Ecuador - Second Livestock Development Project

RESTRICTED rILE COPY Report No. p-734 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF ECUADOR FOR AN INTERIM SECOND LIVESTOCK DEVELOPMENT PROJECT August 11, 1969  INTERNATIONAL DEVEIDPFMT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF ECUADOR FOR AN INTERIM SECOND LIVESTOCK DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US$1.5 million to the Republic of Ecuador. PART I - HISTORICAL 2. In February 1969 the Government requested financing from the Bank group to fill the gap between full conmitment of funds under the first livestock development project (mid-1969) and Bank/IDA consideration of a broad, second-phase livestock project in mid-1970. In response to this request, a mission visited Ecuador in March/April and prepared the accom- panying appraisal report. Negotiations for the proposed credit took place in Washington from June 30 through July 3, 1969. Ecuador was represented by Ambassador Carlos Mantilla Ortega, Mr. Luis King (Deputy Technical Director of the Planning Board), and Mr. Jaime Durango (Embassy of Ecuador). 3. Since 1954, the Bank and IDA have made eight loans and two credi ts to Ecuador for a total of US$76.4 million (net of cancellations). The proposed credit would increase the total of Bank loans and IDA credits to Ecuador to US$77.9 million. The following is a summary statement of Bank loans and IDA credits to Ecuador as of June 30, 1969:  -2- Loan/ Amount (US$ M1illion) Credit No. Year Borrower Purpose Bank IDA Undisbursed 94 EC 1954 Comite Ejecutivo de Roads 7.5 - - Vialidad del Guayas 137 EC 1956 Emresa Electrica Qui- Power 5.0 - - to 176 EC 1957 Republic of Ecuador Roads 14-5 - - 177 EC 1957 fmpresa Electrica Qui- Power 5.0 - - to 212 EC 1958 Port Authority of Port 13.0 - - Guayaquil 379 EC 1964 Republic of Ecuador ) 9.0 - 2.3 51 EC 1964 Republic of Ecuador Roads 8.0 5.4 501 EC 1967 Republic of Ecuador Agri- 4.0 - 2.2 culture 124 EC 1968 Republic of Ecuador Edu- - 5.1 5.1 cation 555 EC 1968 Republic of Ecuador Fisheries 5.31/ - - Total (less cancellations) 63.3 13.1 15.0 of which has been repaid to Bank and others 19.5 Total now outstanding 43.8 Amount sold: 1.8 of which has been repaid 0.9 0-9 Total now held by Bank and IDA 37.6C 13.1 Total undisbursed 4.5 10.5 15.0 1/ Not yet effective. 2/ Excludes US$5.3 million for Loan 555-EC which is not yet effective. 4. The Consortium Highway Project (Loan 379-EC/Credit 51-EC) is a two-stage project which is being financed jointly by the Bank, IDA, AID and IDB under the chairmanship of the Bank. Disbursements had been delayed as a result of adverse weather conditions during 1965-66, lack of local con- tractors qualified to undertake civil works and lack of interest among qualified foreign contractors in submitting bids for civil works. Substan- tial disbursements under the IDA Credit commenced quite recently as this credit is solely for the financing of Stage II of the project. The project is noll progressing reasonably well and is being kept under close review.  - 3 - 5. IFC has made two investments, one in 1965 of approximately US$2 million equivalent in equity and debt of La Internacional, a major Ecuadorian textile firm, and the other in early 1969 of about US$250,000 equivalent in equity of Ecuatoriana de Desarrollo S.A., (Compania Finan- ciera) a private development finance company. PART II - DESCRIPTION OF THE PROPOSED CREDIT 6. Borrower: Republic of Ecuador. Amount: The equivalent in various currencies of US$1.5 million. Purpose: To assist in financing the extension of the livestock development program in Ecuador initiated with Loan 501-EC. Amortization: 50 years including a 10-year period of grace, through semi-annual installments of 1/2 of 1 percent from February 15, 1980 through August 15, 1989 and of 1 1/2 percent from February 15, 1990 through August 15, 2019. Service Clharge: 3/4 of 1 percent per annum on the principal amount of the credit with- drawn and outstanding. Relending Terms: To participating credit institutions-- 18 years including 6 years of grace with interest at 6 percent per armum plus 1/2 percent per annum service charge by the Central Bank. To farmers--8-12 years including 3-5 years of grace with interest at 10 percent per annum. PART III - THE PROJECT 7. A report entitled "Interim Second Livestock Development Project" (PA-17a) on the proposed project is attached. For a more detailed discus- sion of the original project, see the appraisal report, "Livestock Develop- ment Project'? (TO-582a) of April 24, 1967. 8. The proposed livestock development project consists essentially of an extension of the first livestock development project, the results of which were better than expected. Funds were fully committed (by June 30) in 75 percent of the time forecast. While the Association has provided assistance to the Government in the preparation of a broad-scale project which originally was intended to follow the first project, it is not expected  - 4 - to be ready for consideration by the Ececutive Directors before mid-1970. Thus there would be a gap of approximately one year during which time the mo- mentum generated under the first project would lessen, the effectiveness of the administrative apparatus built up under the first project would diminish, and further livestock development would be hindered. For these reasons, and given the continuing strong demand for development financing in the livestock sector, this Interim Second Livestock Development Project is proposed to fill the gap. 9. Ecuador is predominantly an agricultural country and approximately 65 percent of the present population of 5.7 million is rural. Agriculture, including forestry and fishing, now contributes about one-third of the gross domestic product and livestock accounts for approximately one-fourth of total agricultural production. 10. The principal commercial crops of Ecuador are bananas, coffee and cacao, and they account for about 80 percent of total exports. In view of the unstable world markets for these commodities, there is a vital need for diversification in agriculture. One method of achieving this objective is to expand production of beef, for which both domestic and export demand are increasing. 11. The coastal area in which the First Livestock Development Project is being implemented and in which the proposed project will be carried out represents about one-fourti of the land area of Ecuador. It has approxi- mately 3.3 million hectares suitable for agriculture, 65 percent of which are in production, with about 1.0 million hectares in improved and natural pastures. At least 500,000 hectares of the unused coastal land could be utilized for additional improved pastures in the beef cattle development program. 12. As under the first project, funds would be made available for ranch development (land clearance, pasture renovation, fencing, water sup- plies, yards and dips, machinery, improved breeding stock, and other related inputs). It is estimated that 50 to 60 beef cattle ranchers would participate in the project. Investment on each ranch would be phased over a period of up to three years. Loans from the participating credit institu- tions exceeding the equivalent of $100,000 in the aggregate would be sub- mitted to the Association for prior approval. The terms to the participating credit institutions (18 years including 6 years of grace at 6 1/2 percent interest) and the participating ranchers (8-12 years including 3-5 years of grace at 10 percent interest) would remain the same as under the first project. Interest and repayments not required for servicing the IDA credit or the commission of the Central Bank would be re-channelled through the participating credit institutions to be relent to ranchers under the project during the 18-year term of the subsidiary loan agreements. At the end of this period, the funds would accrae to the Government. 13. Benefits are expected to be similar to and proportional to those estimated for the first project, i.e., the average annual net return to the  economy would be of the order of 27 percent. 14. The Central Bank again would act as financial agent for the Government in channelling funds to the participating credit institutions and keeping the accounts for the total project. 15. The coordination and supervision of the project also would remain as before and would be carried out by the Project Commission, established in 1967, composed of representatives of the National Planning Board, the Central Bank, the Ministry of Agriculture, the participating credit insti- tutions and the Coastal Cattlemen's Association. The Project Director has technical responsibility for implementation of the project. (The performance of the present Project Director has been excellent.) Technical assistance to farmers is provided by qualified livestock technicians under the supervision of the Project Director. This group is also responsible for assisting farmers in the preparation of farm development plans, for recommending these plans to the participating credit institutions as bases for lending and for supervising the execution of sub-projects. 16. Goods required for the project would be obtained through existing commercial channels. There are several retail sources for these goods, both imported and local, and sufficient competition is assured in securing supplies. Since items would be purchased by individual ranchers and would not be of substantial value, international competitive bidding would not be appropriate. All purchases of livestock required for the project would be subject to the approval of the Project Director with respect to the quality and suitability of such stock. 17. Of the total project cost of US$2.5 million (excluding working capital), the ranchers would provide 20 percent and the participating credit institutions would advance 80 percent. The Association would reim- burse the participating credit institutions 75 percent of the amounts of their loans. Thus the Association would cover 60 percent of the total cost of the project with the participating credit institutions providing 20 percent out of their own funds. These figures are the same as in the first project. The participating ranchers are unable to provide more than 20 percent of the total project cost since they would be contributing substantial working capital in the form of herd build-up (implying lower current income and higher operating costs in the early stages of ranch development). The participating credit institutions too would provide a large amount of short-term credit for working capital requirements not financed by the participating ranchers, beyond the 20 percent of total project cost. Under these conditions, the contribution by the Association of 60 per- cent of total costs seems essential if the project is to be implemented. 18. Of the total project cost of US$2.5 million, only about $550,000, or 22 percent, represents foreign exchange expenditures (this proportion is also the same as in the first livestock project), so that if IDA were again to cover 60 percent of project costs, this would involve financing of about $950,000 of local currency expenditures. I consider, however, that it would  - 6 - be preferable to accept this amount of local currency financing in Ecuador in order to assure the success of this strategically important project rather than to seek out other lending opportunities that might be based upon the financing of direct foreign exchange costs. PART IV - LBGAL INSTRUMNSTS AND AUTHORITY 19. The draft Development Credit Agreement between the Republic of Ecuador, the Banco Central of Ecuador and the Association; the Recommendation of the Committee provided for in Article V, Section l(d), of the Articles of Agreement and the text of a resolution approving the proposed development credit are being distributed to the Executive Directors separately. 20. The draft Development Credit Agreement follows the pattern of credit agreements for other livestock development projects. However, instead of having a separate project agreement between the Banco Central and the Association, the Banco Central is to be a party to the Development Credit Agreement itself. Attention is drawn to tihe followving provisions: a) Ecuador will enter into arrangements satisfactory to the Association with the Banco Central for the management, administra- tion and disbursement by the Banco Central of the proceeds of the credit (Section 4.03); b) Ecuador and the Banco Central will enter into Second Project Subsidiary Loan Agreements with the participating credit institutions, on terms and conditions satisfactory to the Association, providing for the reimbursement to such institu- tions of a percentage of the loans disbursed to ranchers under the lending program, and prescribing the responsibilities of the participating credit institutions under the project (Sections 4.05 and 4.06); c) Interest and repayments not required for servicing the IDA credit or the commission of the Banco Central wrould be used by the participating credit institutions for livestock develop- ment lending during the 18-year term of the subsidiary loan agreements (Section 4.12(i) and Schedule 2, C). PART V - THE ECONOMY 21. A memorandum of August 11, 1969, entitled "The Economic Situation of Ecuador," is attached. 22. Ecuador remains one of the poorer countries in Latin America with a per capita GDP of about $250. The economy is heavily dependent on exports of bananas, sugar and cocoa, all commodities whose future is uncertain. Qn the other hand, the recent discoveries of petroleum should bring considerable benefits in due course.  - 7 - 23. Over the next few years, Ecuador will need to diversify its econony by shifting production to more promising fields, and Ecuador's development program reflects these needs. The capital required for this process cannot be obtained solely from internal savings and in view of Ecuador's poverty and balance of payments weaknesses, at least some of the capital required from abroad should be obtained on concessional terms. 24. Government policies in the recent past have not been sufficiently rigorous. Fiscal rigidities, especially in respect of revenue earmarked to individual public entities, have resulted in large deficits at a time when Central 'Government expenditures were increasing rapidly. In 1968/69 these increases were financed largely by borrowings from the Central Bank and led to sharp increases in imports and a loss in international reserves. The Government, however, has recognized the need for reverting to the tighter control over domestic finances which has been traditional in Ecuador, and is discussing with the Fund the main steps which are to be taken to restore domestic financial equilibrium. In view of past experience in Ecuador, it is reasonable to assume that corrective measures, although belated, will be taken by the Government. In these circumstances I consider it appropriate to proceed with some lending for high priority projects in Ecuador, while keeping the country's financial policies and performance under close review. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 25. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PERT VII - RECOMMENDATION 26. I recommend that the Executive Directors approve the proposed development credit. Robert S. McNamara Presicent by J. Burke Knapp Attachments Washington, D. C. August 11, 1969