Uruguay - Fourth Livestock Development Project - Stage Two

CIRCULATING COPY FILE - Y BE REUJ TO RPT DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1328-UR REPORT AND RECOMMENDATION OF THE PRESIDENT TO ThE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO,THE REPUBLICA ORIENTAL DEL URUGUAY FOR THE FOURTH LIVESTOCK DEVELOPMENT PROJECT, SECOND STAGE October 10,- 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CTJRRENCY EQUIVALENTS Currency Unit Uruguayan Peso Exchange Rates Effective September 7, 1973 Official Rate (Trade) Selling Rate = US$1.00 = Ur$892 Buying Rate = US$1.00 = Ur$883 Average Exchange Rates 1971 1972 US$1.00 = Ur$260 Ur$556 Ur$1.00 US$0.003646 US$0.001798 Ur$1 million = US$3,846 US$1,798  INTEI'ATIONAL BANK FOR RECONSTRUCTION AND DEVELOPWENT REPORT AND RECOMENDATION OF W{E PRESIlDNT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOANI TO THE REPUBLICA ORIENTAL DEL URUGUAY FOR TEE FOUTRTH LIVESTOCK DEVELOPMNT PROJECT, SECOND STAGE 1. I submit the following report and recomnendation on a proposed loan to the Republica Oriental del Uruguay for the equivalent of US$13.5 million to help finance the secand stage of the Fourth Livestock Development Project. The loan would have a term of 14 years, including four years of grace, with interest at 74 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Uruguay (120a-UR) dated May 10, 1973, was distributed to the Executive Directors on June 6, 1973 (R73-1131). The report is based on the findings of the econ6omic mission which visited Urugaay in Augu.st and September of 1972. A country data sheet is attached as Annex I. 3. The Republic of Uruguay, with its cultura'lly homogenous, well-educated population (over 90 percent literate), low birth rate (now about 2.1 percent) and abundant farmland well-suited to livestock production, had attained by the rmid-1950's one of the highest standards of living in Latin America. Favorable world prices for Uruguay's pastoral products made the decade following World War II a period of steady growth, but throughout this period Uruguay,'e live- stock ranchers remained content with extensive exploitation of their land- holdings, and the principal investment activity took place in the industrial sector, where Government polic ies, oriented toward higher employment and consumption for the largely urban population, fostered the development of light, import-substituting industries under the umbrella of absolute or near- absolute protection. When world beef and wool prices declined followirg, the termination of hostilities in Korea, Uruguay, with its small internal market, entered into a period of prolonged economic stagnation. 4. GDP remained almost constant in real terms during the 1960's and while the modest 1.2 percent demographic growth rate prevented the situation from becoming explosive, per capita incomes are estimated to have declined slightly to about UTS$820. This income level, however, was still high by Latin Ajei,r standards; moreover, income in Uruguay was probably more evrenly distributed than in most Latin American countries. Tne high proportion of wage and salary earners and the virtual absence of subsistence agoriculture  -2- tended to reduce income disparities. Based on the fragmentary data available, the income share of the poorest 20 percent of income recipientsl/ during the early 1960's in Uruguay was about 5.5 percent. This compares favorably with the 1960-64 average for Latin America Free Trade Association (LAFTA) countries of 4.1 percent for the same income bracket. Although the income share of the highest 20 percent in Uruguay is equal to the average for LAFTA countries, 58 percent, only 25 percent of the income goes to the highest 5 percent, while for the area as a whole the corresponding share is 31.5 percent. The distri- bution pattern in Uruguay was thus somewhat better balanced than in most other Latin American countries. However, this income distribution was unfortuynately accompanied by a scarcity of employment opportunities and incentives to invest. These circumstances help to explain the high levels of emigration among the younger, more highly trained population and the outbreak in the late sixties of political and social unrest. Improved Government policies toward the end of the decade led to substantial eco-nomic gains in 1969 and 1970; but these gains proved short- lived as a number of factors, most of them related to impending Presidential elections, made it difficult for the Government to adopt unpopular economic measures. Approval of substantial wage increases and unwillingness to move an increasingly over-valued exchange rate, coupled with relaxation of credit controls, all contributed to a reemergence in 1971 of high rates of inflation, extersive capital flight and a decline in economic activity. A new Adminis- tration took office in March 1972 and moved swiftly to deal with the rapidly deteriorating situation. It designed a growth-oriented development strategy to stirmulate private agricultural and manufacturing production and decreed a number of concrete measures. It (a) devalued the peso from UR$250 to UR$500 per US$1 and declared its intention to adjust the exchange rate frequently in line With in-ternal price changes; (b) raised certain taxes and the domestic prices of petroleurm products which resulted in increased fiscal revenues; (c) reduced its current expenditures budget for 1972; and (d) raised elec- tricity and telephone rates by 90 percent. 6. The recent econoiec report points out that the March 1972 devaluation and the adoptiorn of a flexible exchange rate system, which has become well established during the past year through frequent small devaluations, permritted a substantial rise in beef producers' prices and brought to a halt the balance- of-payTents deterioration experienced during 1971 and much of 1972. In many respects, however, the impact of the new policies in 1972 was disappointing. Gross domestic product in real terms did not increase from the 1971 level. AIso, a poor harvest, rising wor'ld market prices for meat an.d grains, and sudden increased demand for beef substitutes consequent upon the Government's prohibition of beef slaughter for domestic consumption during the July-November oer'iod a-l- contributed to heavy overall price increases. The cost of living in Montevideo rose by 95 percent in 1972 compared with 36 percent in 1971. Norrna2. w-age increases were larger and more frequent than in 1971, but real wages, Jhich had reached a peak prior to the November 1971 e_ectionrs, decreased by O8 nercent in 1972. l inoployed persons and pensioners.  - 3 - 7. While the rate of inflation remains high, the economic outlook for 1973 contains a number of favorable elements. Export volumes are up, which, bolstered by very favorable international prices for both wool and beef, should help total export earnings to rise by about 50 percent over 1972. Although imports also will increase, particularly with higher prices for petroleum and wheat, prospects are good for a surplus in the balance of payments for the first time since 1969. As a result, net foreign exchange reserves are expected to rise substantially over the year (at end-July net foreign exchange reserves stood at US$56.1 million, up US$52.6 million from a year earlier). Expected increases in tax revenue, particularly from the agricultural sector and from a recent increase in the value added tax rate, together with substantially higher public utility tariffs and the Government's expressed intention to continue restraining expenditures, indicate that the overall Central Government deficit is likely to be only 2.5 percent of total revenue (as opposed to 40 percent in 1971 and 19 percent in 1972). Total output is projected to increase by about 4 percent. These favorable prospects, of course, assume that there will be no substantial departure from the Govern- ment's balance of payments policies during the year, and that restraint in the granting of salary increases as well as implementation of recent tax measures,, particularly those strengthening the agricultural land tax, will be successful in decelerating gradually the rate of inflation. The political changes early this year, when the Uruguayan armed forces assumed a major role in the political decision-making process, have not resulted in any major modification of the macroeconomic or livestock sector policies which the civilian authorities have been pursuing. 8. The economic report concludes that over the medium term, provided sound economic and financial policies are followed, a sustained rate of growfth of approximately 4 percent is realistic. To achieve this rate of growth and in view of the heavy debt service schedule of the next few years, an inflow of approximately US$375 million in medium and long-term external credits will be required during 1973-78 if reserves a-re to be built up to a reasonable level. Uruguay's public debt profile in recent years has been heavily affected by commercial arrears (for which the Central Bank has assumed the foreign obliga- tion) which reached US$84 million by July 1972. Aided -by the sale on the free market of about one-fifth of the country's gold reserves in NovemDer/December 1972, commercial arrears were reduced to about US$58 million by the end of the year. With the favorable outlook for exports in 1973, the Goverrment has now begun paying all commercial debts of below US$25,000 and is currently completing its repayment schedule for the balance of the arrears. The Paris Club members, in expressing confidence in Uruguay's intentions, have inforrally advised the Government that they did not consider it necessary to open formal negouiations on the rescheduled commercial debts. 9. The current prospects are that Uruguayts public debt service ratio will decline from 30 percent in 1972 to slightly above 20 percent in 1973. If the projected requirements of medium and long-term external credits are rnet, thus reducing the need for short-term credits, Uruguay's external debt service burden would be reduced further in the next few years. About US$85 million in medium and long-term credits is now in the pipeline and comes largely from the  _4 Bank, from IDB, which has made loans in recent years for industry, transport, education and water supply, and from AID, which made an agricultural sector loan in 1968 and a capital goods import loan in 1969. Provided the Government satisfactorily proceeds with the implementation of its program, it should find it possible to mobilize the additional projected external capital required for Uruguay's development. Annual debt service payments to the Bank are expected to remain virtually constant during 1973-78; however, the Bank share of total exterrnal public debt service, which was only 10 percent in 1973, is likely to rise above 25 percent during the next four years, reflecting the completion of payments on commercial arrears and loans from bilateral sources. Under the circumstances, Uruguay should be judged creditworthy for additional borrowing from the Bank. PART II - BANK OPERATIONS IN URUGUAY t0. Uruguay has received US$141.7 million (net of cancellations) in Bank loans. Almost ninety percent of Bank lending has been for electric power (58 percent) and livestock development (29 percent). Most of Bank lending for power, however, is represented by three loans totalling US$64 million made d-uring the 1950's. Since 1959, Bank lending has consisted of five loans totalling US$41.2 million for livestock development, a 1962 loan of US$18.5 million for highway construction and improvement which is now fully disbursed, and a US$18 million loan for thermal generating equipment and electricity aistribution made in 1970. Annex II contains a summary statement of Bank loans and notes on the execution of on-going projects. 11. When the most recent loan to Uruguay, for the first stage of the Fourth Livestock Developmenit Project, was under consideration in April 1972, the economic -oroblems facing the Government which had just taken office were sufficiently serious that a pause in Bank lending was considered. Given the fact, however, that the Bank is the n^ajor so-rce of credit financing for the livestock sector, this approach was rejected because of the widespread and detrimerntal effects which such a pause could have for the continued success of the livestock developmeint prograrm! and on the national economy which is dependent on livestock. The decision to proceed with the loan was influenced by the Government s announcement of its 1972 economic program and development strategy and by the Governmentts decision to seek support for this program from the IPF. At the same time, however, the Bank considered it advisable to limit the amoulnt of its commitment primarily because it was not certain whether the Government would be able to fully implement the adjustments in the economic and sectoral policies it was proposing. Thus, although the Appraisal Report (PA-113b), dated February 17, 1972, dealt with a two-year (1972-73) project, the Bank proceeded with a loan of US$11.2 million, which -as considered sufficient to finance orly the first year of the project.  12. Since the first stage loan was approved, the principal policy initiatives of the new Government in the balance-of-payments area appear to have gained acceptance within Uruguay, and on this basis, together with the prospects of favorable world market prices for Uruguay's principal exports and improvements in livestock sectoral policies discussed below, lt is considered justified for the Bank to continue its support for the critical livestock sector by going forward with a second stage loan and by including in the loan sufficient funds to finance the estimated external requirements of the Government's livestock development program through 1974. 13. Looking beyond the loan now proposed, the UJruguayan economy will have to rely heavily on the commodity-producing sectors if it is to gain the momentum necessary to move onto a steady upward path. In its future lending, therefore, the Bank's first priority should be to support the growth of these sectors. This would mean a continuation of lending for livestock development and would enable the Bank (a) to support the maintenance of sound overall policies in the livestock sub-sector; (b) to help improve the technical and financial capacity of the Government's Livestock Commission (the "Plan Agrope- cuario"!, as it is often called) to promote directly, and through the demon- stration effect of its program, increased investment in pasture improvement; and improved ranch management, and (c) to help diversify livestock production and to bring increased numbers of smaller producers into the Plan Agropecuario program. 14. At the same time, beginning with the next economic mission schedaled for December, we intend to exanine the feasibility cf a significant Bank role in industry. The problems in the sector are complex, because past protectionist policies have led to structural inefficiencies. A concerted effort, however, to find ways to help resolve them is justified not only because of industryls potential contribution to growth objectives, but also because the problems of unemployment and underemployment are concentrated mainly in the urban areas, and their resolution probably will depend heavily on the development of a dynamic industrial sector. We shall investigate the possibility of promoting non-traditional manufactured exports based on domes3tic raw materials, and of fostering improved institutional arrangements for medium and long-term indus- trial finance through lending to a proposed development barik. Other possible areas of Bank lending may be electric power and transport. 15. Thus far, IFC has made no investments in Uruguay. IFC has been approached by sponsors of a proposed private development finance company for a possible equity and loan participation, but active consideration of this request has been deferred until resolution of the difficulties which the sponsors have incurred in attempting to obtain legislation necessary to obtain foreign financing.  -6- PART III - THE LIVESTOCK SECTOR 16. While agriculture's contribution to national output and employrent is relatively modest -- it provides, directly and indirectly, about 30 percent of Uruguay's GDP and employs about 20 percent of the labor force -- its over- whelming importance as a source of foreign exchange makes its expansion, particularly of livestock, critical to Uruguay's economic development pros- pects. Exports of livestock prod-acts accounted for about 85 percent of expo:rt earnings in 1970 and 90 percent of export earnings in 1971 and 1972. Past stagnation of the economy was directly related to the fact that, apart from year-to-year fluctuations mainly related to climatic conditions, there was little change in the level of livestock or crop production. 17. About 90 percent of Uruguay's 16.5 million ha. of agricultural land is used for pastures which support about 9 million beef cattle, 600,000 dairy cattle, and 19.8 million sheep. In addition, the growing pig industry has over 4o00,000 animals. Livestock production practices have been based histor- ically on extensive systems of land use. Traditional management attitudes, which tend toward low inves-ment and managerial input in the ranch enterprise, are still widespread in the livestock sector. Over the past decade, however, and largely as a result of the impetus provided by the Bank-financed program of the Plan Agropecuario, there have been important advances made in the adop- tion of a more intensive livestock technology. Improved pastures have increased ten times since the early 1960's, reaching over 1.2 million hectares by t972, and are now responsible for 20 to 25 percent of total annual beef output. Nevertheless, improved pastures still represent only about 8 percent of total pasture land, and as all land suitable for livestock production is already being -atilized, wider application of intensive techniques will be crucial tc the long-ran expansion of livestock production. A similar situation exists in agriculture generally, While the land in crops represents less than t0 uercent of the total, much of it is also farmed on an extensive basis, and, as a consequence, yield levels are generally low in absolute terms and, with few exceptions, have shown little tendency to increase over the past 20 years. As is to be expected from a sector based largely on extensive systems of prodluction, most of the lan& is in relatively large holdings, with more than 70 percent of the land in holdings of more than 500 hectares and more than 20 percent in h-oldings of more than 100 hectares. The remaining 10 percent of the land is occupied by about 56,000 crop farms, dairy and pig farms, and mixed livestock/crop farms (representing over 70 percent of all farms and ranches), most of which are probably operating above subsistence levels, but many of which the Goverrment considers too srmall to be capable of efficient operation under the present extensive land use rriethods. 18. Conscious of the need to introduce improved technology to increase -roductiTrity i4 ranching, the Government in i959 established the Livestock _o-mmis ssion as a serri-autonlomous, technical authority under the Ministry of LiTvestock and Xgriculture. The Commission has had primary responsibility ^or tsorrrJat:g and irmplementing the Government's livestock development program a.c has acted as the executing agency for BanIc lending in the livestock sector. Ra-1cher arnd farmer response to Bank-supporued cedit programs,, however, has  - 7 - been determined by cattle prices which were often too low to offer sufficient economic incentives for high levels of investment. Ranch-gate prices in pesos began to increase in real terms during 1970 and 1971, but the failure to move an overvalued exchange rate meant that the increase was much less than world price increases would have warranted. This was reflected in the very heavy volume of sales of contraband cattle to Brazil, estimated during 1971 to be about one-third of the volume earmarked for export, which deprived Uruguay of the value added in processing. The devaluation and the introduction of a flexible exchange rate system in March 1972 had an important positive impact on the livestock sector. There followed a series of increases in producer prices which (combined with Brazilian export control and pricing policies) have all but eliminated the flow of contraband cattle to neighboring areas of Brazil. Assurances were obtained during negotiation of the proposed loan that the Government would continue to permit increases in beef prices to the extent necessary to discourage contraband sales of cattle in the future. 19. The Government recognizes, however, that given traditional rancher attitudes, improved pricing policies alone are not sufficient to assure high levels of investment in the livestock sector. It has been moving, therefore, during the past year toward making effective the implementation of the four- year old IMPROME land tax which is designed not only as a means of raising revenue but also as a device for making under-utilization of land and stock increasingly unattractive to landowners. The tax is punitive on large, unimproved holdings and does not touch small (under 200 ha.) or largely agri- cultural holdings. Last year was the first year full payment of IMPRYME was required under the law and, aided by a system of advance payments instituted in November, the yield from IMPROME in 1972 was five times higher (in current pesos) than it was in 1971. The Minister of Agriculture, furthermore, announced to the livestock sector at the beginning of this year the Government's intenulon strictly to enforce IMPROME, particularly with respect to the approidmately 4,000 ranchers who hold almost 60 percent of the total land in agriculture. it thus appears that IMPROME, which is complex and difficult to adimini_ster, is beginning to receive the political and administrative backing necessary to mince it effective. 20. A further aspect of the Government's program for increasing incentives for more efficient production is the adoption this year of a policy of redaced export taxes on beef production attributable to ranch improvementsv The new policy is in line with recommendations of recent Bank economic missions, which have concluded that the tax involved acts as a disincentive to exports and should be gradually replaced by measures such as the TMPROME land tax. Ranchers will receive the benefit of reduced export taxes on the estimated incremental annual production of beef derived from imptoved pastures established under ranch development plans (using the same methodology formulated to determine land productivity under IPROME) approved by Plan Agropecuario, whether or nlot, financed from Plan resources.  - 8 - 21. Another Governmenit initiative aimed primarily at stimulating more adequate levels of investment in the livestock sector but which will also have an income redistribution effect is a proposed land redistribution scheme, which the Government has under consideration and which is expected to receive wide support. According to the proposal being developed by the Ministry of Agriculture, the first phase of the program would involve the redistribution over a five-year period of approximately one million hectares, most of wh-ich would be acquired through the expropriation of that part of individual holdings which exceeds 5,000 ha. The purchased land would be allocated to smaller ranchers considered to have adequate managerial capacity, with priority being given to those now holding units considered too small to be economically viable. The development of the new holdings would be financed by a series of long-term development loans. A preliminary iMinistry estimate of the total cost of land acquisition and development under the proposed plan during 197h-78 is at least US$25 million eiluivalent per year, which is likely to strain Uruguay's very limited pubLic sector resources, even assuming external financ- ing of a portion of the program, and means that the five-year timetable is almost certainly optimistic. The Government has advised us that it intends to seek Bank-financing for the beneficiaries of the land redistribution progran in a Fifth Livestock Project;. 22. While improvements in sector policies are thus underway or in preparation, one area of weakness that remains is the domestic seed industry. Development of this industry has progressed only slowly and the importation of substantial quantities of seed is still required. Under the second stage project, the Government, with the assistance of Bank-financed specialists, w-ll conduct a study of the domestic seed industry including an assessment of the investment and credit requirements for expansion of production, seed cleaning and processing facilities and the requlrements for rationalizing seed testing facilities. Another obstacle to the development of the livestock sector in the pas- has been the stagnation of the meat-packing industry. While the economi^ report concludes that, as a result OL improved Government policies, an expansion cf facilities, and improved financial prospects resulting from high world meat prices, this industry does not currently present a serious bottleneck to the development of the livestock sector, a problem could arise if additional cold storage facilities are not erected relatively soon and unless reCent improvements in sanitation standards continue. The J B, which has provided financing for slaughterhouse improvements, has recently approved the financing of a study to deteriine the most appropriate methods of expand- ing cold storage capacity and improving refrigerated transportation facilities. We intend to follow closely the Government's efforts to expand cold storage facilitie8 and mairntain high sanitation standards.  - 9 - PART IV - THE PROJECT 23. The Fourth Livestock Development Project was appraised in May/June 1971. The report entitled "Appraisal of the Fourth Livestock Development Project - Uruguayr' (PA-llob), dated February 17, 1972, was distributed to the Executive Directors in April 1972 (R73-81A) in support of the loan (816-UR) for the first stage of the project. The proposed loan for the second stage is based on this Appraisal Report and on the findings of the updating mission of November 1972 which are incorporated in the following paragraphs. A Loan and Project Summary is attached as Annex III. Negotiation of the proposed loan took place in Washington from August 27 to August 31, 1973. The Government of Uruguay was represented by the Honorable Hector Luisi, Uruguayan Ambassador; Ing. Julio Aznarez, President of the Honorary Livestock Commission; Sr. Jorge Sambarino, Director of Credit of the Central Bank; Sr. Jorge Devincenzi Suarez, Sub-Director General, Banco de la Republica and Sr. Rodolfo Palleiro of the Banco de la Republica. Progress Under First Stage Loan (816-UR) 1972 Livestock Development Program 24. Loan 816-UR is providing financial and technical assistance for the continuation and expansion of the Government's livestock development program. The loan amount (US$11.2 million) was based on the appraisal estimate of the external financing requirements of the program for 1972. A summary table of performance under the 1972 program is attached as Annex IV. 2$. The number of loans to participants in the program in 1972 reached ,226 which was close to the 1971 level and exceeded the estimate of 3,650 made at the time of the appraisal of the Fourth Livestock Project. The number of participants with holdings of less than 400 ha. was greater than projected, but the distribution of participants by size was almosu the same as in 1971, with roughly one-third under 100 ha., one-third between 100 and 400 ha. and one-third above 400 ha. (The percentage distribution of participants and funds invested by size of holding for 1971 and 1972 is shown in Annex IV.) The loans to ranchers and farmers were used to improve some 212,000 ha. of pastures. This was 43,000 ha. less than the appraisal estimate, but still more than any other year or the program1 except for the record year of 1971 when 290,000 ha. were improved. The principal reason that the amount of pastures improved fell short of the amount projected, in spite of a larger than anticipated number of participants, was that producer prices for beef were allowed to decline in real terms during the latter part of 1971 and the first part of 1972, thus acting as a disincentive to investment. Although, as discussed in Part II above, producer pricing and other agricultural sector policies improved as 1972 progressed, the improvements came too late to fully offset the negative impact of the earlier policies.  - 10 - 26. Although the area of pastures improved was thus about `5 percent of that projected, disbursements under Loarn 816-UR for ranch development reached only US$3.8 million (total disbursements about US$4.1 million), or about 40 percent of the appraisal estimate. The much greater percentage shortfall in loan disbursements is due primarily to the major devaluation of the Uruguayan peso that took place in 1972. The appraisal estimate of Droducers' on-ranch investments was computed at the 1971 official exchange rate of UR$250 to US$1; the average exchange rate applicable to Bank dis- bursements, however, turned out to be approximately UR$700 to US$1, while the disbursements related to investments most of which were made before domestic prices had begun to catch up with the change in parities. Bank loan funds, therefore, went much farther than expected. Also contributing to the unexpectedly low level of Bank disbursements was the fact that two new components of on-ranch development loans introduced in the first stage project made very little progress in 1972. One of those components was for heifer purchases by Plan participants. It was unsuccessful because the Government- controlled heifer price was too low to be attractive to potential sellers. The other component was for working capital designed to help offset the loss of income to ranchers resulting from heifer retentions. This component was not successful in 1972 apparently because the Plan technicians had difficulty interpreting the administrative safeguards which had been developed to assure that the funds were used for the intended purpose. (Plan personnel are work- ing to overcome the difficulties this year.) However, some of the impact of the unsatisfactory performance of these two new components was offset by orogress on a new sub-project -- for dairy beef production. The principal objective of this sub-project is to encourage dairy farmers to raise to maturity, and to fatten for the beef export market, male calves which are currently killed at birth. About I,000 farmers, mostly in the area of the Miontevideo milkshed, participated in this sub-project, as compared to the appraisal estimate of h50. The principal reasons for this better-than-expected oerformance were a concerted promotional effort by Plan Agropecuario and the fact that the projected financial rate of return was the highest of all sub- projects. Second Stage Pro.,ect 27 mThe second stage project would include the livestock development program of Plan Agropecuario for 1973 and 19714. The total cost of the second stage project is estimated at US$41.1 million equivalent, of which US$20.6 s-illion represents the foreign exchange costs. The amount available from Loan 816-UR to finance these costs is US$7.1 millions (about US$2.8 million of which has already been disbursed f'or imported seeds and fertilizers in preparation for the planting season now underway). The US$13.5 m"'lion balance of the foreign exchange costs would be financed by the proposed new loan. Annex V attached hereto shows the Bank-approved reallocation of' funds under Loan 816-UR and the allocation of funds from the proposed new Loan for the combined 1973-74 operations. These allocations are in t-urn based on the consolidated project investments for 1973-74 contained in Annex VI (which is discussed further ir paragrapn 30 below).  _ 11 - 28. The second stage project would support a credit program for about 7,750 sub-loans to ranchers and farmerE. About forty percent of the sub-loans would go to medium and large size cattle and sheep ranches of more than 500 hectares, with the remaining 60 percent benefiting smaller beef and dairy cattle, pig and mixed livestock/cropping enterprises. The second stage would continue the lines of credit for dairy beef, heifer pv,rchase and pig production introduced in 1972 and would finance a new program for the rehabilitation and development of small mixed livestock/crop farms. Efforts will also be made to considerably strengthen the institutional structure and the capacity of Plan Agropecuario to carry out its expanding administrative and technical responsibilities. The role of the internationally recruited technical director would be that of a technician with a strong managerial and organizational background. In addition, the Government has hired locally a full-time accountant to revise and maintain accurate records of the Plan's operations. The Plan, which has a competent corps of livestock technicians, would seek to improve its technical services, through formulating a program for lo-er level field extension workers as well as developing plans for broadening its extension services over the next year. 29. Specifically, the second stage project would consist of the following components: (a) Cattle and Sheep Ranch Development The financing, through long-term sub-loans, of development plans for about 5,600 ranches and farms to improve livestock production (representing about US$17.3 million of the US$20.6 million financed by the Bank for the Second Stage Project). Farm investments would be for pasture improvement, related structures, machinery and facilities, and purchase of breeding stocr. Bahnk funds would finance the foreign exchange component of these expenditures, amounting to 55 percent of on-ranch investment costs. The ranches would ra-nge from 200 ha. to 5,0OW ha. in size; the average size would be around 900 ha. (b) Da Beef Dairy and beef farms with "dairy beef" operations would be assisted through long-term sub-loans for pasture improvement, machinery, and related structures and facilities. The program was initiated under Loan 816-UR and has pr6gressed better than expected (see paragraph 26 above). It is being extended nationwide this year, and the second stage project would include approximately 1,700 farms. Farm sizes lie in the range of 30-150 ha. (c) Piz Production This program was also introduced for the first time under Loan 816-UR and is designed to increase pork production as a substitute for beef in the domestic market. Due to a shortage of technical expertise, it proved necessary to concentrate the program on 30 farms as opposed to the appraisal estimate of 100, but the number of pigs per unit was higher than projected, and the program made a significant contribution to aggregate pork supply  which, in conjunction with the increase in beef prices in the latter part of 1]972, resulted in pork being available on the retail market at a lower price than beef for the first time. It is expected that the internal market for pork, combined with farmers' response to new technology and the planned strengthening of technical services, will permit an increase in the size of the program in the second stage project. The second stage project would support the development of about 100 additional pig production units. Financing would be providedi for investment in fencing, structures, food- mixing machinery, equipnent and stock. (d) Mixed Farms The proposed loan would support a new program of financial and technical assistance to mixed livestock/crop fprmers with average annval net incomes per family of about US$900 equivalent. This program was developed in 1972 and appraised by the November updating mission. On many of the mixed farms, which would range in size from about 30 ha. to 200 ha., a combination of shallow soils and poor production practices has led to soil degradation, declining yields and reduced farm incomes. The program would provide long- term financing to about 400 farmers for the establishmeent of pasture-crop rotation and the build-up of the cattle herds. The investme-nts in pasture establishment and improvement would be similar to those on the cattle and sheep ranches, and the sub-project would provide a high level of technical assistance. Because of the weak financial position of these borrowers, the sub-loans would cover 90 percent of investmernt costs and carry a longer grace period on repayment of principal than for other sub-loans under the project. The sub-loans would also benefit from a lower interest rate to be charged to s4b-borrowers holding less than 250 ha. (see paragraph 32 below). The average size of' sub-loans per farm would be approximately US$3,600. A more detailed description of the mixed farm program is con- tained in Annex VIi. (e'. Technical Services and Training Tne Second Stage Project would also aim at the strengthening and expansion of the scope of technical assistance provided to the Government and ?lan Agropecuario. In addition to the new technical director of the Plan, who will be responsible primarily for the management and training of technical I._af', t1e services or the agricultural economast already in the field will be continued. Farthermore, the Second Stage Project would include experts i.n dairy production, dairy industries, and pork production. Specialists in Tch,e field of meat marketing, with specific expertise in external marketing and the organization of a meat, board, would also be recruited. The project Woul-d also include t1) specialized technical services in the establishment of a dornes-ic seed production and processing industry and (2) marketing studiaes of selected dairy pt,oducts as a follow-on to work of consultants 'Ln&naCed -ancer previous Bank loans and 'oy AID. Equipment and materials needed to assure the effective execution of the consulting services would also be included. A table showing the different types and amounts of tech- nica' services irA the second stage is attached as Annex VIII.  - 13 - (f) Contractor Machinery and Seed Producing Equipment Under Loan 816-UR, US$0.2 million was made available for the procure- ment of contractor machinery and seed producing equipment. The expected demand, however, failed to materialize in 1972. Part of the difficulty was that seed production machinery, because of its specialized nature, proved unsuited to international oompetitive bidding. Given the improved investment climate, and a proposed easing of the procurement requirements for seed production equipment (quotations from at least three suppliers from at least two countries would be required), it is anticipated that the US$0.2 million will be utili.ed this year. Financing 30. The cost estimates for 1973 and 1974 operations of the livestock development program are detailed in Annex 3 which supersedes the cost data for "year 2" contained in Annex 8 of the 1972 Appraisal Report. The revised cost estimates reflect inclusion of an additional year (1974) in the Project, the introduction of the mixed farm sub-project, and revised price data obtained by the November 1972 updating mission. Because of the availability of improved price data and based on experience gained in 1972, the 15 percent contingency included in the cost estimates at the time of appraisal has been reduced to 10 percent. As mentioned above (paragraph 27), the total cost of the second stage project would be US$41.1 million equivalent, of which approximately 50 percent (US$20.6 million) represents the foreign exchange costs to be financed by the balance available under Loan 8t16-UR (US$7.1 million)and the proposed new loan (US$13.5 million). The second stage local costs would be financed by the Government, the Central Bank, the Banco de la Republica and the sub-borrowers as shown in the following table: Banco Sub- de la Central Govern- Borrowers Republica Bank ment Bank Total Amt. T Amt. 7% Amt. Amt. S Amt At -(us--------------------(us$ 1000)------------------------------ On-Ranch Development Cattle and Sheep Farms 5,984 3,872 4,488 - 17,336 - Pig Farms 178 115 134 - 516 - Dairy Farms 403 261 302 _ 1,166 - Mixed Fanrs 235 152 176 _ 682 - Sub Total 7 19 4,400 12 5T,00 14 - 19,700 55 360 00 Fertilizer Sub. - - - 3,400 100 - 3,400 100 Contractor Mach. and Seed Pro- ducing Equip.. - - - 150 40 230 60 380 100 Tech.Sves. - - - 600 50 600 50 1,200 100 Training _- - _ - _ 100 100 100 100 Training - - ____ - ____ - - io TOTAL 6 800 17 4 400 11 5,100 12 L,150 10 20 630 50 41 080 100  - 14 - 31. The Livestock Fund of the Central Bank, established under the Third Livestock Project (698-UR), would continue as the channel of funds Drovided by the Central Barik and the Bank for credit operations under the project. Beginning with the Third Livestock Loan, a number of rediscounting alternatives had been offered to commercial banks in an effort to encourage their participation in lending to sub-borrowers under the program along with the State-owned Banco de la Republica (BOR). These efforts failed mainly because of the commercial banks' continuing orientation towards short-term lending to preferred clients. Therefore, upon the effectiveness of the proposed new loan, the BOR would be the sole participating bank, and redis- counting terms on funds on-lent by the Livestock Fund (Certral Bank) to the BOR would be simplified. BOR would rediscount with the Central Bank 85 per- cent of each ranch development sub-loan financed under the project, receiving a 2 percern interest rate spread, which is oonsidered reasonable. Sub-Loan Terms and Indexing 32. Under Loan 816-UR, the principal of all sub-loans for on-ranch development is subject to monetary adjustment, to avoid erosion by inflation. The adjustment is applied anmually and is based on the lower of two indices: the average increase in the ranch-gate prices of beef and wool during a 12-month base period (ended on the preceding October 31), and the rise in the cost of liv-ing index during the same period. The adjustment formula is applied fully to sub-borrowers with holdings of 400 or more ha. and only to the extent of 50 percent to those with holdings of under 400 ha. The interest rate paid by the sub-borrowers under that loan is 11 percent, and the terms of the sub-loans range from 3 to 10 years including one to four years' grace. D-uring the review of the proposed loan, it was decided to strengthen the indexing arrangements applicable to sub-borrowers with less than 400 ha. Rising world inarket prices had created substantially improved prospects for the smaller ranchers and farmers, assuming that appropriate policies toward the livestock sector were maintained by the Government. At the same time it was recognized that the t1 percent rate of interest when applied to fully indexed loans was very much higher than rates of interest applicable in other sectors of the economy and that some reduction in the interest rate was there- fcre justified. It was also considered appropriate to apply a differential interest rate for ranchers and farmers with holdings below a certain size, but that ranch or farm size could only begin to be associated with low levels of income at about 250 ha. Setting the dividing line at this point, for example, would ernable all participants in the -mixed-farm sub-project to benefit frorn the lover interest rate. During negotiations, therefore, it was agreed that full indexing, in accordance with the p:eviously agreed formula, would be appolied to all sub-borrowers regardless of the size of their holdings, but tlhat the rate of interest would be 3 percent for holdings of 250 ha. and below, 6 pnrcent for holdings between 251 and 400 ha., and 8 percent for ranchers and a-r,Drs Waith holdings of 401 ha. and over.t/ The average real rate of interest charaed under the project would not fall below 6 percent. f The interest rate on the fully indexed macrinery and ecuipment sub-loans wo-ld also be reduced from the 11 percent currently applicable under Loan 816--iJR to 8 percent.  - 15 - 33. During negotiations the Government also agreed that the improved indexing arrangements described above would apply to the new sub-loans yet to be contracted under Loan 8t6-UR. Procurement 34. Under the proposed loan, international competitive bidding procedures would be used for the bulk procurement by the Plan Agropecuario of pasture seeds and fertilizers, and for goods and equipment related to technical services. At the request of the Government, domestic manufacturers of such goods and equipment would benefit from a preference in bid evaluation of 15 percent or the prevailing rate of duty, whichever is lower. As in the previous loans, bids for the supply of rock phosphates for local grinding and direct application would be restricted to suppliers in countries where rock phosphates have been tested and proved to be agronomically suited to Uruguayan conditions. Other potential suppliers have been and would continue to be invited to submit samples for testing in Uruguay. Bidding for all other types of rock phosphate would be open to all suppliers. As under Loan 816-UR, fencing materials for stock handling yards, farm machinery, water pumps, piping, feed and building materials would be procured through normal commercial channels. An adequate selection of international suppliers is represented in the local market. In view of satisfactory experience under existing loans, the Bank would require prior approval of contracts only when they exceed US$50,000 in value (instead of the US$25,000 applicable under existing loans). Disbursement 35. As in previous loans, two different disbursement techniques would be used for the financing of on-ranch development loans. Of the US$12.9 million to be disbursed for this purpose under the new loan, US$8.2 million would be disbursed by way of reimbursement of 41 percent of the value of sub-loans made by the BOR. The US$4.7 million balance would be disbursed directly to suppliers of imported seeds and fertilizers, and the peso equiva- lent would then be deposited by the Borrower in the Livestock Fund of the Central Bank and used to finance an additional 25 percent of the value ov such sub-loans, so as to cover the full foreign exchange component of the sub-loans. The latter technique was first adopted under Loan 698-UR, at a time when Uruguay's foreign exchange reserves were very low, in order to assure the availability of foreign exchange for the timely importation of seeds and fertilizers for the Plan's pasture improvement program. While continuing this procedure for this second stage project, we have advised the Governmernt that , since Uruguay's foreign exchange situation is now improving and the prospects for continued improvement are favorable, we intend to discontinue the direct disbursement system in arny future loans. Retroactive Financing 36. In view of the advanced stage of the spring planting season in Uruguay and to help initiate as soon as possible the reorganization of the Livestock Commission, it was agreed during negotiations that the Bank would retroactively finance expenditures incurred after September 1, 1973, of up  - 16 - to US$1.2 million for the purchase of seeds and fertilizers and of up to US$0.1 million for consultant and technical services. We have reviewed the bidding documents concerned and have found them acceptable. Fertilizer Subsidy 37. Since the early 1960's, the Government has maintained a policy of subsidizing phosphate fertilizer costs from proceeds of beef and wool export taxes, thus reducing farm gate costs to levels equal to those of Uruguay's major competitors in New Zealand and Australia. The Bank has agreed that the subsidy should continue in order to encourage wider and more regular use of phosphate fertilizer, at least until 20 percent of Uruguay's pasture area is improved. At this level of usage, the value of routine application of phosphate in stimulating pasture production will have been amply demon- strated and the subsidy could be phased out. Under Loan 816-UR, therefore, the Government agreed to submit a plan to the Bank by June 1, 1973 for phasing out the fertilizer subsidy in Uruguay once that level of usage has been achieved. While this plan has not yet been completed, the level of usage is still well below 20 percent, ard it was agreed during negotiations to postpone the date for submission of the plan to December 31, 1973. Economic Rate of Return 38. When the project was appraised in 1971, an economic rate of return of 31 percent was estimated. Since then the average price increase in peso terms for project inputs was about 220 percent, almost equal to the increase -.n the exchange rate, while beef export prices f.o.b. Montevideo rose about 400 percent. However, present high beef export prices (US$1,080/m ton) may not be maintained. It is estimated that the world market price for beef in 1980, expressed in 1973 Unit;ed States dollars, will be about US$950/m ton. Even under a somewhat lower beef price than the US$950/m ton projected for 1980, the economic rate of return would be satfactory. PART V - LBaAL INSTRUMENTS ANT AUTHIRITY 39. The draft Loan Agreement between the Republica Oriental del Uruguay and the Bank, the Report of the Conmmittee 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 tso the Executive Directors separately. The draft Agreement contains provisions to reflect the various arrangements described in tar- IV above, including the usual covenants for livestock projects. Article VIII contains amendments to the Loan Agreement for Loan 816-UR dated April 26, 1972. These amendrmrents, which would be effective as of the date of effectiveness of the oroposed loan, would corform the terms and conditions of Loan 816-UR to those cf the proposed loan. 40. T am satisfied that the proposed loan would comply with the Articles of Agreezrnent of the Barik.  - 1 7 - PART VI - RECOMMENDATION 41. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments October 10, 1973   ANNEX I Page I oE 2 pages COt'NTRY DATA - URlIGUAY AREA POPULATION DENSITY 187,000 k.2 2.959 million (mid-1972) 16.0 per km2 Rate of Growth: 1.27. p.a. (from 1965 to 1972) 18.3 per km2 of arable land POPULATION CHARACTERISTTCS (1970) IIEALTH (1970) Crude Birth Rate (per 1,000) 21.0 Population per physician 1,040 Crude Death Rate (per 1,000) 8.6 Population per hospital bed 210 Infant Mortality (per 1,000 live births) /a INCOME DTSTRIBIUT1iI0 (1960-64) DISTRIBUTIOIJ OF LANO 01-*NERSIIIP 7 of national income, lowest qutintile 5.5 . owned by top 107. of owners highest quintile 58.0 7 owned by smallest 107. of owners ACCESS TO PIPEI) WATER (1971) ACCESS TO EI.CTRICITY ( ) . 7. of population - urban 87.8 % of populaLion - urban - rural 66.4 - rural NUTRITION (1964-66) EWUCAITON (1970) Calorie intake as % of recuirerrents 111.9 Adult literacy rate % 91.0 Per capita protein intake (gr. per day) 105.5 Primary school enrollmient % 94.5 GNP PER CAPITA IN 1970 US $820 CROSS NATIONAI. PRODUCT IN 1971 ANNUAL RATE OF GRO147H (., conistant pricesl US $ Mln. 7. 1960-65 . 1965-70 1971 GNP at Market Prices 2,720.0 100.0 0.7 2.2 -0.5 Cross Domestic Investmenit 258.4 9.5 -9.0 6.6 -2.6 Cross National Saving 187.7 6.9 5.8 -4.0 -9.4 Current Account Bal3nce -63.6 -2.3 Exports of Goods, NFS 252.6 9.3 7.0 0.6 -5.9 Imports of Goods, NFS 302.9 Il.1 -7.0 9.5 -1.2 OUTPUT, LABOR FORCE AND PRODUCTIVITY I. 1971 Value Added Labor Force- V. A. Per Worker US $ Nln. Mln. Z US S 7% AgricuIture 278.7 12.4 0.18 17.9 Industry 625.7 28.0 0.26 25.8 Services 1,334.1 59.6 0.49 s68.2 . Unallocated . 0.08 8.1 Total/Average 2,238.5 100.0 1.01 100.0 .. 100.0 GOVFERNMENT FINANCE Ec teneral Covernment- Central Coverr.cnt (Ur' Blo.) Z of cmP ( Ur$ Bli. _ of GDP 1972 1972 1969-71 1972 1972 196q-71 Current Receipts 369 27.9 31.7 160 12.1 13.2 Current Expenditure 375 21.4 31.7 161 12.2 13.4 Current Surplus -6 -0.5 0.1 -I -0.1 -0.2 Capital. Expeniditures 56.7 4.3 4.3 . 17 1.3 1.4 External Assistance (net) 2.7 0.2 0.7 -1 -0.1 1.2 1/ The Per Capita GlNP estimate is at 1170 market prices, calculated by the sane conversion technique as the 1972 llorld A;tn-s. AlI other conversions to dollars in this t.ble are at the average exchanige rate prevailitig during the period covcred. 2/ Total labor force; uneoploved are .ailoc.iled to sector of their niormal occupation. "Inallocated' consists mainly of Uncr.ployt.d worVers seeling their first job. , not available not 'pplicable a/ by incoML ruCipiC;lt b/ 1963 cei.ss S/ Total Pu'lic Sector.  AtNNEX I Page 2 of 2 pages COUN'RY DATA - URUGUAY MONEY, CRED7T end PRICFS 1965 1969 1970 1971 1971(June) 1972(June) (Billion UrS outstanding end period) Money and Quasi Money 19.3 98.1 116.6 189.3 139.7 223.0 Bank Credit to Public Sector 3.0 17.0 17.3 55.0 26.0 72.3 Bank.Credit to Private Sector 17.1 51.9 82.6 122.0 98.9 166.4 (Percentages or lndex Numbers) Money and Quasi Money as % of GDP :36.8 19.7 19.2 24.5 Ceneral Price Index (1963 X 100) 221 1972 2313 2859 2710 4793 Annual percentage changes in: General Price Index 56.6 20.9 16.4 23.9 20.8 72.7 Bank credit to Public Sector 145.5 123.7 1.8 217.9 188.9 178.1 Bank credit to Private Sector 48.1 27.6 42.5 47.7 45.6 68.3 BALANCE OF PAYMNENTS HMERCHANDISE EXPORTS (AVERAGE 1969-71) 1970 1971 1972C US $ Mln 7. (Millions USS) Exports of Goods, NFS 280.5 252.6 257.0 Meat 73.2 35.4 Imports of Goods, NFS 286.5 302.9 265.0 Wool 69.8 33.7 Resource Cap (deficit - -) -6.0 -50.3 -8.0 Hides 23.3 11.3 Vegetable Oil and By-Products 21.2 10.2 Interest Payments (net) 13.4 12.6 13.2 All other comumodities 19.5 9.4 Workers' Remittances . . . Total 207.0 100.0 Other Factor Payments (net) 8.6 9.O 11.8 Net Transfers 5.2 8.3 8.0 EXTERNAL DEBT, PFCFCMBER 31, 1972 Balance on Current Account -22.8 -63.6 -25.0 US $ Mln. Direct Foreign Investment Net MLT Borrowing 4.7 10.4 29.0 Public Debt, incl. guaranteed 312.6 Disbursements 43.6 53.8 91.5 Non-Guaranteed Private Debt .. Amortization 38.9 43.4 62.5 Total outstanding & Disbursed Subtotal 4.7 10.4 29.0 1/ Capital Grants 3.2 2.7 3.8 DEBT SERt'ICE RArio for 1972 - Other Capital (net) 7.8 .. .. , Other items n.i.e. -43.2 25.4 -1.8 Increase in Reserves (+) -50.3 -25.1 6.0 Public Dcbt, incl. guaranteed 29.5 Non-Guaranteed Private Debt Gross Reserves (end year) 197.5 204.4 .. Total outstanding & Disbursed Net Reserves (end year) ''.1 29.0 35.0 RATE OF EXCAIANGE IBRD/IDA LENDING. (.Januanry, 1973) (?lillion l'SS: Msrcb e, 19(1, IBRD IDA US $ 1.00 = urS-500 Ur $ 1.00 = US$0.WJd Outstanding & Disbursed 57.4 - Undisbursed 20.2 - February ?1, 1973 Outstanding incl. Undisbursed 77.6 - US $ 1.00 = iVr832 Ur $ 1.00 =0550.0012 1/ Ratio of Debt Service to Exports of Couds and Non-Factor Services. not available not applicable e estimate  ANNEX II Page 1 of 2 STATUS OF BANK GROUP OPERATIONS IN URUGUAY A. Statement of Bank Loans (as of June 30, 1973) Loan (US$ million) No. Year Borrower Purpose Amount (less cancellations Bank Undisbursed Six loans fully disbursed (30, 132, 152, 245, 324 and 407) 102.2 698 1970 Rep. Oriental del Uruguay Agriculture 6.3 0.1 712 1971 UTE Power 18.0 14.7 773 1971 Rep. Oriental del Uruguay Agriculture 4.0 - 816 1972 Rep. Oriental del Uruguay Agriculture 11.2 4.2 Total (less cancellations) 141.7 19.0 of which has been repaid to Bank and others: 67.2 Total now outstanding 74.5 Amount sold 3.3 of which has been repaid 3.3 _ Total now held by Banki/ 74-5 Total undisbursed 19.0 B. Statement of IFC Investments (as of June 30, 1973) None have been made as of June 30, 1973. 1/ Prior to exchange adjustment.  ANNEX II Page 2 of 2 C. NOTES ON PROJECTS IN EXECUTION AND ON COMPLETE) PFOJEcTSl/ Loan 712 Fourth Power Generation and Distribution Project, US$18.0 million, November 25, 1970. The Bank loan finances most of the foreign exchange costs of the installation of a 125 MS thermal unit in Montevideo, the installation of distribution equipment for the Monte- video system and consultant services (1) to improve UTEts administration and accounting system, and (2) to assi8t UTE and the Government to develop a long-range power generation plan. The generation studies have been comple- ted, and the accounting and administrative studies are in progress. Construction of the steam unit is about three months behind the contract schedule and is expected to be in operation in December 1974. Projected cost overruns of 22 percent over the original contract price are due mostly to escalation clauses and extension of the suppliers' credit is being sought by the Borrower. These cost increases do not affect the original decision to go ahead with the project since there was no practical alternative solution at that time. Tariff increases have been made vhich should cover the rise in local costs. The rehabilitation of the distribution system is also generally on schedule. The reorganization of the financial structure, systems, and procedures is on schedule, although further progress may be slowed down by lack of properly trained personnel and the slow speed with which old records are being updated. 'The Bank will continue to review the bill collection and other administrative problems in connection with the on-going consultants' studies. The Closing Date is December 31, 1974. Loan 816 Fourth Livestock Project, US$11.2 million, April 26, 1972. The status of this loan is described in Part IV of this Report. IkThese notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- s4tanding "hat they do not purport to present a balanced evaluation of strengths and weaknesses in. oroject execution.  ANNEX III Page 1 of 2 URUGUAY LOAN AND PROJECT SUMMARY Borrower: Republica Oriental del Uruguay Amount: US$13.5 million equivalent Terma: Repayment in 14 years, including 4 years of grace at 7-1/4 percent interest per annum. Relending Terms: Funds from both the Bank and Goverrnment sources would be reloaned by Banco de la Republica to ranchers and farmers for periods between three and ten years, including one to five years of grace at 3 percent for holdings of 250 ha. and below,6 percent for holdings between 251 and 400 ha., and 8 percent for ranchers and farmers with holdings of 401 ha. and over. The prin- cipal of all sub-loans will be subject to full monetary adjustment, based on the average increase in the ranch- gate price of bee; and wool during a defined base period or the increase in the cost of living index during the same period, whichever is lower. Project Description: The continuation of the Government's livestock develop- ment program through the making of sub-loans to about 7,750 ranchers and farmers for the development of bee; cattle, sheep, dairy beef, pig, and mixed livestock/crop production. Technical services and related goods will be provided to support the credit program, to provide local and overseas training, and to perfo:nn pre-invest- ment studies. Estimated Cost Component Local Fore' n Total of Project: - (UA iilion7-- 1. On-ranch Development Cattle and Sheep Farms 1243 17.3 31.6 Pig Farms 0.24 0.5 0.9 Dairy Farms 1.0 1.2 2.2 Mixed Farms 0.6 0.7 103 Sub-total 1 .3 19.7 E 2. Technical Services 0.6 0.7 1,3 3. Contractor Machinery and Seed Producing Equipment 0.2 0.2 0.4 4. Fertilizer Subsidy 3.4 - 3.4 Total Cost 20.5 20.6 1.1  ANNEX III Page 2 of 2 FMancinq: US$ Nlillions Percent Loan 81 6-Mr 7.1 )50 Prooosed Loan 13.5 ) Local Sources Governmerit 4.2 10 Cenc.ral Bank 9.1 12 Banco de la Republica 4.4 11 Sub-borrowers 6.8 17 Total 41.1 100 Procurement: Bulk procuremnenc, of pasture seeds and fertilizers and rhe purchase of goods and equipment for technical services will be carried out on che basis of international competitive bidding. International bidding for rock phosphate for local 7rinding and direc, apolica3ion would be restricted to those sources where rock phosphates have been agronomically tested and -roved sai ted to Uruguayan condi ions. Fencing, materials for handling yards, farm machinery, water pumps, piping, feed a.nd buildingT materials would be procured through normal comnercial channels. An adequate selection of international suo.liers is represented in ;he local market. irrma ted Disbursement of iYocosed Loan: FY74 - -JS$4.5 million FY75 - US$9.0 million Internal Economic 2abe of Return: At least 31 percent Es diia eu proj ec , 'Completion Date: End of 1974  ANNEX IV PERFORMANCE OF THE LIVESTOCK PROGRAM, 1971-1972- 1971 1972 Estimated/2 Actual Number of loans 4,406 3,650 4,226 Total area of farms ('000 ha) 2,970 2,457 2,786 Average 'arm size (ha) 674 673 659 Area improved ('000 ha) Conventional pasture 74.9, 67.3 57.3 Oversown and sod-seeded 80.4; 102.0 58.9 Fertilized natural pasture 122.4 86.0 87.4 Other 11.1 - 8.3 Total new area 288.8 255.3 211.9 Refertilized 176.0 - 142.7 Total area financed 464.8 255.3 354.6 Average area improved per farm - new 66 70 50 (ha) - total 105 70 84 Use of loans (X) Pasture improvement 47.0 43.2 Machinery 19.0 10.3 Fencing 9.3 7.2 Water supply 8.4 8.4 Labor 2.9 2.5 Freight 7.7 5.5 Reifer purchase - 18.4 Others 5.7 4.5 Total 100.0 100.0 Distribution of loans by farm size (.) 0-50 ha 19.1 20.3 50-100 ha 13.7 13.6 100-200 ha 14.3 14.2 200-400 ha 16.4 16.5 400-1,000 ha 18.2 17.2 1,000-2.SOO ha 13.0 13.1 2,500+ ha 5.3 5.1 Total 100.0 i00.0 Distribution of funds by farm size (.) 0-50 ha 2.8 3.4 50-.100 ha 4.0 3.6 100-200 ha 6.3 6.5 200-400 ha 11.5 12.7 400-1,000 ha 22.0 24.1 1,000-2,500 ha 26.8 28.4 2,500# ha * 26.6 21.3 BaX.u 100.0 InDut Use (tons)- Seed 1,336 1,250 1,062 Fertilizer 95,700 67,800 69,600 /1 Data are baaed on loans approved by BDR, and area figures have been pro-rated accordingly. L2 Baaed on estimates made at time of appraisal in mid-1971.   ANNEX V ALLOCATION AND DISBURSEMENT OF FUNDS UNDER LOAN 816 UR FOR 1972 OPERATIONS AND PROPOSED FINANCING FOR 1973 & 1974 OPERATIONS (US$' 000) Amount of Foreign Financing of Loan 816-UR Exchange '73 & '74 Operations Proposed Loan 816-UR Disbursed Requirements Available from: Allocation For Loan Categories Original for 1972 '73 & '74 816-UR As Second Stage Second Stage Allocation Operations Operations Reallocated Loan Loan (1) (2) (3) (4) (5) (6) Ranch Development a) On-ranch development 6,700 1,900 11,600 3,400 8,200 8,200 b) Incremental working 700 10 305 305 _ _ capital c) Seeds and fertilizer for 2,900 1,900 7,760 3,100 4,660 4,700 pasture establishment Sub-total 10,300 3,810 19,665 6,805 12,860 12,900 Contractor Machinery 120 - 120 120 - _ Seed Producing Equipment 110 - 110 110 - - Technical Services 110 165 600 100 500 500 Training abroad 110 100 100 - 100 100 Unallocated 450 - _ _ Total: 11,200 4,075 20,595 7,135 13,460 13,500  COt44OLI3'lf ' i ,.oJiCr LiT E. SINA ;- FOR 1973 AND 19,4 OtE.-ATlONS Foreign Totil Exchno'.. FerCign Catle and Sheep Ranches Pig Far.s 3_.r, FVros Mixed Fams Total Total Cmnopcent x. c5anze 4,000 h. ,000 ha 5O he 30 hs 100 ha 150 ha -. - (UrS rllion) - - - - . - - - - (uSS'000) (1) (GSVOOO) ol-b-er Of R6ncaes 350 1,700 3,500 100 1,700 400 7,750 ON-RA.CH IYESST7IELT PAS .iUF I1P8RVEhENT Fertilizer 723.8 799.0 622.5 6.8 204.5 39.6 2,596.2 4,754.9 so 3,603.9 Fieight 154.0 170.0 175.0 0.4 12.4 6.4 520.2 952.7 45 428.7 S,cd (C,tilvated Pasture) 189.7 230.5 158.2 4.0 122.9 18.0 723.3 1,324.7 65 861.1 Sed (Ov-esowiog) 116.6 132.1 136.0 . - - 384.6 704.4 65 457.9 I-ocu-ant 9.1 10.5 9.5 0.S 2.4 0.4 32.7 59.9 15 9.0 Steak-r 1.9 2.2 2.1 - - - 6.2 11.4 85 9.7 Cost of Coltivation Labor 39.9 48.5 33.3 0.8 25.8 3.8 152.1 278.6 - - hachinery 308.7 374.9 257.3. 6.6 199.9 29.4 1.176.8 2,155.3 70 1,508.7 Topdressing and Overswing Labor 14.7 19.9 21.0 - 0.2 55.8 102.2 Machinery 134.1 162.7 191.5 - _ 2.0 490.3 898.0 70 62.9.6 Sub-total 1,692.4 1,950.3 1,806.4 19.4 567.9 101.8 6,138.2 11,242.1 7,707.6 REFERTILIZATION Fr-Ight 56.0 68.0 70.0 - 3.1 - 197.1 361.0 4S 162.5 Fertilizer 263.2 319.6 329.0 . 51.2 - 903.0 1,73.3 7 sO Oh 0 Labor 16.1 19.7 20.3 - 3.1 59.2 108.4 - - Machinery 144.9 176.1 181.3 - 28.2 5 530.5 971.6 70 660.1 Sub-total 480.2 583.4 600.6 85.6 1,749.8 3,204.7 2,253.6 BUILDINGS 105.0 127.5 175.0 234,0 3.4 - 644.9 1,181.1 35 413.4 UATER SUPPLY 257.6 312.8 322.0 29.0 95.2 52.0 1,068.6 1,957.1 55 1,076.4 MACHlNtRY 175.0 425.0 525.0 23.0 170.0 1,318.0 2,41.Y.9 75 1,o10.4 LIMESTOCK uBls 210.0 408.0 420.0 - - 6070 1,098.0 2,011.0 - Hl-ers - - 2,450.0 - 308.8 2,758.8 5,052.7 40 2,021.1 Su-r, - _ 12.0 - - 12.0 22.0 - So. - . - 59.6 - S9.6 109.7 - - Sob-total 210.0 408.0 2.870.0 71.6 3b8.8 3,928.4 7,194.9 2,021.1 FEhCIiCG 700. 1.275.0 291.6 78.0 106,3 79.2 _2,530.1 4 633.9 50 2,317.0 TOTAL ON-RANCH IRVESIISEN 3,620.2 5,082.0 6,590.6 455.0 1,028.4 601.8 17,378.0 31,827.7 17,599.5 INCREt.~T.II. 6^INC CAPITAL lle-fer Rcrntlon 73.5 118.8 154.2 _ , 346.5 634.6 40 253.8 Start-up Feed Cost - - - 150.8 - - 150.8 276.2 - - Crop Inp.lts - _ - - 151.4 151.4 277.3 75 21S.0 Total 73.5 118.8 154.2 150.8 151.4 648.7 1,188.1 461.8 CONT1I:rNCYi1 3,000.0 1,600.0 CONVIRCTOR MIACHINERY AND SEED PROWDCIN EqlIlM'ENT 380.0 60 230.0 TEChNICAL A." CONSUL1.TINC SERVICES 1,200.0 50 500.0 TRAINING 130.0 100 100.0 FERTILIZER SUBSIDY 3,432.0 - TOTAL CTS 'OR 1975 AD 1974 41 _2 591.3 1/ Calc.lated usIng prJces as of April 1972, and converted to US$ at the exchange rate of UR$ 546:U15S1. From April 10, 1972 to January 5, 1973 there was a 45 percent increase of the exchange rate (export rate) index In Uruguay. Durln. this time the cost of livini index has inereased by 46 percent. Since these chonges are asraot the same, the bsic figures have not been adjusted. 2/ Tn Contingency, as calculated, is intended to cover possible real price increases 1i% dollar terms of 5 percent per annu, over a 2 to 3 year dibursement wer1od, vhich wounta to W-L . 10 percent of the total toats of the on-ln4ding for the ranch and farv development prograr.  ANNEX VII Page I Of 2 Mixed Farm Sub-Project Background 1. There are an estimated 3,500 small crop farms (30-200 ha), locaved in the south and southwest of Uruguay, chat are subjec-t to declining yields and income levels as a result of a long history of continuous crooping. Because of inadequate management practices, these farms have experienced soiL degradation and erosion, a substantial reduc-tion in productive capacity, and a consequent decline in production. The average annual net incomes per family of these farmers is estimated at about US$900 equivalent. The proeosed )rgr-W, would provide a long-Germ credit line and Gechnical assisbance co restore soil. fertility through the in-troduction of a crop-pasture rotation, with an eventual increase in both crop and livestock production and the restorauion of the farm, as viable comnmercial enterprises. Exiscing production patterns are dominated by cultivation of wheat, sorghum and maize. The farmers own little macainery, and most operations are performed by contractors. Fertilizer use is minimal, and yields are very low. Some dairy cact-.le may be kept, but mil prok d .on is used largely for home consumption. Project Description 2. The initial phase of the program would involve 4u0 iarms a, an average investment of about US$3,600 Per farm for a tobtal investmenc of about US?;,44tJ,'.: Of this amount, approximately 115 .ercenc would be in the form oL' incrementa:. working cadital for the purchase of' fertilizers and herbicides for use onl crops. The project would finance the establishmenG of improved pasture on :u, 10-20 nercent of the farm area which, with additional grazing gained froi c0,J stubble and natural pasture, would form the basis for thle develooment of ,ivestock. The farmers would continue to cultivate field croos on about- h' the farm area, and the project would, through the provision of technical assistance and short-term production credit, lead -to an imtjrovemenv in flUt'itOi ' oractices and an increase in yields. It is an6iciinated -hac new oasdure s woai d be established every five years, on a rocational basis, although the devaaL&,' of the program would vary wich individual farms. On-Lending Terms 3. ihe proposed investmens program would be financially remunerai!-ve fo-r the farmer, with a financial rate of re-turn on incremen.a,l investment over -. 12-year period estimated to be about 30 percent per annum. however, ;ne i aome is likely to face a major liquidity problem over -he first- few years durir.; the herd build-up period. For this reason, it will be necessary GO chane-e repayment conditions somewhat from the pattern laid down for oasture deve i nc i loans on beef-cattle ranches. Since the program would be new, there shot. d considerable flexibility on the reDayment conditions, wiF,h terms ca:Lculated to suit the specific needs of individual fanrs. It will )robably be necessary .irn most cases to reduce the contribu-tion made by the farmer to the initial invest- ment cost of the droject from the noraal 20 percent expected from -the larger ranchers, to 10 percent, and to allow a grace period on reoayment of nrinci-oal  ANNEX VII Page 2 of 2 of nD to five years, instead of up to four years in the case of the other ranchers. Monetary adjustment and interest rates would be applied in the same manner as to beef-cattle and sheep ranches. Technical Assistance 4r Although some of the borrowers under this sub-project would possibly be experienced in livestock management, it is probable that for the majority of farmers this would be a new enterprise. At the same time, the introduction of a pasture-crop rotation would require a much higher level of farm manage- ment than traditional production systems demand, and a greatly improved knowledge of crop husbandry practices would be required. It will be necessary, therefore, to supply a considerable degree of technical assistance in both crop and livestock production to sub-borrowers under this program. As the technical requirements for such assistance will be rather different from those of the standard beef and sheep ranches, it will be necessary to recruit and train specialized technicians for this function. A minimum of two such technicians will oe employed at the start of the program, with further recruitment neces- sary as the program expands.  ANNEX VIII Technical Assistance Foreign Lxchange Costs USp ?roject Director 50,002 Agricultural. Economist 30,000 Meat marketing and meat board organizational specialists 50,000 Specialists in dairy production, dairy industries, and pork production 1