Colombia - Caqueta Land Colonization Project

gii:te ?N RESTRICTED Report No. P-921 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 The report may not be published nor may it be quoted as representing their views.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 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE CAQUETA LAND COLONIZATION PROJECT April 21, 1971  INTERNATIONAL BANK FOR RECONSTRUCION AND DEVELOPMENT REPORT AND RECOY'4ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PIOPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE CAQUETA LAND COLONIZATION PRDJECT 1. I submit the following report and recommendation on a proposed, loan in an amount in various currencies equivalent to US$8.1 million to the Republic of Colombia, the proceeds of which are to be made available to the Colombian Institute for Agrarian Reform. (INCORA). PART I - HISTORICAL 2. The proposed loan would be the Bank's seventh loan for agri- culture in Colombia. Two loans (18 00 and 108 CO) for US$5 million Each to finance the importation of agricultural equipment have been fully repaid. The third loan (448 CO) of US$16.7 million was made in October 1966 for the first livestock development project; and. the fourth loan (502 CO) of US$9 million was made in June 1967 to INCORA for the first stage of the Atlantico irrigation project. Another loan of US$17 million was made in June, 1969 for an INCORA agricultural credit project, and a loan of US$18.3 million was made in December 1969 for the second livestock development project. 3. The Caqueta Land Colonization Project was identified as being of high priority by a Bank mission which reviewed INCORA's program and. operations in 1967, and was subsequently prepared by INCORA with assistance from the FAO/IBRD Cooperative Program. 4. Bank missions to Colombia appraised the proposed loan during January-June 1970 and negotiations were held in Washington during January 16-25, 1971. The Government was represented by Dr. Eduardo Gaitan (Minister Plenipotentiary of the Colombian Embassy in WJashington) and Dr. Gabriel Pullido (Division Chief, National Planning Department), INCORA by Dr. Carlos Villamil (General Manager), Dr. Hernando Durana (Chief of Planning), and Dr. Gustavo Artunduaga (Project Manager), the Caja de Credito Agrario, Industrial y Minero by Dr. Eduardo Vega (Counsellor to the General Manager) and the Banco Ganadero by Dr. Arturo Bonnet (General Manager). 5. The proposed loan,which would be the forty-fourth made to Colombia, would increase the total amount of Bank loans to Colombia to US$726.8 million (net of cancellations), of which US$572.h million is now held by the Bank. IDA has made one credit of US$19.5 million for highways in Colombia. The following is a summary statement of Bank loans and IDA. credits to Colombia as of March 31, 1971:  -2 Loan or Amounts (US$ Millo Credit No. Year Borrower Purpose Bank IDA Undisbursed Fu ly disbursed loans and credits 313.7 19.5 345 1963 Acerias Paz del Pic,S.A. Steel 30.0 0.9 369 196Ia Empresas Publicns de IfMedellin Pcwer 39. L.6 44B 1966 Colombia Agriculture 16.7 5.0 451 1966 Banco de la Republica Industry 25.0 0.7 455 1567 Empresa Nacional de COrwiuni- Teleccrmrtunicacicenes caticns 16.0 6.5 502 1967 Instituto Colombiano de la Reforma Agraria Irrigation 9.0 6.6 534 1968 Banco de la Republica Industry 12.5 2.4 536 1968 Empresa de Acueducto y Alcantarillado de Water Bogota Supply 14.0 5.4 537 1968 Empresa de Energia Electrica de Bogota Power 13.0 6.5 55C 1963 Colombia Roads 17.2 7.1 551 1968 Ferrocarriles Nacio- nales RailNays 12.4 6.2 552 1968 Colombia Education 7.6 3.7' 575 1968 Interconexion Electrica, S.A. PowJer 18.0 11.1 624 1969 Colombia Agriculture 17.0 15.: 625 1969 Banco de la Republica Industry 25.0 13.0 651 1969 Colombia Agriculture 18.3 15.3 679 1970 Co1ombia Education 6.5 6.5 680 1970 Colombia Roads 32.0 32.0 681 1970 Interconexion Electrica2 S.A. Power 52.3 42.; 682 1970 Mnpresas Municipales de Wirater Cali Supply 18.5 - Total (less cancellations) 718.7 19.5 of which has been repaid to Bank and others 1i4.9 Total nou outstanding 573.9 Amount sold: 17.7 of which has been repaid 16.2 1.5 Total now held by Bank and IDA 572.4 19.5 __ Amount undisbursed 213.7 213. 7  6. Twenty-three loans have been completely disbursed. Of the twenty loans with undisbursed balances, disbursements on ten continue to proceed at a normal rate. After a somewhat slow start, due primarily to personnel changes that occurred following the April 1970 elections, disbursements began in March under Loan 682-Oo, in April under Loan 680-Co and are expected to start shortly under Loan 679-Co. On the remaining seven loans, the status of project execution is as follows: The Executive Directors were previously informed that the Closing Date on the Loan for the Acerias Paz del Rio steel project (Loan 345 co) had been postponed to June 30, 1971 (R69-215). Almost the entire undisbursed balance represents amounts being retained from the principal contractor until the equipment he has supplied has been operating satisfactorily for one year. Since a switch failed during test runs of this equipment in 1970 and is in the process of being replaced, the retention period will be substantialy' extended and a further postponement of the Closing Date is under conside- ration. In September 1967, the Executive Directors approved amendments to the Loan Agreement for the Nare hydroelectric project (Loan 369-CGO) to permit the financing of additional generating units out of project savings. Accordingly, the Closing-Date was extended by two years to December 31, 1970 (R67-136). Subsequent delays in the delivery of equipment made necessary a further extension of the Closing Date until December 31, 1971, and it is expected that the loan will be fully disbursed by that date. Owing principally to delays in building construc- tion, there has been some delay in the original construction timetable anc. in the disbursement of Loan 499-O0 for the first Telecommunications project, and the Closing Date has been postponed from December 31, 1970 to December 31, 1971 (R69-72). The full amount of the loan has been committed and bot, disbursement and construction are expected to be completed by the neiw Closing Date. 7. Disbursements under Loan 448-0o for the first livestock develop- ment project, while rapid in the early years, slowed considerably during the last year and one-half. Discussions uith the executing agency for the project identified several causes for this problem, the most important one being the agencyts failure to provide working capital finance to project ranchers. Agreement was reached in March 1971 on the resolution of the principal difficulties, including confirmation of the commitment by the borrower and executing agency to provide the necessary working capital finance. W4hile disbursements should now proceed t a satisfactory rate, the project will be kept under close supervision during the coming months. The problems which affected Loan 448-Go also delayed the decla- ration of effectiveness of the loan for the second livestock development project (Loan 651-CO) until Ilarch of this year, and it will be kept under similar close supervision. The consultants hired under the first Atlantico inigticn project (Loan 502-CO) encountered greater difficulty in selecting suitable soils than had been expected and the' completion of agricultural plans was delayed and construction purposely slowed until the problem was  - 4 - solved (in 1970). Disbursements are now proceeding normally, and. it is expected that they can oe completed by the original Closing Date of December 31, 1972. The progress of the Agricultural Credit Project (Loan 624 CO) was delayed initially by problems in the administrative arrangements for the financing of seasonal credits for project farmers. These problems have been resolved but contributions from the Government's budget have not been received to the extent required by the project. During the past month, however, the Government has paid in additional amounts and has agreed on a timetable for providing the balance required for the current calendar year. 8. I expect to submit to the EXecutive Directors within the next few weeks loans of US$15.0 million for the Second Telecommunications Project, US$U8 million for the Second. Bogota Water Supply Project, US$400. million for the Fourth Development Finance Companies Project, US$2.0 million for the Palmira Water Supply Project and US$5 million for the Second Atlantico Development Project. 9. IFC has made 35 investments and underwriting commitment in 18 enterprises in Colombia totalling US$18.5 million (net of cancellations). PART II - DESCRIPTION OF THE PRDPCSED LOAN 10. Borrower: Republic of Colombia Beneficiary: Instituto Colombiano de la Reforna Agraria (INCORA). Amount: Equivalent in various currencies to US$b.1 million. Purpose: To assist in financing a project for the colonization of the Caqueta region of Colombia. Amortization: In 19 1/2 years including a four- year period of grace, through semi-annual installments beginning September 1, 1975 and ending September 1, 1990. Interest Rate: 7 1/4 percent. Commitment Charge: 3/4 of one percent. Relending Terms: Republic of Colombia will relend. the proceeds to INCORA on terms of 30 years, including a 10-year period of grace, at 4 percent interest with the Republic of Colombia assuming the exchange risk.  - 5 Estimated Economic Return on the Project: 16 1/2 percent. PART III - THE PROJECT 11. An appraisal repcrt entitled "'Caqueta Land Colonization Project - Colombia" (FA-60a) on the proposed Project is attached. 12. INOORA. was established in 1961 as the agency with primary responsibility for implementation of the agrarian reform law passed in that year. Its mandate was not only to carry out land redistribution activities but also to promote the increase in agricultural production and productivity. Endowed with dynamic leadership, INCORA embarked upcn an ambitious land titling program and began putting together an impressive number of development projects in the areas of land reclamation (irrigation, drainage and flood control), supervised agricultural credit, and colonization. IWhile the number of titles issued by 1970 had passed 100,000 for about 2.9 million hectares of farm land and the number of development projects has now reached 42, the agrarian reform program has nevertheless remained, at least until the last year, the kind of moderate reform program that had been envisaged by the framers of the 1961 law. It had been designed as a program which would improve the lot of the small farmer without sacrificing production, and which would move fast enough tq4-fatisfy the rural poor without unduly antagonizing property owners. .Thus, the titling activities have been limited largely to unused public land,.abandoned private land which reverted to the public domain, or .private land which was sufficiently marginal that the private owners preferred to sell to INOORA rather than undertake the heavy investment thnt-would be required to make the land productive. Since 1968, the land redistribution activities have also included the granting of certi- ficates of possessicn (entitling the recipients to INCORA supervised credit) to farmers uho could establish their status as tenant farmers or share- croppers, but it uas only in 1970 that steps were undertaken for the first time to expropriate underutilized high value land. The resulting outcry from property owiners, and counter-reaction from left of center opinion urging more rapid redistribution on the ground that the number of small farmers touched by agrarian reform is still a small portion of the total, caused the Colombian President to convene a commission in late 1970 to revie-w3 the agrarian reform program and agricultural development in general. The Commissionts report, on balance, leaned somewhat to the right, but it is apparent that the Government still intends to push agrarian reform more aggresively than in the past, as some further ex- propriation of high value land has been initiated since the report was issued. 13. About 80 percent of INCORA's investment funds have :been divided about equally between its supervised credit and land reclamation activities, with the balance going to colonization projects. It has received substantiaL  - 6 - support from external lending agencies. In addition to the Bank loans for the Atlantico Irrigation (502 CO for US$9 million) and the Agricultural Credit (624 CO for US$17 million) projects, INCORA has received loans totalling US$20.5 million from the Inter-American Development Bank for irrigation projects and US$18.5 million from the U.S. Agency for International Development (AID) for supervised credit. In addition, counterpart funds from AID program and agricultural sector loans over the past six years have been allocated to INCORA investment activities in amounts averaging about US$13 million equivalent per annum. The proposed Bank loan would be the first loan by a major external lending agency specifically for an INCORA colonization project (although a significant portion of AID supervised credit funds has been made available to the Caqueta area). 14. The Caqueta Project, located along the eastern foothills of the Andes mountains, is designed to consolidate and expand the largely spontaneous colonization already underway in the area. Its main purpose is the same as for all INCORA colonization projects, i.e. to provide small farmers with an alternative to either continued existence in one of the traditional rural areas of Colombia where subsistence farming still predominates, or migration to one of the already over-crowded cities, where open unemployment has reached an estimated 10 to 15 per- cent of the urban work force. About 3,500 partially established settlers and 2,800 new settlers would benefit directly from the Project. They wouldoperate farms averaging 75 hectares when fully cleared, and would produce mainly beef, rice and pork for the Colombian domestic market. Each settler could expect to reach a net cash surplus level (above subsistence costs) of about US$1,000 per annum at full develop- ment. The investment costs per settler to the Government of achieving these income levels are estimated at US$2,000 and the Project would yield an economic rate of return of 16.5 percent. 15. Total costs of the Project are US$21.6 million, of which the Bank would finance the estimated foreign costs of US$5.5 million and US$2.6 million of local costs (which would represent about 32 percent of the Banc loan and 12 percent of total local costs of the Project). This seems fully justified, especially since the Bank's share in the total cost of the Project would remain at 38 percent. As set forth in some detail in the Bank's latest economic report on Colombia (WH-200a of November 1, 1970), Colombia has a well conceived development program, but, in spite of its efforts to zobilize domestic resources in its support, requires external assistance in excess of the foreign exchange component of development projects suitable for international financing. 16. About US$4.6 million of the proposed loan would help finance the construction of approximately 380 km. of penetration and access roads, and US$0.6 million would assist in financing the construction of primary schools, health centers and administration buildings and the procurement of a small amount of vehicles and equipment. This portion  - 7- of the Bank loan would be made available to INCORA by the Borrower on a grant basis. The remaining US$2.9 million of the loan would finance medium and long-term credits to about 3,500 partially established and 1,000 (of the 2,800) new settlers in the Project area for farm investments (fencing, livestock, etc.) and would be on-lent by the Borrower to INCORA at 4 percent interest, for a term of thirty years, with ten years' grace. INCORA, in turn, would on-lend these funds to the Colombian Livestock Bank (Banco Ganadero) at 4 percent interest, and the Banco Ganadero would lend them to farmers at 8 percent interest, for terms ranging from seven to twelve years with grace periods between three and seven years. The exchange risk on these funds would be borne by the Borrower and the credit risk by the Banco Ganadero. Seasonal credit (to be financed entirely by the Borrower) would be made available through the Caja de Credito Agrario, Industrial y Ninern (T.Caja!) at 8 per- cent interest to the farmers but with TNCORA assuming the credit risk. All, loans to farmers would be made on the basis of farm plans prepared by INCCRA in consultation with the farmer. WTithin INCORA technical supervision of the Project would reside in the INCORA field headquarters in Caqueti, now under the direction of a highly ccmpetent project manager who has supervised road and building construction activities and coordinated credit operations with the Banco Ganadero and the Caja in the area for the last seven years. 17. Highway construction contracts would be awarded on the basis of international competitive bidding, but are expected to go all to Colombian firms as an adequate number of qualified local contractors is available and the contracts are likely to be too small to attract foreign firms. Schools would be built on a self-help basis with materials obtained by INCORA in accordance with its local bidding procedures. Health centers and administration buildings would be built by local contractors selected in accordance with INCORA's local bidding procedures. Goods for on-farm investment would be procured through normal commercial chlannels except for livestock, which wculd be procured either through normal commercial channels, with the approval of the Banco Ganadero, or through the Banco's livestock purchase scheme currently in effect in the area. The normal commercial channels and the procedures of INCORA and the Banco Ganadero are considered adequate to insure competitively-priced goods and services for the Project. PART IV - LEGAL INSTRUMNUTS ATD AUTHORITY 18. The draft Loan Agreement between the Republic of Colombia and the Bank, the draft Project Agreement between INCORA and the Bank and the draft Project Financing Agreement between the Republic of Colombia, INCORA, Banco Ganadero and the Caja, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately.  - 8 - 19. The draft Agreements contain covenants normally included in agreements for road and building construction and agricultural credit projects. The proceeds of the loan would be made available by the Borrower to INCORA under a Project Financing Agreement wihich has to be executed a d delivered in the S anish language before the loan can become effective (Section 8.01 (b) of the draft Loan Agreement). PART V- THE ECONOPY 20. Colombia's economic situation was fully assessed in the Bank's November 1970 report, Economic Growth of Colombia: Problems and Prospects (WH-200a, in 12 volumes). The report emphasizes the progress achieved in recent years, but also points out that unemployment and widespread rural poverty require an accelerated development effort. A Basic Data sheet is annexed. 21. Colombia's GDP growth rate has been rising at an encouraging pace, moving up from an average 4.7 percent per annum in the 1960-65 period to 5.2 percent in 1965-68, 6.5 percent in 1969, and approximately 7.0 percent in 1970. Planning mechanisms have been strengthened, and the country's ability to formulate and execute investment projects is impressive. In recognition of this ability the Bank-led Consultative Group agreed, in principle, in February 1971 to support some US$300 million per year in project assistance to Colombia during the next few years. 22. The development objectives sought by the Government of Colombia include an annual GDP growth of 7.5 percent, non-traditional export growth of 20 percent, and rising levels of public saving and investment. The export momentum of 1967-69 was interrupted in 1970 by adverse harvest conditions for certain commodities and increased domestic consumption of others. Colombia has recently suffered an extremely long and heavy rainv season, moreover, wqhich may prevent the attainment of agricultural pro- duction and export growth targets in 1971. On the fiscal front, decrees have been issued to raise sales and stamp taxes, and preliminary estimates are that these could result in as much as Col.$500 million in new revenue during 1971. Additional measures are under consideration which, if implemented, could provide the remaining Col.$500 million believed necessary for full financing of the public investment program. 23. Public and publicly guaranteed external debt, including undis- bursed amounts, rose from US$1.5 billion at the end of 1969 to an estimated US$1.7 billion at the end of 1970. Assuming reasonably favorable coffee prices and a healthy expansion of non-traditional exports during the next  - 9 - five years, the debt service ratio is expected to remain in the 12-15 percent range. Colombia should, therefore, continue to be creditworthy for the sizable foreign borrowing program which was recently presented to the Consultative Group and which was discussed in the aforementioned Bank economic report. PART VI - COMPLIANCE IITH THE ARTICLES OF AGREEMENT 24. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOIMINDATION 25. I recommend that the Executive Directors approve the proposed. loan. Robert S. McNamara President Attachments Washington D.C.  Annex COLOMBIA: BASIC DATA Area: 439,825 square miles Population: Estimate, mid-1970: 21.6 million; Growth Rate 3.3 percent Gross Domestic Product: Total GDP in 1968 Col.$ 96,384 million Approximate US$ Equivalent US$ 6,060 million Real Growth in 1968 6.1 percent Average Real Growth, 1964-68 4.8 percent Per Capita GDP in 1968 US$ 300 Percentage Contribution to GDP: 1958 1968 Agriculture 37.3 30.6 M4anufacturing 16.2 16.8 Other 46.5 52.6 Saving and Investment: Gross Fixed Domestic Investment as Percentage of GDP: 1966 1967 1968 16.7 17.6 19.5 Percentage Composition of Investment and Saving in 1968: Gross Fixed Domestic Investment 92.2 Construction 57.4 Transportation Equipment 9.0 Machinery and Other Equipment 25.8 Inventory Change 7.8 Gross Domestic Investment 100.0 Corporate Saving 11.3 Perscnal Saving 6.2 Government Saving 26.6 Current Account Deficit 16.0 Capital Consumption Allowance 39.9 Central Government Finances 1967 1968 1969 Current Revenues 6,688 8,057 9,250 Current Expenditures 4 293 5,122 6,418 Current Surplus ,935 2,832 Investment Outlays 2,626 3,646 3,987 Overall Deficit 231 711 1,155  Money Supply End End End 1967 1968 1969 Millions of Pesos: 13,150 15,435 18,448 Prices 1967 1968 1969 National Consumer Price Index (Annual Averages, 1958 = 100) 262 281 305 W4holesale Price Index (Annual Averages, 1958 = 100) 252 267 290 Exchange Rate End End End 1967 1968 1969 Principal Exchange Rate, Selling (Pesos per U.S. Dollar) 15.82 16.91 17.90 Balance of Pa ents in 1968 (Millions of U.S. Dollars) F.o.b. Merchandise 1Exports 609 (Of which, coffee) (368) F.o.b. Merchandise Imports 615 Net Services - 72 Factor Payments to Foreigners -113 Net Transfers 31 Current Account Balance -160 Net Private Capital 52 Net Public Capital 90 Errors and Omissions 12 Increase in Central Bank Reserves - 62 Decrease in Commercial Bank Reserves 68 External Public Debt (Mlillions of U.S. Dollars) End 1968 Enhd 1969 IBRD Total IBRD Total Disbursed 290 948 318 1,083 Undisbursed 163 372 176 429 Total 453 1,320 494 1,152 Debt Serbvse Ratio 1968 1969 Debt Service Ratio 12.8 11.6  - iii - Net International Reserves of the Central Bank (Millions of U.S. Dollars) End End End 1967 1968 1969 - 36 35 97 IMF Position at end of 1969 Quota US$125 million Net Drawings US$139 million Fund Holdings of Pesos Col$233 million Fund Holdings of Pesos as Percentage of Quota 187 percent Rate of exchange as of March 31, 1971 Col$19.5 per US$ April 19, 1971