFOR's Socia'l Forestry Program, which is aimed at offering the rural poor employment alternatives, such as conversion from subsistence farmers to forestry workers, is to receive full Government support. New grain silos and on-farm storage are to be given emphasis as well as market structures within the plan for new infrastructure. In regard to institution building, there are two major undertakings: (a) to convert BANAFOM into an Agricultural Credit Bank; and (b) to strengthen the effectiveness of regional offices of all institutions by providing them with greater local autonomy. B. Banana and Plantain Development 1.21 Honduras is the fourth largest banana exporting country in the world, contributing 10% to the international trade, although in the past (1971) it had accounted for up to 16% of the world market. The U.S.A. is its biggest market, taking about 80% of exports, while the other three important markets are Germany, Belgium and Holland. Before Hurricane Fifi struck in 1974, banana exports often contributed over 50% to the country's total export earnings. The storm damage, however, cut this severely and Honduras has made serious attempts to restore its productive capacity. As a result, export values have increased over the last four years from US$107 million in 1976 to US$200 million for 1979. 1.22 Before Hurricane Fifi, there were 21,530 ha under banana cultivation, but this was reduced to 14,570 ha by the hurricane. Part of the damaged areas has already been rehabilitated and in 1978 the country had 17,100 ha under banana cultivation. The Tela Railroad Co. (United Brands Co.) and Standard Fruit Co. have some 9,500 ha under their direct management; associated farmers, who market through the two foreign companies, have about 5,000 ha; and COHBANA has some 2,600 ha. The national target is, not only to regain the 1974 level, but also to expand to 24,000 ha, based on a yield of 1,977 box/ha (800 box/acre). A feasibility study for banana plantations has been completed for some 2,000 ha on the Ulua river and another study is available at the pre-feasibility level for 2,700 ha in the Aguan valley. Considerable investments are required in drainage and flood-protection works in order to minimize damage by tropical storms and hurricanes which periodically affect these areas. The banana industry employs some 10,000 workers who are becoming more insistent in their wage demands. Also, input costs have risen recently, and there are uncertain- ties concerning fiscal policy and taxes on banana exports that are limiting the interest of large-scale private investors in plantation expansion.  1.23 Plantains in Honduras have been badly affected by the Black Sigatoka disease (Mycosphaerella fijiensis var. difformis) which appeared in 1974 following Hurricane Fifi and has reduced exports to the USA to negligible amounts. The recuperation of diseased stands of plantains is possible only if disease control is practiced over the whole area. Therefore, MRN, with financial support from the Central American Bank for Economic Integration (BCIE), has recently initiated a disease control program for all the major plantain areas of northern Honduras. 1.24 COHBANA, an autonomous state institution, was created in 1975 to promote more favorable conditions for the development of bananas in Honduras and to obtain an increasing national participation in the production, market- ing and transport of bananas. The production expansion program is being developed jointly with INA to combine this program with agrarian reform and farmer settlements. To date it has been successful in rehabilitating three plantation settlements: Isletas, Compania Bananera Hondurena S.A. (COBAHSA) and Finca 3. COBRANA has an approved technical staff strength of 88 but there are many vacancies; in addition, there are 19 persons who give technical support to the Isletas plantation and 38 in administrative posts. The finan- cial resources of COHBANA increased from US$2.7 million in 1975 to US$10.8 million in December 1978, but it had overall operating losses in three of its four years of operations, principally because of 179% increases in costs and a revenue increase of only 155%. The statutes of COBHANA state that the Govern- ment will contribute an initial capital of US$50 million within a period of four years; at appraisal the only contribution that had been made, however, was a capital contribution of US$1.4 million in 1975 and this had been eroded by losses to US$0.85 million by the end of 1978. The corporation's income base is limited to a 5.5% surcharge on banana exports for technical assistance and a commission of two points over the cost of the loans it administers which are financed with funds borrowed from foreign commercial banks. 1.25 Government revenues from banana exports have increased dramatically since 1974 when a US$0.50 tax per box was imposed; in 1973, banana export tax revenues were US$0.40 million; in 1974, US$4.1 million and in 1978, US$18.0 million. C. Forestry Development 1.26 Lumber and wood products have accounted for about 12% of the total annual export value during 1973-77 (Annex 2, Table 2), over 98% of wood exports going to markets in the Caribbean Islands, Europe and Latin America. Although production of wood has remained fairly constant, internal consumption has increased as shown below:  -8- Production Apparent Internal Millions of Export Consumption Year Board Feet (bf) Million bf Million bf 1974 285 193 92 1975 250 192 58 1976 247 180 67 1977 259 189 70 1978 261 180 81 1.27 In 1977 there were 118 sawmills operating with a toSal lumber production of 259 million board feet, equivalent to 610,600 m . There were also 58 secondary wood processing industries in Honduras, including pine resination plants and two major companies that produced 13,000 m of plywood. Present production methods are poor, however, with only 70% of wood cut reaching the mills as a result of inefficient harvesting, transport diffi- culties and antiquated production techniques at the mills, such as using circular saws, which yield an output of sawn wood that is only one-third of the wood input. 1.28 Although the potential for a vastly improved forest industry exists, it faces many constraints, the most alarming one being the rapid depletion of the resource itself as a result of widespread burning of forests as part of the system of shifting agriculture. According to a recent forest inventory taken by the UN Food and Agriculture Organization (FAO) and the Canadian International Development Agency (CIDA), there was a 40% reduction of the iational forest area in the 12-year period prior to 1978. Of about 6 million m of estim ted annual incremental growth, the industry harvests only about 1.3 million m , whereas losses by forSst fires and illegal cutting for fuel are estimated to be some 5.0 million m ; furthermore, excessive clearing of forests on steep land and marginal soils is leading to increasingly serious soil erosion of the catchment areas of the major river systems, including the Ulua, which drains through the main banana and plantain areas of the north coast. Since the creation of COHDEFOR, there has been a check on the rate at which forest resources are being depleted, but the situation is still very serious. 1.29 A Forest Law was published in 1974 that created COHDEFOR and decreed state ownership of all forest trees in the country, regardless of land owner- ship. COHDEFOR's mandate is to generate funds for the nation through sound economic forest development. It has the authority to use forests under any system it chooses and, although it is obliged to pay private landowners a stumpage value for trees, this value is determined by COHDEFOR and it is currently insufficient to induce replanting. This is a basic issue which will have to be addressed before any major improvement in the rate of replanting can be expected. COHDEFOR can also undertake the industrialization of forest products, often through state-owned companies or enterprises of mixed capital, and it also handles all exporting and domestic wholesaling of forest products. COHDEFOR is required to organize a Social Forest System by forming forest worker associations and cooperatives for resin refining. 1.30 The current assets of COHDEFOR have increased from US$15.1 million at the end of 1975 to US$37.4 million by October 1978 (these figures do not include a valuation of all forest resources as they are state-owned);  -9- furthermore, it has made a profit every year since it began operations (net profits to October 31, 1978 were US$7.25 million). Other than the obliga- tion to deliver US$2.5 million annually to the Government out of profits, COHDEFOR can retain its earnings. Although COHDEFOR itself has a strong financial position, some of the wood manufacturing companies it has set up are in grave financial difficulties. However, given its financial base, COHDEFOR has access to local financial sources for working capital and fixed investments. Its present portfolio of US$10.25 million has a low delinquency ratio of 2.2%. At the time of appraisal, COHDEFOR had not given any loans for reforestation. 1.31 COHDEFOR's development strategy involves substantial investments that could total US$75 million by 1983. The three main areas of activity are: (a) the Olancho Project that is intended to put a major forest area under intensive production and reforestation; (b) the Comayagua forest area development program designed to reduce costs of lumber production and transportation; upgrade milling practices; and expand employment opportunities in reforestation, forest fire protection and resin production through rural cooperatives; and (c) the expansion of the secondary wood industry sector by attracting local and foreign participation in millwork and furniture and plywood production. 1.32 It is estimated that in 1978, some 29,700 people worked in the forest subsector, of whom 57% worked in manufacturing industries and 43% in silvi- culture. COHDEFOR alone employs 1,650 people (a 57% increase over 1977 figures), of which only 45 have university degrees. Although there is a forestry training school at Siguatepeque and considerable technical assistance from international and bilateral agencies is available, there is still, however, a continuing shortage of experienced professionals to work in the forest subsector. D. Bank/IDA Involvement in the Sector 1.33 The first Livestock Development Project, with a total project cost of US$5.2 million, of which US$2.6 was provided by IDA Credit 179-HO, became effective in October 1970. Emphasis was placed on export diversifi- cation through lending to medium- and large-size farms for beef, dairy dev- elopment and supply of working capital for fattening operations. Technical assistance was provided by a Project Unit set up within BCH. The overall implementation of the project was satisfactory in view of the objectives that had been originally set. However, Project Performance Audit Report No. 1920 of February 21, 1978 drew attention to a number of issues in regard to the first project, many of which had in fact already been taken into con- sideration in the design of the next two projects (paras 1.34 and 1.35). -1.34 The Second Livestock Development Project became effective in January 1974. The total project cost was estimated at US$11.0 million, of which US$6.6 million was provided by IDA Credit 434-HO. The project  - 10 was a continuation of the previous project, with the added goal of involving more small- and medium-scale farmers. All funds are committed and total disbursement of the Credit is expected by April 1980, including US$1 million for a subloan approved for the rehabilitation of the Isletas Banana Cooperative, severely damanged by Hurricane Fifi. Implementation of Credit 434-Ho is considered to be satisfactory. 1.35 The first Agricultural Credit Project that became effective in December 1976 envisaged a total project cost of US$28 million of which US$14 million was to be financed by IDA Credit 628-HO. The objectives of this pro- ject were broader than those of the previous projects, and emphasis was placed on making subloans available to the cropping subsector for on-farm investment, agro-industries and heavy machinery, although subloans were also to be made available for the livestock subsector. The project included US$6.7 million for technical assistance and funds were also allocated to complete the rehab- ilitation of the Isletas Banana Cooperative. The Project Unit is the same as that for the previous two projects. The difficulty in recruiting suitable expatriate technical personnel has resulted in a low rate of disbursement of funds for technical assistance, but credit funds were fully committed at the end of February 1980 because of the increased demand for agricultural lending in the cropping subsector. 1.36 The Guayape Regional Development Project became effective in December 1978. It has a total project cost of US$14.6 million, of which US$10.5 million are to be provided by Loan 1576-HO. The project finances on-farm investments, small irrigation schemes, machinery pool services, rural road improvements, extension services and agricultural research facilities for some 1,200 small- scale farmers and 70 agrarian reform settlements (1,500 families). The project became operational early in 1979. 1.37. The Industrial Credit Project, which became effective in July 1979, has a total project cost of US$28.4 million, of which US$15 million are to be provided by Loan 1659-HO. The project is to establish the institutional capa- city to select, appraise and finance industrial investment projects, parti- cularly those of small- and medium-scale manufacturing firms in the wood industry, and is being undertaken by a specialized Project Unit called the National Industrial Development Fund established in BCH. II. AGRICULTURAL CREDIT A. Role in the Agricultural Sector 2.01 The agricultural sector is financed by both institutional and non- institutional sources, and, although no reliable information is available about the latter source, estimates suggest that nearly 80% of small-scale farmers depend on private moneylenders and pay usurious rates of interest. Institutional credit is supplied mainly by the banking system and, to a smaller extent (about US$2.5 million annually), by cooperatives and private agencies, the most important of which are the Honduran Development Foundation, the Federation of Savings and Loan Associations and the National Association of Campesinos.  - 11 - 2.02 The banking system in Honduras consists of BCH, 13 private commer- cial banks, three public sector development institutions and six specialized credit institutions. The consolidated balance sheets as of June 30, 1979 of the entire banking system, excluding BCH, are summarized in Annex 2, Table 5. The commercial banks accounted for 91% of the deposits mobilized and 74% of the loans provided by the banking system. Total credit rose from US$374 mil- lion in 1976 to US$517 million in 1978, an increase of 38% over the period. 2.03 During 1976-78, the total volume of agricultural credit rose from US$116 million to US$152 million, an increase of 31%. The proportion of agricultural credit provided by commercial banks also rose slightly, from 14.6% in 1976 to 15.9% in 1978. Their outstanding loans for agricultural credit increased from US$55 million in 1976 to US$83 million in 1978, a 50% rise. During that year, their lending for export crops increased by 95%, for basic grains by 71%, and for livestock by 8%. 2.04 There is a problem of loan guarantees for small-scale farmers that BCH hopes to resolve by changing the bank law with regard to loan collateral and guarantees. The initial reluctance of the banking sector to continue agricultural lending after the passing of the law that empowered INA to pay compensation for expropriated land with bonds that carried low rates of in- terest and lacked marketability was overcome in the case of IDA-financed agricultural projects (paras 1.33 to 1.35) when BCH agreed to buy back these bonds from the banks. B. Public Credit Policy 2.05 BCH, as the monetary authority, determines the credit policy and regulates the flow of credit to the economy by: (a) fixing minimum legal reserve requirements on deposits; (b) determining rediscount rates; (c) set- ting maximum interest rates for lending and deposits; (d) fixing portfolio limits; (e) determining limits for external debts; (f) conducting open market operations; and (g) setting exchange rates. 2.06 BCH is also the regulatory body for the banking system, exercising this function through the Office of the Superintendent of Banks, an official appointed by the Board of BCH. At present, the Superintendency of Banks also undertakes external audits of projects financed by international banks or through multi- or bilateral aid programs; however, this task may be delegated to an independent firm of auditors in the future. 2.07 Banks in Honduras are required to maintain 35% liquidity (either in cash or Government bonds) against their domestic liabilities and 45% against foreign liabilities. To channel money for productive activities, the BCH has set a limit of 25% as the maximum share of domestic trade and consumption in the loanable funds of commercial and development banks. Every year BCH fixes the limit for rediscounting facilities, which from the end of 1978, was US$74 million. From September 1979, the rediscounting rate for agricul- ture has varied from 5% to 6% and was generally provided for 12 months  - 12 - unless there were exceptional circumstances. Deposit rates for banks fixed by BCH currently range from 7% to 8.5% and lending rates for loans exceeding US$1,250, are 11% for agricultural production, services, transport and commu- nication and a maximum rate of 16% for trade and consumption. 2.08 BCH may borrow funds and act as fiscal agent for Government, as it has for past projects IDA has financed and would do for the proposed project. The PU set up in BCH for the management of the IDA projects is attached to the Credit and Investment Department. The PU would also manage the proposed project. C. Credit Institutions 2.09 Out of the 13 commercial banks, six participated in the First Livestock Project (Credit 179-HO) and nine in both the Second Livestock Project (Credit 434-HO) and the Agricultural Credit Project (Credit 628-HO). Factors that helped maintain the interest of commercial banks in IDA projects have been the attractive financial conditions, the land bond guarantee (para 2.04) and the effective technical assistance provided by the PU. 2.10 BANAFOM, the state development bank, founded in 1950, provides the major portion of the institutional finance for agriculture. It has by far the largest participation in small-scale farmer credit both within and outside the land reform sector. Its head office is in Tegucigalpa and it has 28 banking outlets throughout the country and a staff of some 1,000. The Board of Directors consists of its President; the Ministers of Natural Resources, Finance and Communications; and representatives from the BCH and the private banking sector, as well as five other members representing various groups of economic interests. 2.11 The institution became involved over the years in an excessive number of functional activities, many of which were not directly related to banking, but contributed to its operational losses and made it difficult for management to carry out an effective job of banking. Government therefore decided to divest BANAFOM of its non-banking functions and to transform it into an agricultural development bank. Accordingly, by the end of 1978, BANAFOM had been relieved of the following activities: marketing and storing of grains, industrial sector financing and coffee development programs. Also under consideration for divestment are the sale of popular consumer goods and the section responsible for marketing farm inputs. Consultants financed by USAID began work in May 1979 to assist in the reorganization of BANAFOM. The areas of reorganization are institutional reform; livestock, crop and coopera- tive credit; data processing; organization and banking services; resource mobilization; financial management; accounting; and systems and procedures. 2.12 The Government has had to make substantial contributions to BANAFOM over the years to keep it in operation. Although the overall resources of BANAFOM were increased during 1974-78 from US$86 million to US$100 million, net equity declined from US$22 million to US$14 million, mainly because of  - 13 - losses incurred in non-banking operations and development financing. Alter- native means of handling development finance, such as establishing trusteeship funds, the interests from which would not be charged to commercial banking operations, are being considered. Because of the slow growth in deposits, BANAFOM has been mainly dependent on external borrowing for its lending operations. Loans and discounts contributed about 60% of the total assets as of December 31, 1978. Interest rates on advances and rediscounts with BCH fluctuate between 3% and 8% per annum, while commercial foreign bank credits charge between 8% and 15% per annum, depending on the current level of LIBOR rates; BANAFOM's financing of borrowing is therefore very costly. Long-term borrowings totaled US$29.2 million as of December 31, 1978, with interest rates varying considerably according to the lender from 1.5% on some IDB loans to 9% on commercial bank loans. 2.13 Agricultural loans are granted to individuals, groups of farmers and agencies such as the Honduran Development Foundation for on-lending to their members. In 1972, BANAFOM arranged credit for settlement of previously landless peasants who had few resources of their own. Since then BANAFOM's involvement in small-scale farmer credit has increased and, during 1978, there was an increase of 16% in the number of loans and 7% in the value of lending to this category of borrower. 2.14 Production loans are granted for periods of up to 18 months and are secured by chattel mortgage, land title or a guarantee. In addition, the joint and several signatures of members are required. Farm development loans are usually granted for up to seven years (this restriction was removed for ongoing IDA projects) against chattel mortgage and up to 25 years against a mortgage of fixed assets. Borrowers are required to contribute 20% to the development cost, but this requirement is reduced to 10% in the case of small-scale farmers and can be completely waived for asentamientos when appropriate. Loans can be disbursed in cash or kind or against approved purchase orders; production loans are usually disbursed in installments. No penalty is levied on overdue loans, but overdue interest is capitalized. 2.15 BANAFOM's loan portfolio consisted of 41,951 loans at the end of 1978, a 12% decrease from 1977 figures although the number of small-scale farmers increased. The collection ratio for 1978 was only 38%, while overdue loans in relation to the portfolio was 33.6%. BANAFOM is reluctant to condone any of its delinquent, small-scale farmer loans by writing them off to the reserve. It plans to cease sales of consumer items and agricultural inputs and to create a trust fund department to avoid draining capital from its commercial banking operations and to complete an internal reorganization which should make it the agricultural credit bank that Honduras requires.  - 14 - III. THE PROJECT A. Introduction Project Identification and Preparation 3.01 The Government of Honduras has requested the World Bank Group to continue to help financing medium- and long-term investments in the agricul- tural sector. The proposed project would be the fourth in a series of projects administered by a Project Unit (PU) established for this purpose in the Central Bank of Honduras (BCH). In addition, the Government has requested assistance in the development of a pilot-scale reforestation scheme. 3.02 The feasibility study for the proposed project was prepared by the PU on the basis of preparatory work by a mission of the FAO/Bank Cooperative Programme that visited Honduras in September/October 1978. COHBANA prepared the banana component in November 1978, assisted by a civil engineer from FAO, while the forestry component was identified in 1978 in the course of the preparation of the integrated rural development project for the western high- lands known as PRODERO, which is to receive financial assistance from IFAD. Project Formulation 3.03 The proposed project is similar to that outlined in the feasibility study presented to the appraisal mission on its arrival in Honduras. The main difference is that a component for small irrigation schemes of some 150 ha each has been excluded because of insufficient technical preparation and the lack of an adequate national water policy. A list of studies and working papers related to the proposed project is given in Annex 3. General Project Objectives 3.04 The project would assist national programs of agricultural develop- ment and agrarian reform, principally by: (a) expanding the area under food crops and for livestock production to provide more adequate nutrition for the national population; (b) improving the contribution of the agricultural sector to export earnings and import substitution; (c) increasing employment oppor- tunities and improving family incomes on farms and in industries associated with the transformation of agricultural products; and (d) supporting selected institutions for further planning and development of the agricultural sector and for the conservation of natural resources. B. Brief Description 3.05 The project would comprise the following main components to be carried out over four years:  - 15 - (a) a nationwide I/ agricultural credit program to finance lending through the national banking network for (i) crop and livestock investment plans: (ii) agricultural machinery for contractors; and (iii) abattoirs for small municipalities; (b) a pilot forestry program in western Honduras; (c) studies of (i) groundwater resources in valleys of high agricultural potential, but with limited seasonal river flows; (ii) the use of waste bananas and plantains and sub-products for animal feed; and (iii) the organization and management structure of COHBANA. (d) training for staff of COHBANA, COHDEFOR and the PU; and (e) incremental expenditures for the PU including the provision of consultant services, vehicles and equipment. 3.06 Special attention would be given to farm development by cooperatives growing sugar, rice, bananas and plantains and breeding dual-purpose cattle (para 1.13), but all farmers would be eligible to apply for investment credit. The construction or rehabilitation of municipal abattoirs would be included to improve the hygienic condition of meat on the domestic market and to make full use of by-products. Machinery contractors would be assisted to purchase heavy equipment required for drilling boreholes for water, land clearing and drainage. The pilot scheme for reforestation would establish the basis for a possible major forestry program in the future. Over half of the agricul- tural credit program of the proposed project would be for small-scale farmers, including members of agrarian reform cooperative societies (para 3.23), and this group would probably make up more than three-quarters of the beneficia- ries of the project. 3.07 BCH would be the principal executing agency, operating through the PU, already established to carry out projects financed in part by IDA Credits 179-HO, 434-HO and 628-HO. BCH would make medium- and long-term subloans for agricultural development through public and private financial intermediaries. Public corporations would carry out the banana (COHBANA), plantain (COHBANA with MRN) and forestry (COHDEFOR) components under project administration con- tracts with BCH (para 4.10). C. Detailed Features Lending Program for Agricultural Development 3.08 Investment for the development of all forms of agriculture would be financed through subloans to be committed over four years by financial intermediaries to individual investors and to groups of small-scale farmers associated in cooperatives or other combinations. A summary of the proposed lending program is as follows: 1/ For the Guayape Valley, limitations have been introduced to avoid any overlap with the potential beneficiaries of Loan 1576-HO (para 4.14).  - 16 - Average Cash Value Total Invest- Cash Number of Investment Plans ment Invest- Project Year 1 2 3 4 Total Plan Subloan ment Small-scale farmers Sugarcane 9 15 6 30 83 83 2,490 Rice 3 6 8 17 77 77 1,309 Banana 2 2 1 5 1,020 1,020 5,100 Plantain 137 138 275 7 7 1,925 Dual-purpose cattle 38 40 40 118 29 29 3,422 Sub-Total 189 201 55 445 32 32 14,246 Other investors Sugarcane 7 10 3 20 89 71 1,780 Rice 3 6 7 16 79 63 1,264 Dual-purpose cattle 60 58 58 176 30 24 5,280 Municipal abattoirs 1 2 1 4 250 200 1,000 Other agricultural investments, including con- tractors 10 10 10 9 39 100 80 3,930 Sub-Total 81 86 79 9 255 52 42 13,254 TOTAL 270 287 134 9 700 39 - 17,500 3.09 The principal crops to be financed are expected to be sugarcane (5,000 ha), irrigated rice (1,650 ha), plantains (1,375 ha) and bananas (1,000 ha). In addition, small areas of various perennial tree crops would be developed, including cacao, citrus and coconuts. Subloans would also be made to clear and prepare land for seasonal dryland crops such as soybeans and corn and to finance investments for crop storage installations on farms and the purchase by contractors of heavy farm equipment. 3.10 The predominant livestock activity to be financed would be dual- purpose (beef-dairy) cattle farming, although investments in other lines of activity would be eligible, provided the investment plan was supported by a technical and market analysis acceptable to the PU. About 300 dual-purpose schemes are projected to be financed, of which about 40% are expected to be on farms of cooperatives. Most of the cooperative farms are likely to be in the Aguan valley, where both crop (oil palm) and livestock development is being promoted by INA on large areas of cooperatively managed land. 3.11 About four municipal abattoirs would be improved or rebuilt to raise the quality of meat offered on the local markets, to make fuller use of sub-products, and to reduce pollution in nearby streams.  - 17 - Forestry Development 3.12 The purpose of the forestry component would be to develop, on a pilot scale, the organization and management systems necessary to initiate a major national reforestation program which would be principally on state- owned land of which there are considerable areas available for planting. This pilot phase would be in western Honduras, associated with the PRODERO regional development program, and it would consist of the following elements to be completed in four years: (a) the establishment of a nursery for the annual production of 1.8 million pine seedlings for the reforestation program and two nurseries for the annual production of 800,000 broadleaf seedlings for firewood in the area near Belen (Map IBRD 14339); this program would require three pickups and two trucks as well as nursery equipment; (b) a reforestation program of 4,000 ha of pine (Pinus oocarpa) for timber production on state-owned land; this project would finance 3,500 ha as 500 ha have already been planted; (c) development of a forest fire protection system to cover pasrt of the PRODERO region, including the project area; the service would require a tanker-truck and fire-fighting equipment; (d) the formation of a forest management unit for the existing forests in the project area; the unit would be located in Santa Rosa de Copan and would consist of a forest manager, three foresters, four rangers, a draftsman and two supporting staff. This unit would be provided with an office, equipment and furniture and two vehicles; and (e) internationally recruited consultant services for a total of 12 man-months at a gross cost of US$8,250 per man-month, and 24 man-months of training would be provided for staff of COHDEFOR at an average gross cost of US$2,200 per man-month (para 4.08). Studies and Training 3.13 Studies for Water Resources and Agricultural Development. Studies would be carried out, over a period of two years commencing in 1980, of the water resources and appropriate development strategy for a valley of high agricultural potential. The study would be supervised by the Water Resources Unit of MRN. The purposes of the study of the valley would include the following: (a) preparation of an assessment of the groundwater resources; (b) establishment of guidelines for the rational exploitation of the valley;  - 18 - (c) preparation, to the feasibility level, of a drainage plan; and (d) identification of areas of the valley suitable for irri- gated agriculture. Outline terms of reference for such a study are given in Annex 1. During negotiations an assurance was obtained that, no later than September 1, 1980, the Government would submit its detailed proposals to the Bank. 3.14 Banana and Plantain By-products. Studies would be carried out under the supervision of COHBANA, over a period of three years commencing in 1980, on the use for animal feeding of rejected and surplus fruit, and leaves and pseudostems of bananas and plantains. The research and development program would include the preparation of silage and dry meals from the raw products and the fermentation of fruit pulp with yeasts and other single-cell organisms to increase the protein content of the final product. These studies would form part of the collaborative program of banana research being coordinated by the Union of Banana Exporting Countries. The work to be carried out would be in accordance with a program and specifications to be previously approved by the Bank. 1/ 3.15 COHBANA, Management Studies and Training. Internationally recruited consultants would be engaged by COHBANA to examine the present structure and management system of the institution and to make recommendations for strength- ening its management, administration, accounting, financial and technical capacity. Funds would be provided to finance 41 man-months of consultant services at an average gross cost of US$8,030 per man-month. Funds would also be provided to finance 24 man-months of training for COHBANA staff in management, accounting, financial and technical matters. Project Unit 3.16 The existing PU would be maintained at least until the delivery to the Bank of a project completion report (para. 4.27) and financed from recoveries made by BCH from subsidiary loans made under the provisions of Development Credit Agreements 179-HO, 434-HO, and 628-HO. The proposed project would provide a senior professional to be posted to a new regional office of BCH, probably at Danli, and three professional staff to strengthen the regional offices in La Ceiba and San Pedro Sula and the central office in Tegucigalpa. The new staff would include specialists in crops such as cacao, citrus and sugarcane. Provision would also be made for a total of eight man-months of training for PU staff at an average gross cost of US$2,200 per man-month (para 4.08). 3.17 The current consultancy service agreement with the regional organiza- tion, CATIE, extends to the end of June 1981. The proposed project would provide for a similar long-term agreement for three full-time experts (probably 1/ References to the Bank or loan apply equally to IDA or credit, where appropriate.  - 19 - in the fileds of animal production, pasture management and farm economics) for a duration of two years, at an estimated gross cost equivalent to US$4,675 per man-month for a total of 72 man-months. In addition, eight man-months of short-term, internationally recruited consultant services, at an estimated gross cost equivalent to US$7,700 per man-month, would be budgeted for crop specialists. 3.18 A total of 13 vehicles would be purchased for use by the PU staff-- six in the first project year, one in the second and six in the fourth. Office equipment and furniture for the new regional office would also be financed under the proposed project. 3.19 Two trainees to work with each expert would be provided by MRN, INA and participating banks (PBs) (para 4.04) for about six months on a full-time basis with the three long-term consultants (para 3.17). Subsistence and travel expenses for the trainees (36 man-months/year) have been included in the budget for the proposed project, but all their other expenditures would be borne by their respective employers. Subsistence expenses for the four additional staff of the PU and the operating and maintenance expenses for seven vehicles 1/ have been included in the project costs, and resources have been allocated for farm demonstrations and field days to be organized by the PU. Further particulars are given in Annex 2, Table 6. D. Project Cost 3.20 The total cost of the proposed project is estimated at US$38.5 mil- lion adjusted to December 1979 prices (which includes no significant local tax (para 3.25)) of which about US$19.3 million, or 50%, represents the foreign exchange requirements. Price contingencies on the foreign exchange element were calculated assuming that commitments would begin in January 1980 (para 3.21) and that annual international price increases would be 10.5% in 1980, 9% in 1981, 8% in 1982 and thereafter 7% per annum until 1985. For local costs, it was assumed that domestic price inflation would be 8% per annum. Cost estimates, based on representative enterprise investment models described in Chapter V, are summarized in the following table. These cash costs exclude (a) an estimated US$1.5 million of family labor and inputs in kind to be con- tributed by smallscale farmers; and (b) the operational costs of the existing PU, which would be financed by funds recovered by BCH from the lending programs, partially financed by Credits 179-HO, 434-HO and 628-HO. The phasing of the lending program and project costs and the cash flow for BCH are given in Annex 2, Tables 7 to 9. The average gross costs per man-month of internationally recruited consultant services are estimated at US$8,030 for 61 man-months of short-term assigiiments and US$4,675 for 72 man-months of long-term assign- ments, giving a weighted average of about US$6,200 per man-month for 133 man-months of consultant services. Training costs are based on US$2,200 per man-month for a total of 56 man-months. 1/ The other six new vehicles would be to replace existing vehicles of the PU.  - 20 - Foreign Baseline Project Components Local Foreign Total Local Foreign Total Exchange Cost -----(L million)----- ----(US$ million)---- % 7 Agricultural Development Small-scale farmers 14.6 13.8 28.4 7.3 6.9 14.2 48 42 Other investors 14.0 12.6 26.6 7.0 6.3 13.3 48 40 Forestry Development 2.6 1.0 3.6 1.3 0.5 1.8 30 6 Studies and Training 1.2 5.0 6.2 0.6 2.5 3.1 80 9 Project Unit 1.0 1.2 2.2 0.5 0.6 1.1 52 3 Baseline Total 33.4 33.6 67.0 16.7 16.8 33.5 50 100 Price Contingencies 5.0 5.0 10.0 2.5 2.5 5.0 50 15 Total Project Cost 38.4 38.6 77.0 19.2 19.3 38.5 50 115 Note: Figures in this table have been rounded. E. Financing 3.21 The proposed IDA credit in various currencies equivalent to US$5 million and Bank loan in various currencies equivalent to US$20 million would finance the foreign exchange cost of the project (50%) and US$5.7 million of local costs, which are justified on country economic grounds, and, thus, 65% of the total project cost. Sub-borrowers would finance US$3.3 million, or 9% of total project cash cost. As shown below, it is estimated that US$4.3 million (11%) would be contributed by Government and BCH, US$3.9 million (10%) would come from the participating banks, and US$2.0 million (5%) would come from the national corporations, COHBANA and COHDEFOR.  - 21 - Participating Institutions Total Project Public Government/ Bank/ Cash Project Components Beneficiaries Banks Corporations BCH IDA Investments US$ M % US$ M % US$ M % US$ M % US$ M % US$ M % Agricultural Development Small-scale farmers /a 0 1.1 7.5 1.0 7.5 1.1 8 11.0 77 14.2 100 Other investors 2.7 20 2.1 16.0 1.1 8 7.4 56 13.3 100 2.7 10 3.2 12.0 1.0 4 2.2 8 18.4 66 27.5 100 Forestry Development - - - - 0.6 33 - - 1.2 67 1.8 100 Studies and Training - - - - 0.1 4 0.9 29 2.1 67 3.1 100 Project Unit _ _ - _ - - 0.4 33 0.7 67 1.1 100 Baseline total 2.7 8 3.2 10 1.7 5 3.5 11 22.4 66 33.5 100 Price contingencies 0.6 0.7 0.3 0.8 2.6 5.0 Total project cost 3.3 9 3.9 10 2.0 5 4.3 11 25.0 65 38.5 100 /a Investment plans would include about USS1.5 million family labor and contributions in kind. 3.22 Participating banks would also provide the complementary funds necessary to finance the lending program and supporting services and such short-term funds, estimated at US$0.7 million, as may be required by project beneficiaries to complete their investment plans (para 4.11). 3.23 The lending program would be financed in the proportions shown below. Total Participating Bank/ Credit Institutions BCH IDA Program US$ M % US$ M % US$M % US$ M % Lending Program for Agricultural Development Small-scale farmers 2.1 15 1.1 8 11.0 77 14.2 100 Other investors 2.1 20 1.1 10 7.4 70 10.6 100 Baseline total 4.2 17 2.2 9 18.4 74 24.8 100  - 22 - 3.24 The Bank loan would be made to the Republic of Honduras at the Bank lending rate prevailing when the loan and credit documents are circulated to the Board, for a term of 20 years, including approximately five years of grace.l/ The credit would be provided on standard IDA terms. The Bank loan and IDA credit would be channeled by the Government through BCH under subsidiary agreements (para 4.09). The foreign exchange risk on the servicing of the loan and credit would be borne by: (a) BCH in respect of amounts withdrawn for the lending program and for the expenses of the PU and training, except for the training of COHDEFOR staff; and (b) the Government in respect of amounts withdrawn for the components for forestry and studies. Assurances were obtained at negotiations that financing would be as specified in this and the preceding paragraphs. F. Procurement 3.25 The on-farm investment items to be financed for approximately 700 subloans throughout Honduras over the four-year investment period would be varied and not suitable for procurement through international competitive bidding; therefore, sub-borrowers would purchase their requirements through regular commercial channels. Wherever an individual order for goods, works or services (other than consultant services) to be procured was expected to exceed US$50,000, price quotations would be obtained from at least three suppliers and confirmation of the order would require the prior approval of the institution making the subloan. Foreign firms are adequately represented in Honduras and there is a good network of competitive suppliers of agricul- tural inputs. Facilities for maintenance of machinery and equipment are adequate. All inputs, machinery and equipment for the proposed investments are exempt from import duties and there are no import restrictions that could affect purchases through existing local channels. Farming inputs, machinery and equipment are also exempt from the current 3% sales tax. 3.26 Civil works for the banana and plantain areas (US$1.6 million) and forestry development would be carried out through force account by COHBANA, MRN or COHDEFOR as appropriate, or through locally advertised competitive bidding procedures, which are acceptable to the Bank. The remaining expendi- tures for these components of the project are not suitable for competitive bidding. 3.27 Vehicles and equipment, estimated to total US$200,000, would be procured by the PU and COHDEFOR over four years through local competitive procedures. The Bank would review invitations to bid, proposed awards and final contracts for goods and civil works estimated to cost the equivalent of US$75,000 or more for: 1/ Four years and 10 months, assuming the legal documents are signed in April 1980.  - 23 - (a) flood protection and land drainage for banana and plantain development; (b) the forestry component; and (c) the PU. Assurances were obtained during negotiations that procurement procedures outlined in this and the preceding paragraphs would be followed. G. Disbursement 3.28 The Bank Group would disburse over a period of five years: (a) 77% of amounts previously disbursed by PBs for subloans for agricultural developments by small-scale farmers for (i) a total value of US$4.0 million for banana and plantain devel- opments; and (ii) a total value of US$5.5 million for other developments; (b) 77% of expenditures for engineering studies, civil works for flood control and drainage, and common services for banana and plantain development for a total value of US$1.5 million; (c) 70% of amounts previously disbursed by PBs for subloans made to sub-borrowers other than small-scale farmers, for a total value of US$7.5 million; (d) 100% of foreign expenditures for directly imported and 67% of local expenditures for locally procured vehicles and equip- ment, for a total value of US$167,000; (e) 100% of foreign expenditures for directly imported and 67% of local expenditures for locally procured materials and ser- vices, including salaries, for a total value of US$1,241,000; (f) 100% of total expenditures for consultant services for a total value of US$460,000; (g) 100% of foreign expenditures and 67% of local expenditures for training, for a total value of US$200,000. (h) 100% of foreign expenditures and 67% of local expenditures for studies, for a total value of US$1,800,000. The US$2,632,000 price contingencies to be financed by the Bank would initially be unallocated in the Bank loan. 3.29 Disbursements under the loan would not take place until the credit had been fully disbursed or specially committed.  - 24 - 3.30 Retroactive financing is recommended for payments made before the date of the Loan and Project Agreements, but after January 1, 1980, for an amount not exceeding the equivalent of US$100,000 for the establishment of a forest nursery early in the year to produce tree seedlings in time for the 1980 planting season. 3.31 It would be a condition of disbursement that the respective partici- pating entity had entered into a project administration contract with BCH (para 4.10). Conditions of disbursement for engineering studies, civil works and common services for banana and plantain development are given in paragraph 4.07. 3.32 Disbursements for the lending program would be made against certifi- cates of expenditure, the documentation for which would be retained by the PU, COHBANA and COHDEFOR and made available to the Bank and external auditors for inspection during the course of project supervision and audit inspections. All other disbursements would be supported by standard documentation. Assur- ances were obtained at negotiations that disbursements would be made in accordance with this and the preceding paragraph. 3.33 The estimated schedule of disbursements by the Bank Group is given below, assuming that the date of effectiveness of the proposed loan and credit would be no later than July 31, 1980. 1/ The estimated date of project comple- tion would be December 31, 1984 and the estimated closing date would be June 30, 1985. Bank/IDA Fiscal Year Disbursed and Semester During Semester Cumulative ---------