Colombia - Agricultural Credit Project

RETURN,1 TO REPORTS DESK RESTRICTED WITHtIN 11lE Cff lfReport No. PA- lle ONE VWEEK 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION AGRICULTURAL CREDIT PROJECT COLOMBIA May 27, 1969 Agriculture Projects Department  CURRENCY EQUIVALENTS 1 US$ - 16.77 Pesos 1 Peso (Ps) 3 US$ 0.0596 1 Million Pesos - Us$ 59,630 WEIGHTS AND MEASURES Metric System ABBREVIATIONS CAJA: Agrarian, Industrial and Mining Credit Bank ICA: Agriculture and Livestock Development Institute IDEMA: Agrarian Marketing Institute INCORA: Institute for Agrarian Reform  COLOMBIA AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. INTRODtJCTION . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. BACKGROtJND . . . . . . . . . . . . . . 1. . . . . . . . . . . A. General .1... . . . . . . . . . . . . . . . . . . . . . B. Agricultural Credit ... . . . . . . . . . . . . . . . . 5 III. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . . 7 A. General Descriotion . . . . . . . . . . . . . . . . . . . 7 B. Detailed Features . . . . . . . . . . . . . . . . . . . . 9 C. Cost Estimates and Financing . . . . . . . . . . . . . . 13 IV. ORGANIZATION AND ADMINISTRATION . . . . . . . . . . . . . . . . 15 V. PRODUCTION, MARKETS AND FARMERS' BENEFITS . . . . . . . . . . . 18 VI. BENEFITS AND JUSTIFICATION ..21 VII. CONCLUSIONS AND RECOMEENDATIONS ..21 ANNEXES: 1. INCORA 2. CAJA 3. Agricultural Credit 4. Project Areas 5. Project Costs and Financing 6. Cesar River Study 7. Yield and Cost Assumptions 8. Farm Models 9. Economic Rate of Return MAPS 1. Natural Regions of Colombia 2. Location and Nature of INCORA Projects This appraisal report is based on the findings of a mission which visited Colombia in October/November 1968, and was composed of' Messrs. A. H. Stoneham (Bank), J. F. Dekker (FAO Consultant) and K. Berg (Consultant). This report was prepared by Messrs. Stoneham and Berg.   COLOMBIA AGRICULTUFAL CREDIT PROJECT SUMMARY i. In August 1968 the Government of Colombia asked for a Bank loan to help finance an agricultural credit project to develop about 3,300 medium- sized crop and livestock farms covering about 250,000 ha in seven different areas in wlhich the Colombian Institute for Agrarian Reform (INCORA) is respon- sible for development. At appraisal it was agreed that because of limitations of management, the project would be confined to 2,500 medium-sized (10-50 ha) crop farms covering about 80,000 ha in the two most fertile INCORA areas (Tolima and Valle). ii. The project would be a four-year supervised credit nrogram to in- crease productivity of major crops for export and import substitution (cotton, rice, maize, beans and soya) by providing institutional credit to farmers who at present only have access to limited credit from private sources, and are farming relatively inefficiently. It would provide incremental seasonal credit for fertilizer, pesticides and mechanized farming services, and longer term credit for agricultural machinery and on-farm improvements. It would include technical assistance to ensure effective administration of the program and to prepare an irrigation project of about 60,000 ha in the Cesar river valley. It would be executed by INCORA, which would also take the financial risk. The Agrarian, Industrial and Mining Credit Bank (CAJA) would assist by administering the project account and supplying farm inputs to farmers and contractors through its supply organization. iii. Estimated cost would be about US$42.5 million of which one-third would be for machinery and on-farm improvements, and one-half for the in- creased working capital required to finance seasonal farm invuts. The bal- ance would be for technical assistance and contingencies. Farmers, contrac- tors and commercial sources would contribute US$17.3 million, 41% of the total cost. Government would provide US$8.2 million, 19%. The proposed Bank loan of US$17 million represents 40% of the total cost of the project, and would be lent to the Government which would on-lend to INCORA on the same terms as received from the Bank. iv. The project is sound and economically justified, with a rate of return to the economy of about 25%. It is suitable for a loan of US$17 mil- lion, repayable over 15 years, including a five-year grace period. v. In the last three years the Bank has made two loans for agriculture in Colombia. In 1966 a loan of US$16.7 million was given for a Livestock Development Project, and in 1968 a loan of US$9 million for the Atlantico No. 3 Irrigation Project.   I. INTRODUCTION 1.01 A Bank missions led by Mr. W. Schaefer-Kehnert visited Colombia in 1967 to evaluate t,he programs and operations of INCORA. It recommended, inter alia, an early emphasis on credit programs for medium-sized farms to comple- ment USAID-supported programs for smallholders. Later a credit project was prepared by INCORA with assistanice from the FAO/IBRD Cooperative Program, and in August 1968 the Government of Colombia asked for a Bank loan of about US$25 million to help finance it. The project proposed a credit program for the devE-lopment of about 3,300 medium-sized crop and livestock farms, covering about 250,000 ha. Total cost would be about US$50 million over a four-year period. The farms would be in seven selected areas in which the Colombian Institute for Agrarian Reform (INCORA) is responsible for agrarian reform and development. The project as presented was too ambitious for INCORA's re- souirces, in particular because project supervision in seven widely scattered areas would have strained management unnecessarily. Because of its very lim- ited scope compared with the overall demand for credit among medium-sized farmers, and the heavy demand for credit in the two most fertile INCORA areas, Government and INCORA agreed that the project should be confined to 2,50() medium-sized crop farms (10-50 ha) covering about 80,000 ha in these two areas, giving priority to about 900 irrigated farms. 1.02 This appraisal report is based on INCORA's request and on the find- ings of a mission consisting of Messrs. A. H. Stoneham (Bank), J. F. Dekker (FAO Consultant) and K. Berg (Consultant) which visited Colombia in October/ November 1968. II. BACKGROUND A. General Agriculture- 2.01 Agriculture accounts for about 30% of Colombia's gross domestic product, 75% cf total exports, 95% of its food supply, and over 50% of its supply of industrial raw materials, and directly absorbs about 50% of its economically active population. Transport and handling of crops, production of agriculturel inputs and processing of agricultural products provide sub- stantial additional employment. 2.02 Less than one-third of the available land in Colombia is used for productive purposes. It is mainly in the Andean region (Map 1), where most of the population is located. The 1960 census shows some 1.2 million farms (crop and livestock) covering about 27 million ha. Of these about three- fourths are smallholdings averaging about 3 ha each, occupying less than 10% of this area. At the other extreme, under 4% of farms (50,000) occupy three- fourths of the area, and average about 400 ha each. Apart from coffee, which 1/ The up-to-date position is set out in "Current Economic Position and Prospects of Colombia": Report No. WH-188a, December 30, 1968.  - 2 - is dominant, other crops of importance are bananas, plantains, maize, rice, barley, wheat, cassava, sugar, tobacco, cotton, soya, edible beans, fruit and vegetables. Livestock is very important and represents by value about one- quarter of total agricultural production. 2.03 Gross value of non-coffee agricultural production has expanded at an annual rate of about 4%, slightly more than the rate of population growth. This has been mainly due to increases in land and labor, with little advance in other farm inputs or in technology. Production of rice, cotton, sugar and bananas is increasing, but for most other crops has levelled off. By value coffee represents about one-third of agricultural and livestock production, and almost two-thirds of total commodity exports. Bananas, cotton, sugar, cattle and meat together account for about 13% of agricultural exports, and are the only other significant non coffee exports. Agricultural imports com- prise about one-tenth of total imports, and wheat, wool, cocoa and vegetable oils are the most important. Government's current policy is to encourage in- creased production of export and import substitution crops, mainly cotton for export and rice, maize, edible beans and soya for local consumption. Bank Loans for Agriculture 2.04 In the last three years the Bank has made two loans for the devel- opment of agriculture in Colombia, totalling US$25.7 million. A loan of US$16.7 million (448-co) was made in October 1966 for a Livestock Development Project, estimated to cost about US$28 million. The project covers on-farm improvements (land clearance, fencing, water supplies, stock handling facili- ties, and the improvement of pastures and breeding stock) on about 900 beef cattle ranches, 250 dairy farms and 35 sheep farms, to raise output and pro- duction efficiency. It is administered by CAJA (para 2.05). A second Live- stock Development Project is currently under appraisal by the Bank. A loan of US$9.0 million (502-CO) was made in June 1967 for the first phase of the Atlantico No. 3 Irrigation Project, estimated to cost about US$16.7 million. The project covers the settlement and development of about 9,900 ha of irri- gated land for crops. It is administered by INCORA (para 2.05). Agricultural Institutions 2.05 The four main nublic institutions serving the agricultural sector are: (a) The Agriculture and Livestock Development Institute (ICA); established in 1962 as the national institution for research on crops and livestock, and thaving some responsibilities for agricultural education. It 'till ultimately take over respon- sibility for coordination and supervision of all extension services (para 2.08); (b) The Institute for Agrarian Reform (INCORA); set up in 1961 with responsibility for agrarian reform and development in certain specified areas, aid described more fully in Annex 1. It has concentrated on land reclamation, irrigation, anc4 land acquisition for improving conditiona for smallholders. It  -3- has introduced a supervised credit program for smallholders and has over 40 projects throughout the country; (c) The Agrarian, Industrial and Mining Credit Bank (CAJA); established in 1931. Its main functions are to provide credit for agricultural purposes and to supply farm inputs. It is more fully described in Annex 2; (d) The Agrarian Marketing Institute (IbEMA); which recently (1968) succeeded an older institution, and now has respon- sibility for domestic pricing and distribution of farm products, and promotion of non-coffee agricultural exports. Additionally there are quasi-public crop development agencies for coffee, rice, and cotton. Institutional Reorganization 2.06 As part of its economic reform objectives, late in 1968 the Govern- ment reorganized all public institutions serving agriculture. This included consolidation of the almost; 30 former institutions into 10 new ones, each with clear-cut lines of responsibility. There is now a three-tier hierarchy, with the Ministry of Agriculture at the top, responsible for planning and co- ordination. In the middle are the four main operational institutions; ICA, INCORA, CAJA and IDEMA. The third tier comprises the rest of the new insti- tutions. 2.07 An Executive Agricultural Committee has been created, responsible for agricultural and livestock policy. The Chairman is the Minister of Agri- culture, and the members are the managers of ICA, IDEMA, INCORA, CAJA, a new institute for developing natural resources, the Livestock Bank and the Coffee Growers' Federation. Its technical secretariat is the Planning Office of the Ministry of Agriculture. Policies being discussed include prices, credit, storage facilities, identification of exportable surplus and import substi- tution opportunities, and a reView of the channels for external finance. Extension and Technical Services 2.038 Agricultural extension and technical assistance services, other than those of ICA and INCORA, are widely dispersed among about 70 private agencies, each functioning independently. INCORA provides an extension ser- vice for its supervised credit program for smallholders. The crop development agencies and an increasing number of private firms provide extension services of varying effectiveness at farm level. Those of the crop development agen- cies tend to specialize in the prevention of pests and disease. For most seasonal crop loans from institutional and banking sources, farmers have to contract with one of the agencies or firms for extension assistance. In gen- eral farmers are willing to use and pay for such services. Government intends that ultimately all extension services at farm level should be provided through these agencies and firms, under strict supervision of the newly integrated service of ICA. This is expected to take at least four years. There is a shortage of suitable personnel available for training for extension work, which limits its expansion.  Seasonal Inputs 2.09 Consumption of fertilizer in Colombia increased rapidly from about 220,000 tons in 1962 to 300,000 tons in 1964, and has remained practically unchanged since. Considerably more fertilizer could be effectively used if sufficient credit was available to farmers to cover its cost. Capacity of the six local factories, which now produce the bulk of the fertilizer used, is about 700,000 tons annually, and so is considerably underutilized. Pro- duction includes urea, ammonium nitrate and phosphate, and mixed fertilizer. Practically all of the nitrogen and some of the phosphate is locally produced, while potash is imported. CAJA distributes about half of all fertilizer used in the country. 2.10 Extensive use is made of pesticides (insecticides, fungicides and weed control chemicals) by large and small farmers alike. Much is applied through private aerial crop-spraying services which are available in the major agricultural areas. Demand for pesticides has been roughly proportional to the demand for fertilizer. While the basic ingredients are imported, most of the solvents and emulsifiers used to dilute pesticides for spraying are domes- tically produced. CAJA distributes about one-third of the total amount used in Colombia. 2.11 The use of improved seed has been increasing in recent years. Re- sponsibility for its production now rests with ICA, while CAJA is the princi- pal distributor. Although selected seed varieties are fairly readily avail- able, there is a lack of information for farmers on such matters as optimum seed rate, suitable varieties, and cuantity and time of rertilizer appli- cation. This should improve in future under ICA's leadership. Farm Equipment 2.12 Mechanization has not advanced significantly over the past 10 years. Average number of tractors imported in -he five years ending 1958 was about 1,900 annually, declining to about 1,650 annually in the five yearn ending 1968. The total effective number of tractors in use today is of the order of 20,000, probably no larger than 10 years ago. In the past, impcrts of farm machinery have been given a low priority, and insufficient spare parts have been brought in to keep all serviceable machinery in operation. This has inhibited increased m3!chanization, and has resulted in inefficient use of the machinery E,.lready in the country. Mechanization is mainly confined to larger farms and commercial crops, particularly paddy, cotton (except for harvesting), some cereals, and large scale sugar cane production. Many of the tractors and equipment are owned by small contractors, who do much of the plowing, cultivating, etc. under contract with individual farmers. INCORA uses mechanized farming services on contract to an increasing extent in its smallholder credit program. Apart from tractors and ancillary farm machinery, there is a small but increasing demand for combine harvesters, and a rising demand for aircraft for crop spraying. Tractors, harvesters and aircraft are imported, but most of the ancillary equipment (farm implements) is now manu- factured locally, as are some tractor parts, including tires and batteries.  There are five main manufacturers of ancillary equipment. Importation of such equipment is severely restricted by licencing rArocedures. Present duty on imported farm machinery and equipment is generally 2% ad valorem. 2J13 In the period 1961 through 1967 some 13,000 tractors of 60 different makes were imported. Three quarters were of 10 different makes. Numerically, about 60% came from the United Kingdom, 25% from the USA, and a further 5% each from West Germany and Sweden. Tractors from the USA were generally of higher power, and were valued at over half the total cost. At present some seven or eight well-known makes are actively represented by ag-ents, and the market is competitive. Import licensing restrictions have been considerably eased, but spare parts are still in short supply due to Government's reluctance to issue licences freely. CAJA plays a major part in the supply of farm ma- ch.inery and equipment on credit to farmers and contractors, who are free to purchase from any source. The Government maintains a school for training tractor operators, and CAJA tries to ensure that tractors bought on credit are handled by qualified operators. Marketing and Storage 2.:L4 IDEMA's responsibilities (para 2.05) include the stabilization of domestic prices. A support price, at which IDEMA is prepared to buy direct from farmers, is published for most crops before planting starts. If the market price is above the support price farmers sell their crop in the open market. In the past, whenever the open market price has been below the sup- port price, IDEMA's cash resources, storage facilities and staffing have proved insufficient to absorb more than a fraction of the marketable crop. So the support price mechanism has not prevented extreme seasonal price move- ments, and farmers have tended to ignore it when deciding what crops to plant. The position is improving rapidly. IDEMA's purchases in the first half of 1968 were nine times those of the same period of 1967, due to improved access to Government funds to finance stocks. It has applied to the Inter-American Development Bank for a loan of US$15 million to increase storage capacity. IDEMA can in the future be expected to influence more effectively both price behavior and cropping decisions. 2.L5 There has been a steady improvement in recent years in the storage and processing facilities available for the major crops, but they are still below needs. A number of private concerns associated with commercial banks have developed storage, silos and drying facilities for use by farmers. Other installations are owned and used by processors and manufacturers. B. r_icultural Credit Background 2.16 Institutional sources of agricultural credit are described in detail in Annex 3. Available funds are scarce compared with demand, which is esti- mated to reach over Ps 10 billion per planting season, mainly for seasonal credit for fertilizer, pesticides, mechanized services and labor. Demand is  at least three times the current supply from all sources. Supply of institu- tional credit reaches less than 30% of farmers but is rarely adequate for their needs. Of this CAJA provides about one-half, the commercial banks one- third between them, and the balance comes from INCORA and other institutions. Loans through private moneylenders are extensive, but cannot be measured. Credit through CAJA reaches some smallholders and medium sized farmers, but only in areas where it has farm planners to make appraisals. Credit for small- holders through the INCORA supervised credit Drogram reaches no more than 10/J of smallholders in INCORA areas, or 2% of the total in the country. 2.17 A study of agricultural credit was released by the Government early in 1968. It reports that only 25% of institutional credits are advanced as a result of detailed technical appraisal of requests, as distinct from rule of thumb evaluation by farm planners. Most institutional credits are approved for 'safe' crops only, and are usually fixed as a percentage of estimated pro- duction costs, which bears no relation to farmers' individual requirements. Delays in processing applications cause some credit approvals to arrive too late to be effective. Existing security requirements exclude many potential borrowers who could use credit effectively but are unable to furnish adequate security. The study also records that some f'unds advanced for credit are diverted to other purposes (particularly among larger farmers), a high pro- portion of loans go to relatively few large borrowers, and there is a lack of information on credit through private moneylenders. Credit Terms and Conditions 2.18 Terms and conditions for agricultural credit are detailed in Annex 3, para 3. In general any security is acceptable for short term credits (up to one year) for farm inputs, but for medium (one to five years) and long term (five years and over) credits for machinery and farm improvements, a property mortgage is required. Advances for seasonal inputs are generally limited to 40% of estimated crop value, and for medium and long term to 75% of the caDital cost of the machinery and improvements. Most credit from institutional sources is granted only if the borrower agrees to accept and pay for technical assist- ance. Interest Rates 2.19 Interest rates charged by agricultural credit institutions are gen- erally around 'O to 11% per annum short term, and 12 to 114% medium and long term, with penal rates of 50% or more in case of default. Commercial bank interest rates for agricultural loans are around 9 to 10% per annum, rising to 18% in case of default. Smallholders in the INCORA supervised credit pro- gram are charged 8% per annum. Farmers in the Livestock Development Project (supported by Bank loan 448-CO) are charged 124 for medium and long-term loans. Invariably 1% is added to all the above rates to cover life insurance on the borrower. Interest rates charged by private moneylenders are of the order of 25% per annum. 1/ Ministry of Agriculture, 'Aspects of Institutional Agrarian Credit in Colombia" (in Spanish): Bogota, January 1968.  -7- III. THE PROJECT A. General Description Definition 3.01 Theb project would be a four year supervised credit program to improve production on about 2,500 medium-sized crop farmt (10-50 ha) in INCORA areas. It would include technical assistance to ensure effectiveness of the ;aroposed program. Finance would also be provided to INCORA for the preparation by consultants of an irrigation project of about 60M000 ha in the Cesar river vEalley. 3.02 The credit program would be in the Departments of Tolima and Valle irn areas where INCORA is responsible for development; known as Tolima 2-4 (rainfed), Tolima 5 (irrigated) and Valle 1 (rainfed and irrigated) (Map 2). The principal aim would be to increase productivity of major crops for export and import substitution (cotton, rice, maize, beans and soya), by providing institutional credit to farmers who, in its absence, are dependent on insuf- ficient and expensive credit from private moneylenders, and are farming rela- tively-inefficiently. The responsibility for executing the project, and the financial risk of the credit program would rest with INCORA. CAJA would be responsible for supplying farm inputs and for maintaining, for a fee, the pro- ject account. Project Areas 3.03 The areas chosen for the project deserve priority for the following reasons: (a) they have the best farm land in the country; (b) supporting serv- ices for farm input supply, processing, storage, marketing and transportation of farm produtce are comparatively well developed; (c) farmers are generally mcre active and progressive; and (d) the return to farmers from both irrigated and rainfed farms is potentially much greater than the national average. 3.o4 Altitudes in the project areas vary between 1,000 and 2,000 meters. Climates are temperate, with average temperatures around 18 C. There are two raLiny seasons, February to April and September to December, and one dry season, April to AuguLst. Annual rainfall varies from 1,000 to 1,400 mm. The estimated size of the project areas and number of farms is as follows: Total area Number of farms FhaW __Total Medium Prolect Tolima 5 65,000 6,ooo 1,000 700 Tolima 2-4 800,000 50,000 11,000 1,420 Valle 1 550 ,00 -_45,0 6,ooo 380 Total 1,415,000 101000 18,000 _ _2X500  -8- About 45,000 ha in Tolima 5 will be affected by current canal rehabilitation works. In Valle 1 major flood control and irrigation works are being con- structed with help from the Inter-American Development Bank. tKroJe_ct C~ro!tp- 3.05 'Two crops can be grown each calendar year in all areas. Major cropping patterns would be: First Second Area 'fype season __ season Tolima 5 Irrigated Cotton Rice Tolima 2-4 Rainfed Cotton Maize Valle 1 Irrigated Cotton Soya and beans Valle 1 Rainfed Cotton Soya and beans To control disease in project areas, cotton is not allowed by law to be grown in the second season. If rice is planted in both seasons in Tolima 5, a weed (coquito or nut grass) appears which causes milling problems, and means re- duced prices to the farmers. There is insufficient water in Valle 1 (irrigated) to plant rice in the second season, and soya and beans are the best alternatives. The cropping patterns in areas other than Tolima 5, particularly in the second season (July to December), would be liable to change through possible influence by IDEMA on cropping decisions (para 2.14), and the development of alternative crops. The patterns above show the most likely crops to be grown, based on their current profitability. But if other crops become more profitable, whether due to higher support or market prices, better yields, or any other factor, they will be substituted. When ICA has developed a disease-resistant variety of sesame, it should prove an attractive alternative in project areas, where past results with it have been disappointing. Project Farmers 3.06 Farmers who would benefit from the project are potentially very good but their productivity is hax4pered by lack of credit. They are unable to get credit from commercial banks because of the type of loans required (development credit) and lack of orthodox banking security (para 2.17). Being in INCORA areas they cannot presently get credit from CAJA. The amounts obtained from moneylenders are very limited and relatively expensive and generally money- lenders do not give credit for on-farm improvements, which are essential to improve productivity on some irr:Lgated farms. As a result of lack of credit farmers cannot obtain the limited mechanized farming services currently avail- able when they require them, but only when convenient to the contractor. Work tends to be dore inefficiently at cut prices and this coupled with its untime- liness, has an adverse effect on yields. Insufficient credit also precludes the use of adequate fertilizer and pesticides for optimum yields. Almost half the farmers in rainfed areas do not plant a second crop !ach year, preferring to leave their lands fallow. Productivity would be significantly increased through access to adequate credit and improved availability of mechanized serv- ices. Land at present under fallow for one season would be farmed for both seasons, effectively increas1n- the area under cultivation by about 20,000 ha.  - 9- B. Detailed Features Project Farms 3.07 About 2,500 farms are expected to participate in the project, with estimated phasing as below: Number of farms 1969/70 1970/71 1971/72 1972/73 Total (%) Tolima 5 320 380 - - 700 (28) Tolima 2-4 rainfed - 90 570 760 1,420 (57) Valle 1 irrigated - 60 80 40 180 ( 7) Valle 1 rainfed - 30 70 100 200 ( 8) Total 320 560 720 900 2,500 (100) Cumulative 320 880 1,600_ 2,500 _ Cumulative (%) 12 35 64 100 Priority would first be given to Tolima 5, afterwards to Valle 1 (irrigated) as that became ready in 1970/71. The project would reach about 14% of the 18,000 medium-sized farms in the project area. Phasing would be limited by the rate at which farm planners could be trained (para 4.03). The maximum effect from the project could be expected from 1976/77 onwards, when the farms entering it in 1972/73 would be at full production. 3.08 The average size of a project farm in Tolima 5 would be 25 ha; all others would be 35 ha. The estimated build-up of area under development is shown in Annex 4. Total area affected would reach 72,500 ha (30% irrigated and 70% rainfed) at the end of 1972/73, of which almost 85% would be in Tolima. This total excludes 10% of each farm area as being under miscellaneous crops and buildings. Gross area would be 80,000 ha. On-farm Improvements 3.09 On-farm improvements, mainly to land, buildings and roads, are esti- mated to cost about Ps 78 million, with a foreign exchange component of about Ps 16 million (20%). Average cost of improvements on irrigated farms, at Ps 75,000 per farm, would be ten times that on rainfed farms, and would in- clude levelling, irrigation and drainage ditches. Some of the land improve- ments, particularly on irrigated farms, would be done by INCORA with earth- mc,ving equipment purchased on its own account (para 3.11), and farmers would be charged with the cost of the work. Machinery for Farmers and Contractors 3.10 Total cost of machinery and spares is estimated at Ps 161 million, as follows:  - 10 - Unit Total Quan- cost cost __ tity Ps '000 Ps million Tractors and equipment 65 HP 720 115 82.8 Tractors and equipment 35 HP 350 90 31.5 Combine harvesters 37 250 9.3 Crawler tractors 5 700 3.5 Scrapers, levellers, etc. 6 450 2.7 Spares for above items - - 26.0 Aircraft 13 320 4.2 Aircraft spares - - 0.8 Total cost 160.8 3.11 Only farmers with more than 30 ha would be given credit to buy a tractor and equipment to work their own farms exclusively, and about 400 could be expected to do so. Under conditions in the project area, annual costs per ha on smaller farms would be less by using contractors' services. However, farmers with less than 30 ha would be encouraged to buy machinery on credit, provided they contracted with INCORA to supply machinery services to other farmers in the area. Contractors would buy the balance of the tractors and the combine harvesters, with credit advanced by INCORA through CAJA (para 3.16). The crawler tractors, scrapers and levellers would be purchased by INCORA and used for land improvements (para 3.09). 3.12 Aircraft crop spraying services are required mainly for cotton, and to a lesser extent for rice. Cotton has to be fumigated about 13 times per season, mainly in a period of two months. Due to the relatively small size of each field, one plane is able to fumigate between 300.and 400 ha only per day, and so is able to take care of about 1,500 ha of cotton effectively in the growing season. There are at present eight companies owning 32 aircraft in the rroject area, but this fleet is considerably augmented by aircraft from other areas during the cotton growing season, and itself goes elsewhere when local demand is small. To meet the extra demand for crop spraying services for the additiQnal 20,000 ha expected to be farmed under the project (para 3.06), 13 more aircraft would be required. They would be purchased through one or other of the three agents at present importing them. The available makes are from USA firms specializing in crop-spraying aircraft. Manufactur- ers from other countries are not debarred from the Colombian market, but few specialize in these aircraft. Contractors would pay half the cost, and obtain the balance on credit through INCORA (para 3.17). 3.13 Past shortage of spare parts for imp3rted agricultural machinery and equipment has been due to the restrictive import licensing system, and has inhibited increased mechanization (para 2.12).: Similarly shortage of spare parts for crop spraying aircraft (particularly engine spares for routine over- hauls) has restricted their serviceability. Adequate spares are essential to the project. Assurances were obtained during negotiations that the prompt importation of spare parts, to such an extent as would be required for the  continuous and proper functioning of all imported agricultural machinery and equipment and crop-spraying aircraft, would be p6rmitted. Cost of spares has been calculated at 20% of the total cost of machinery, equipment and aircraft. Net Increase in Working Capital 3.:L4 Seasonal credit would be givezn for fertilizer, pesticides, and mach- inery services (except when farmers owaed their own tractors, para 3.11), and farmers would provide their own funds for labor, seeds and other seasonal in- puts. The amounts required at the beginning of each season would be reimbursed at the end, so the additional working capital required to finance seasonal in- puts as the project builds up would be their incremental cost from one season to the next. The provision of the additional working capital requirements is an essential part of the project. Without it the other inputs could not be advantageously used, and the project would be ineffective. The estimated in- crease in working capital would be Ps 355 million over the first four project years (Annex 5, Table 2), of which Ps 171 million (48%) would be from credit through INCORA, and the balance would be found by farmers from their own re- sources. As already explained in para 3.06 farmers in the project areas can- no-t obtain their credit requirements from either the commercial banks, CAJA or moneylenders. Even if this were possible the total funds currently avail- able are quite insufficient to meet the demand for credit, which is at least three times the supply from all sources (para: 2.16). If the project is to be effective, provision must be made for additional working capital. This is an experimental program in a development area and the loan would not replace existing working capital. Credit to Farmers 3.15 Credit would be extended to farmers holding title to a farm, and to creditworthy tenant farmers with satisfactory tenancy agreements, farming between 10 and 50 ha in the project areas. They would be required to accept supervision by INCORA's farm planners. (a) Medium and long-term credit: INCORA would advance credit for 75% of the cost of farm machinery and on-farm improvements, the balance being found by the farmer. Borrowers would pay 13% interest per annum plus 1% life insurance. Credits for farm machinery would be for five years, and on-farm improvements 10 years, with no grace period. (b) Short-term seasonal credit: INCORA would provide through CAJA seasonal credit for fertilizer, pesticides and mechanical services. Borrowers would pay 13% interest per annum, plus 1% life insurance. Credit would be supplied in kind from CAJA's depots whenever pos- sible. INCORA would pay contractors direct for services to farmers. Credit would be repaid at the end of the season in which it was advanced.  - 12 - Credit to Contractors 3.16 INCORA would advance credit to contractors supplying contract serv- ices in the project areas for tractors, ancillary equipment and combine har- vesters. Credit would be repaid over five years with no grace period, and with interest at 13% per annum. Purchasers would pay 25% of the cost in cash. Contractors receiving credit would contract with INCORA to provide a speci- fied minimum service to project farmers. About 700 tractors would be required to meet the estimated increase in demand for contractor services. Existing contractors may find it difficult to expand operations at an appropriate rate, because of limitations to their creditworthiness and to the size of an economic contracting unit. Assurances were obtained during negotiations that INCORA would encourage existing contractors to participate and new ones to enter project areas, by making firm contracts with them for agreed services to project farmers. 3.17 INCORA would give credit for 13 crop-spraying aircraft up to 501c of their cost, subject to purchasers offering adequate security, obtaining a license from Government to operate a service in a project area, and contract- ing with INCORA to provide a specified minimum service to project farmers. Credit would be repaid over tnree years with interest at 13%o per annum. Credit Terms and Conditions 3.18 During negotiations assurances were obtained that the above terms and conditions for credit to farmers and contractors would not be altered with- out prior consultation with the Bank. Technical Assistance and Services 3.19 Cost of tech4ical assistance to INCORA for management services and the Cesar River Study would amount to about Ps 57 million (US1$3.5 million) with a foreign exchange component of 41%, Ps 24 million (US$1.4 million). 3.20 INCORA Management Services: Technical assistance would consist of one credit expert to assist with administration of the program at headquarters for a 4-year period (para 4.02), four experienced agronomists to assist in training farm planners in the field for a 3-year period (para 4.03), together with the cost of 75 vehicles for the farm planners, which would be necessary for efficient use of their time. Details are at Annex 5, page 2. 3.21 INCORA Cesar River Study: The proposed study is not directly related to the main credit project, but has been included to maintain the pipeline for possi1le future projects. Consultants would prepare by mid-1971 a feasibility study, suitable as a basis for appraisal, for irrigated development of about 60,000 ha in the Cesar river valley. They would establish a 100 ha demonstra- tion and experimental farm on a representative area, and initiate a pilot pro- ject on about 3,000 ha. They would also outline a draft master plan for the ultimate development of the entire 250,000 ha believed to be suitable for ir- rigation in the valley. INCORA invited two consultants familiar with condi- tions in the Caribbean Plain (Map 2) to make proposals for the study, and 'as  - 13 - tentatively accepted those of Tahal Consulting Engineers Ltd. of Israel. Du- ri.ng negotiations assurances were obtained that the terms and conditions of the proposals, staff members assigned, and consultarnts contract would be acceptable to the Bank. Total estimated cost of the work would be Ps 43 mil- lion (US$2.57 million) of which 36%, or Ps 15 million (US$0.92 million), would be foreign exchange. Further details are in Annex 6. C. Cost Estimates and Financing P2rjxect Cost 3.22? The estimated total cost of the project would be Ps 712 million (US$42.5 million), of which 29a, Ps 208 mtllion (US$12.4 million), would be foreign exchange. Details of these estimates are in Annex 5. They are sum- marized below: Total Project Cost Ps million US$ million For- To- For- To- 'i'1 % Item Local eign tal Local eign tal TPC FEC On-farm improvements 62 16 78 3.6 l.0 4.6 11 20 Machinery and spares 65 96 161 3.9 5.7 9.6 22 60 Incremental working capital 300 55 355 17.9 3.3 21.2 50 15 Technical assistance 5 9 14 0.4 0.5 0.9 2 66 Contingencies on above (10%) /2 44 17 61 2.6 1.0 3.6 9 28 Cesar River Study 28 15 43 1.7 0.9 2.6 _6 __36 504 208 712 30.1 12.4 42.5 100 29 /:L RTPC: % of total project cost; FEC: % of foreign exchange cost of item. /2 Exclusive of Cesar River Study, which has its own contingencies. These estimates and their foreign exchange components are based on the assump- tions set out in detail in Chapter III B, and on a review of recent experience by INCORA, CAJA, and suppliers of agricultural inputs, services and machinery.  - 14 - Proposed Financing 3.23 The Project would be financed from the following sources: Private Government Participants INCORA BANK TOTAL Millions Ps and Millions US$ Ps US$ X Ps Us$ % Ps Us$ % Ps US$ 7o On-farm improvements 19 1.1 (24) 7 0.4 ( 9) 52 3.1 (67) 78 4.6 (100) M4achinery & Spares 60 3.6 (37) 12 0.7 ( 8) 88 5.3 (55) 161 9.6 (100) Incremental Working Capital 184 11.0 (52) 79 4.7 (22) 92 5.5 (26) 355 21.2 (100) Technical Assistance Credit Expert, Agronomists and Vehicles 2 0.2 (14) 12 0.7 (86) 14 0.9 (100) Cesar River Study 28 1.7 (64) 15 0.9 (36) 43 2.6 (100) Contingencies 27 1.6 (44) 10 0.5 (14) 25 1.5 (42) 61 3.6 (100) 290 17.3 (41) 138 8.2 (19) 284 17.0 (4o) 712 42.5 (100) 3.24 The proposed Bank loan of US$17 million (Ps 284 million) would be lent to Government which would bear the exchange risk, and on-lent to INCORA on the same terms as received from the Bank. Loans to farmers for capital investment would be made over the first four years, and repayments by them for on-farm improvements would end in the fourteenth year. The Government would, from 1973 onwards, maintain the Fund for seasonal credit at not less than Ps 171 million. The cash flow estimates (Annex 5, page 5) of the project ac- count (para 4.08) show that, provided the Government contribution to project funds was given to INCORA as equity, free of interest (para 3.25), the project would be able to repay the Bank loan over 15 years, with a grace period of 5 years. Funds surplus to project requirements would be used for further credits to medium-sized farms until required for loan repayment, and the interest earned would accrue to the project account. Agreement to the above terms, including the use of surplus funds as proposed, was obtained during negotiations. 3.25 The balance required from public funds would be Ps 138 million (US$8.2 million); of which Ps 79 million (US$4.7 million) is for incremental working capital. CAJA has access to Central Bank funds for rediscounting up to 100% of credits of five years and less, up to a present limit of Ps 1,700 million (Annex 2), and also to the Agrarian Finance Fund (Annex 3) for limited discounting on some other agricultural credits. Since it uses these facili- ties to the limit for its other commitments, it would not be able to finance project working capital from these sources without displacing some other com- mitment. INCORA is dependent on Government for its funds for all purposes. The balance from public funds would therefore have to come from Government sources. The project account cash f'low estimates (Mnex 5, page 5) show that the project would not be able to support any interest payments on Government funds without increasing interest rates to farmers. Assurances were obtained during negotiations that Government would make the balance of public funds necessary to implement the project available to INCORA as an interest-free grant.  - 15 - IV. ORGANIZATION AND ADMINISTRATION P_oJect Administration 4.o)l Details of INCORA are in Annex 1. A Bank mission which reviewed its operations in 1967 reported that while it was carrying out its responsibi- lities creditably under progressive leadership, on-going reclamation projects should be completed before new ones were started. The mission recommended that: (a) new projects should not be undertaken before their feasibility had been established;,(b) more emphasis should be given to colonization to balance INCORA's investment program; (c) a credit program for medium-sized farms should be started, to complement the smallholder credit project; (d) program planning should be improved by establishment of a planning and economic analysis unit; and (e) staff capabilities should be improved by continued in-s;ervice training. Government and INCORA accepted the main findings of the mission's report, which remain valid, and have been implementing them. The planning unit has been set up hnd is functioning effectively. In-service training is continuing, but staff capabilities are still a limiting factor. 4.02 The credit division within INCORA's Agricultural Development Depart- merit is responsible for coordination and promotion of agricultural credit and extension, and supervision of credit programs. For the project to function efficiently, the division would require strengthening by the addition of a senior credit specialist to head a new section responsible for the project. The appointment would last four years, and the specialist would be required to train a counterpart to succeed him. Agreement was obtained during nego- tiations that prior to effectiveness of the loan INCORA would appoint on suitable terms and conditions a senior credit specialist acceptable to the Bank. 4.03 A major factor limiting project implementation is the rate at which farm planners can be trained. A training program is currently operating with French technical assistance, producing around 18 farm planners a year. Twenty trainees are alreadv in the field, and by the end of 1972/73 about 75 farm planners would be working. Because of competing demands for qualified person- nel for training, it would be difficult to increase this number significantly. Assurances were obtained during negotiations that funds would be made available to continue the training program through 1972/73. Trainees are mainly agri- cultural engineers of university level. Their training is generally very goc)d, although somewhat lacking in agronomy. To remedy this it is proposed to appoint four practical agronomists with field experience of similar agri- culture for a period of three years, to assist and train the farm planners at farm level. Agreement was obtained during negotiations that prior to effective- ness of the loan INCORA would appoint four agronomists acceptable to the Bank on suitable terms and conditions. 4.()4 INCORA would be responsible for the implementation of the project, and would assume the financial risk. Its farm planners would prepare with the! applicant a farm plan and credit application. INCORA's credit section  responsible for the project would establish applicant's creditworthiness, and the terms, guarantees and conditions of the credit. Through the farm planners it would supervise implementation of the farm plan. It would be responsible for collection of overdue loans. 4.05 CAJA would act as INCORA's agent for the credit program, by oper- ating the project account and by supplying farm inputs in kind. It has suf- ficient depots close to project areas to give an adequate service to ptoject farmers, both for supplying farm inputs and receiving loan repayments. It would also prepare credit documents, fulfill legal formalities, and send bor- rowers repayment reminders. Its fees for its services are discussed in para 4.09. Prior to effectiveness of the loan, an agreement satisfactory to the Bank would be signed between Government, INCORA and CAJA, covering their responsibilities and duties for project implementation. Procurement 4.o6 Procurement of project supplies would be as follows: (a) Fertilizer and pesticides: Farmers would obtain their supplies in kind from CAJA depots. In keeping with Bank loan procurement re- quirements, assurances were obtained during negotiations that CAJA would obtain its supplies through international competitive bidding procedures; (b) Machinery: This comprises mainly tractors and combines which are imported (para 2.12). It is available through local importers, of which there are a sufficient number to provide adequate competition. Farmers and contractors would be free to purchase from any local supplier, subject to CAJA approval of the purchase price. Assur- ances were obtained during negotiations that INCORA would purchase vehicles for farm planners through international competitive bidding procedures. Goods to be procured under international competitive bidding would be subject to E. preference margin of 15% or the exist- ing level of duties whichever is the lower. These would include, in addition to vehicles, the fertilizer and pesticides referred to in subparagraph (a) above; (c) Equimpent: Farm implements would be purchased by farmers from exist- ing commercial channels. Suitable implements are manufactured locally and supplies are adequate. Imports are virtually excluded by licens- ing procedures (import duties are only 2% ad valorem). Prices for locally manufactur