Bolivia - Mining Credit Project

r.1j7,!7 Copy CIRCULATING COPy TO BE RETURNED TO R'L S DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1343a-BO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BOLIVIA FOR A MINING CREDIT PROJECT January 2, 1974 Latin America and the Caribbean Regional Office 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 It may not be published, quoted or cited without Bank Group authorization.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.  CURRENCY PIJITVALENTS Currency Unit = Bolivian Peso (.$b) US$l $b 20 $b 1 US$0.05 $b 1,000 - US$50 $b 1,000,000 = us$50,000 Fiscal year - January 1 to December 31  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC CF BOLIVIA FOR A MINING CREDIT PROJECT 1. I submlt the following report and recommendation on a proposed development credit to the Republic of Bolivia for the equivalent of US.36.2 million on standard IDA terms, to help finance a project consisting of a Credit Program for the development and expansion of private mediam-size mines, a National Survey of Snall Mines, and a Technical Assistance Program for the mining sector. Of the credit proceeds US$5-o miillion would be relent to Banco Industrial S.A. (BISA) with interest at no less than 7-1/4 percent per annum; US$850,000 would be made available to the Servicio Geologico de Bolivia (GEOBOL) for the National Survey of Small Mines, and US$350,000 to the Ministry of l4ining and Metallurgy in support of a Technical Assistance Program for the mining sector. PART I - THE ECONOMY Introduction 2. An economic report entitled "C3urrent Economic Position and Prospects of 2olivia" (WH-213a, dated November 9, 1972) was distributed to the Excecutive Directors on November 20, 1972 (R72-254). Subsequent developments were reviewed by an economic mission in Mlarch 1973. A sum- mary of Country Basic Data is attached as Annex I. Background 3. Bolivia is the poorest country in South America. The majority of its population is engaged in traditional agriculture; only a small part of the labor force partuicipates in salaried activities in mining, petro- leum and commaercial agriculture. The infrastructure is still very primi- tive and the road and rail networks cover only a fraction of the country. The combination of strong traditional social ties within the Indian com- munities and the economic obstacles to the development of a national market have perpetuated the demographic concentration on the Altiplano, a region rich in minerals but with low agricultural potential. As a result, about two-thirds of Bolivia's population live a physically, culturally and economically isolated existence in one of the world's most inhospitable regions: the Altiplano, a barren, windswept and dry plateau perched at 10 - 15 thousand feet between the Andes' Western Cordillera and the Cordillera Real. 4. GNP per capita reached US$180 in 1970, but this figure hides the true dimension of Bolivia's poverty: while the richest 20 percent of the population enjoy a per capita income of around US.500 the per capita income of the remaining 80 percent is about US$100, providing for a standard of living similar to that of the rural inhabitants of Africa or Asia. Poverty is reflected in inadequate nutrition levels, high in- fant mortality and illiteracy -- about 60 percent of the population is illiterate.  -2- The 1952 revolution sought to put an end to the dual economic stzmctre which had characterized Bolivia s economy since colonial times. -t iught to deprive the landowning and mining oligarchy of its economic base& Thnis objective was only partially achieved. Despite the social ach-iaverants in eradicating feudal relations, distributing the land and eliminating obstacles to social mobility, the power vacuum left by the destutuction of the oligarchy led to political instability. In the economic sphere, the agrarian reform and the nationalization of large Lanes were followed by declines in agricultural, mining and manufacturing production. GDP declined in the 1950's and did not recover to its pre- 1952 level until 1961. During the subsequent decade, output increased steadily at an average annual rate of around 5 percent, providing for average annual per capita income increases of 2.5 percent. As a result, GNP per capita which had fallen by 24 percent in the 1952-60 period had recovered, by 1970, to the 1952 level and was better distributed. 6. Ln 1971, the momentum of economic growth was again lost because of political instability and deteriorating public finances. Private investment fell and public investment was unable to fill the shortfall due to lack of financial resources. The deterioration of public finances reflected a structural flaw in the economy. Since the expropriations of 1952, Bolivia's public sector became proportionately one of the largest in South America and a source of livelihood for a sizeable segment of the population. With the scarcity of employment opportunities in the private sector, pressures to expand the ranks of public servants proved difficult to resist. Increased expenditures on wages and salaries, combined ivith a weak tax system, left few resoarces for investment. Moreover, the inability of the public sector to generate cdequate savings limited its capacity to utilize external assistance. The gravity of the situation was accentuated as a result of increased hiring of personnel and earnings' increases in the public sector. Pecent Developments and Prosects 7. Bolivia s growth prospects have been enhanced by recent economic policies. Cn coming to power in 1971, President Eanzer faced the need to provide jobs for the uneigloyed and to set the basis for investment growth. This need was faced in the context of a sharp deterioration in Bolivia's terms of trade which declined by about 20 percent in 1971. In late 1971, the Government put into effect an "Eaergency Program" aimed at creating jobs on public works. To establish a more favorable climate for private investment, new laws offering guarantees and incentives to private investors were promulgated; in addition, the Government settled claims arising from earlier nationalizations. At the same time, the Government improved public administration, and the pricing policies of some public undertakings. These policies were successful in increasing private investment and in bolstering the rate of growth to 7 percent in 1972. They also resulted, however, in a large budgetary deficit and losses of international reserves.  To t-ac folrf.fei-. c.nrha,ge 9psition and improve the bud- get.ary situation., the Go1Fern.ument introduced in October 1972 a "'Stabiliza- tion and DSVelOn aent' Tn lar" ae Flan included a devaluation of the peso fromr $bIl.88 tc $b23C pa-; US dollar; taxes on exports, a general wage increase of $bl35 uer rionth, to be followed by a one-year wage freeze and a freeze on residentiai rents. WIile the Plan's results have not been as successful as eavisaged, positive results have been achieved. The growth of GDP in 19713 is expected to be 7 percent. Private investment and savings appear t5o bQ growng, Public i._ estment? which was 10 percent higher in 1972 than in the precedirg year, is expected to fuirther increase in 19730 Tbhe Government succeeded in attracting inflows of capital from bilateral and international lenders. Dtring the eight months after the devaluation, the balance of payments benefited from the increased inflow of foreign assistance and fror improved export prices. However, these positive achievements havre to be weighed against the shortcomings of fiscal policsy the Government hs not reached the objective to increase revenues as envisaged. -tile it maraged to increase its command over resources at the expense of the higher-paid wage earners, leaving the lower-paid wage earners and the iural noor somewnhat better off than before, much of the devaluatiorn benefits were captured by Bolivia's exporters. These shifits in inecome, combined with an expansionary monetary policy, produced excess liquidity and led to price inflation. This situation threatened to reduce t;he benefits of the Plan. However , in October 1973 , the Government took corrective measures, including the reduction of subsidies and other currernt expenditures, and a tax reform. unfortunately, the new tax struct.u.re may not yield the reqaired. increase in revenues in the short run. 9. Additional decisions are needed to improve mediu-term develop- ment prospects and to assure financial stability through 1974. A reaeonable policy objective would be to raise public savings from an average of 3.7 percent of GDP during 1965-71 to 6 percent during 1973-77. This level of public savings would make it possible to implement a public investment program averaging about 105 percent of GDP over the period. This level of capital formation (Iwhsich would be consistent with GDP growth of between 6 and 7 percent per annmm during 1973-77) should help Bolivia accelerate its process of development. For the Government to be successful in its efforts to improve cond.itions in the countryside, it would have to achieve greater investment in agriculture, extension of public services in rural areas and encouragement of rural population shifts to more fertile areas. Carrying out such programs, designed to improve tIE living standards of the majority of the Bolivian population, and thus to achieve a more equitable distribution of the benefits of economic growith, will be a long and difficult process, External Assistance Requirements 10. To sustain an annual growth of GDP by 6 to 7 percent, gross external capital inflows will have to average some US$80 milliorn in 1973-77 as Compared with US$2 nilli.Lon in 1961- 71. Provided public savingrs in- crease in line with these targets,, Bolivia's public sector may expect to obtain an average of about uS$50 nillion annually during 1973-77 from uLndisbursed loan balances and new loans from multilateral and bilateral agercies. The remainder may be expected to come in the form of suppliersX  credits and from private investors. aiould this pattern of external financing materialize, Bolivia Is outstanding external public debt would increase slowly, from TIS$628 million in 1972 to US$780 million in 1977. The debt service burden, however, is expected to fall from 19 percent of exports of goods and non-factor services in 1972 to about 15 percent in 1977, mainly on account of Bolivia's favorable export prospects: earnings from exports may reach about US475 million by 1977, up by some 50 percent in real terms from the 1972 level, mainly as a result of increased earnings prom hydroclrbon and rinerp.l exports. 11. The Boliviarn Government has made good efforts in the past two years to remedy the difficult fiscal situation although the results have fallen short of expectations. Provided additional fiscal measures are implemented in the near future, they would justify external financial assistaxice of the magnitude indicated above. In the meantime, given Bolivia's great poverty, its recently improved performance, as well as its substantial debt burden, external capital needs should be met on as soft ternms as possible. PART II - BANK GROUP OPERATIONS EN BOLIVIA Introduction 12 Bolivia is an original mem'oer of the Bank but did not receive Bank Group resources until 1964. Bank Group assistance to Bolivia has had to take account of the countryts tight budgetary situation and its limited capacity to service external debt. Except for a Bank loan to help finrance an "enclaveIr project, lending to Bolivia has been in the form of IDA credits. Moreover, with the exception of an IDA credit made in Decefber 1972 in suppo.r of the Bolivian Railways, Bank G-roup financing has been 1,r-ited to proAects reouiring no contribution from the Covernment. u3eoau.4 of' the narrow score for -orivate investment, the first IC invest- ment was only made in 21973J Status of. Bank Groun C.tearations l3; '.nniLrex IT coontainns a sumuary statement of Bank loans, IDA credits an.-S- ie 'ts as of tOw sAber 30, 1973, and notes on the execution of _,ngoing projects- n a-tYi.zJ- -o the US$. million railway credit men- >zoned Thovxi, ' ias _iamde i1our cocadirt. for power generation and distri- t ;i o KTU3$28,._ r1 c an tree li-estock development (US$10.2 `Ta. ,e B n k-x '-.ade a loan r $23215 -m1ion3 to help finance an _inola,veo P-Ow ect the construction of a pipeline to transport natural gas to Argentina. *ank Group Pole in External Capital Assistance .40 iehe proposed credit would be the Bank Groupts tenth operation in Bolivia, bringing the amount of IDA assistance to US$52.8 million. Lncluding undisbursed balances, Roliviats debt to the Bank and ID.P now represents about 10 percent of its external public indebtedness; by 1980 t,his ratio might increase to about 15 percent. The share of the Bank  Group in total debt serrice is now abeut 5 percent and is expected to increase to about 8 percent in 1980. As a source of financial assistance to Bolivia, the Bark Groirp raiks well below the US Government and the IDB. Nonetheless, its activities have been expanding: Bank/IDA lending which in the five years 196-1658 amounted to US$17 rnillion, reached US$52.8 mil- lion in the 1969-73 period, a threefold increase. Future Direction of Bank Group Lending 15. In the nex' few years, the Bank: Group will endeavor to support the Bolivian Government's efforts to remedy imbalances in the distribution of the benefits of econadc growth concurrently with those ensuring con- tinued ecnomic growth and expanding eMloyment opportunities. Thus, preparatory work has been initiated for possible Bank Group support of projects forming part of the Govermnent 's rural development progran which aim;s at improving the quality of life on the Altiplano. In addition, preparatory work has been started on a project aimed at the developnent of Bolivia's small mines. Under cooperative arrangements with UNEESCO and WHNO, assistance is being provided to the Goverment for the preparatian of educational and rural water supply programAs which might provide oppor- tunities for Bank Group lending. Bnk Group activities would also support the Govemment7s production, export and employment objectives. Thus, we would expect to contiue lending for electricity servrices, railways, pipe- lines, and commercial agriculture. In doing this, we would stress the need for adequate tariffs to be charged by the power and railway enter- prises, thus freeing Govermment resources for pressing developmental needs, including programs supporting the underprivileged sectors of Bolivia's population. We would also continue stressing the need for charging posi- tive rates of interest on capital (indexing has already been introduced on sub-loans under the livestock projects), thereby changing the price relationship between capital and labor, and inducing the adoption of more labor-intensive invesitment and production techniques. Two lending proposals may reach the negotiation stage in the neSt twelve mionths or so. One is a credit program which would benef'it agricultural producers, mainly cotton and sugar planters in the Santa Cruz area and dairy farmers in the Cochabamba area. This project has been delayed by a deterioration in the organization and financial position of Banco Agricola, raising doubts about its capacity to handle an addi- tional credit program at this time. IDA and other lending agencies are presently discussing with the Government a plan of action., which would remedy the adninistrative and financial shortcomings of Banco Agricola. IDA may also be able to help finance expansion of the electricity trans- mission and distribution network in and around La Paz. The Government does not wish to move forward with this project until it has worked out arrangements for the purchase of the assets of the Bolivian Power Company, and a possible IDA credit will only be considered after the Government puts the electricity supply operation in La Paz on a sound financial basis by allowing the introduction of adequate rates.  -6- PART III - MN=JG TN BOLIVIA 17. The mining tradition in Bolivia stretches into pre-Columbian times. Yining has had a decisive :impact on Bolivia's political history, on the layout of its transportation system and on its pace of development. Thousands of Bolivians are employed by the mining cmpanies, and a few hundreds of thousands indirectly depend on mining for their living. About 80 percent of Bolivia's foreign exchange originates from mineral exports. 18. In 1952, three private mining groups, responsible for 80 percent of Bolivia s mineral output, were expropriated, and Corporacion Minera de Bolivia (COMIBOL) was set up to operate their properties. This took place at a time when the richer tin veins were exhausted and tin production was declining, and large investments in exploration and mine modernization were required. In the years that followed, beset by low tin prices, labor unrest, feather-bedding, violence and political activity in the mines, COMIBOL saw its position deteriorate. In 1964, the Government launched a program tc reorganize COMIBOL and restore the economic exploitation of the mines. Although the program helped to prevent its collapse, COMIB0LTs basic problems -- high production costs, labor and Government interference in management -- did not disappear and have continued to the present. The potentially serious impact of the COMIBOL problem on the economy was alleviated by an important development which took place in the 60ts: the private, ostly Bolivian-owned, yrmning sector expanded vigorously and today accounts for 50 percent of Bolivia's output, compared to 20 percent in 1952. 19. Tiining is a capital-intenssive activity in which there is a need for continuous investrent in exploration. lining in Bolivia is costly because of the difficult terrain, but it is, however, one of the sectors in which Bolivia has a ccmparative economic advantage. Bolivia has not beer, able to generate the steady flow of capital which is required to carry out, a methodical explorationr program and to modernize mining facil- ities. external funds have onlyv t-riclkled into the countrJ, drying up during aonvg neriods. Since B-livia ts prospects for development largely depend on the taxes and foreign currency generated by the mining sector, investments -in exploratio and equpment modernization are essential to prevent a "eecline in rineral production. 20. .'ri xzate cap-ital li tihe sector has been often discouraged by -.,.at _appeared o be a tendenc- towards increased state control, ar-sing an acivreroc reaotnonrlto i-,re exo-'tation of natural resources by D rvate firn',,^;ms w-hich did notal ai;ayS act in the best interest of the *- r T .ne r,resent CGovernment considers participation of private .s<. . ninua7 l for mining development, but that this participation ;, o oncv- stai-e st pervis on to ensure that mnineral resources are exploited in tnie best interests of Bolivia. Market Outlook 21. Bolivia is a high-cost producer of minerals and the project would help the sector to become more competitive. The mining companies partici-pating in the proposed Credit Program would expand production and exports mainly of antimony, tin and tungsten. The additional exports of  - 7 - antiniony would net exceed 3 percent of world supply, and those of tin and tungsten would be of the order of 1 percent. In view of gradually expanding demand in industrialized countries, Bolivials additional sales should be absorbed r.ith little effect on the world price situation. For antimony any major long-term price increases are unlikely and increase in demand is expected to be 1-1/2 to 2 percent per annum. For tin it is expected that the price will fluctuate between the lower and middle price ranges of the International Tin Agreement and demand will grow at a rate of 0.5 to 1.5 percent per annum. Tungsten prices are likely to remain at the current level and demand is expected to grow at a rate of 5 to 6 per- cent per annum during the next decade. Organization of the Sector 22. The mining sector in Bolivia could be divided into: (a) COMIOL, the state mining enterprise; (b) about 40 privately-owned medium-size mining companies carrying out technically and financially viable operations; and (c) over 2,000 small privatte mines, most of which are marginal family operations. 23. COA-130L, because of its high costs arising from excessive per- sonnel and many years without exploration work and inadequate investment in equipment, has too many problems to take the lead in the sector. The privately-owned medium-size miring companies, however, have been a most dynamic group in Bolivia. They have shown the entrepreneurial spirit and the technical competence to give mining steady imomentum. Their constraint is shortage of credit. The small mining sub-sector has potential insofar as many small mines could be expanded and made more efficient; it faces two con- straints: shortage of credit and lack of technical expertise. 24. A distinct feature of the Bolivian mining sector is the weakness of the Ministry of Mini'ng and Metallurgy, which should be the directing and coordinating center for the sector. The Ministry, although de jure controlling COMIBOL and other institutions in the sector, lacks up-to-date information about the sector and sufficient qualified staff to exercise control and to carry out an integrated mining policy. This is reflected in the lack of data about the sector, and in the lack of consolidated planning for the sector. The Bank Group's Role in the Mining Sector 25. In 1971, a Bank mission visited Bolivia to examine the mirdng sector and to identify a development program which external financing agencies might consider for financing. From the findings of the mission, contained in a report entitled "The Mining and Metallurgical Sector Bolivialt (No. PI-14a of December 7,, 1972) which was distributed to the  - 8 - Executive Directors on December 29, 1972 (R72-277), and subsequent con- versations with the Bolivian Governient, it was concluded that the impact of Bank Group assistance would be greatest if it was first directed towards the financing of expansion of private mines, since this was the part of the mining sector where increases in production could be achieved most rapidly. The first phase of the program, to be assisted by the pro- posed credit, comprises the financing of projects in the medium-size mining sub-sector and a survey to identify and prepare small mining pro- jects suitable for development, which would in turn be financed in the second phase of the program by a second credit. The third phase could be the formation of an exploration fund following the enactment of appropriate legislation to encourage prospecting. These phases, of course, should be acconpanied by the strengthening of the institutions in the sector, pri- marily the Ministry of Mining and Metallurgy, and by the implementation of measures tending to create a climate favorable for mining investment. During negotiations the Government agreed to promulgating, no later than .rmid-1974, a revised mriing code which would largely be a codification of the existing code and subsequent legislation. PART IV - THE PROJECT 26. The project has three components: (a) A Credit Program to help finance about 25 development and expansion projects for about 'CO mining enterprises from among the 40 private companies mentioned in paragraph 22 (b); (b) a 'Nati onal Sarvey of 3nall Mines, designed to prepare an inventory of smlall mines, select mines with the best potential, and provide them with technical and exploration assistance; C) a program of technical assistance to strengthen the inistry of Xining and Metallurgy. 2Te project was appraised by BDA i-n June 1973; negotiations were held from Dece2ner `'O0 to 13 -wit.h es sr Alfonso Bedoya, Willy Vargas and Jose rCui erro Torres represerting the Government and 4r. Jorge Lopez represent- .n-33-t F,St.ate anl 7in--.~ncinR Pla.n -7 Te tb votal cost-, of the project is estLnat.ed at US$9.27 million equ-ivant :? wit'hl a foreign exchange component of USq6 20 million, which is the portion DA would finance. rne rest would be financed by BISA (uS$0.77 million), by BISA sub-borrowers (US$1.93 million) and by a small Government contribution of US$0.37 million.  9_ The Credit Program 28. The funds for the Credit Program (Us$5.0 million equivalent) would be lent through BISA, a private development finance company, 60 per- cent owned by private Bolivian shareholders, 26 percent by ADELA and 10 per- cent by Banco Popular del Peru, and established in 1963. BISA was selected after evaluating a number of other potential intermediaries. A Sxmnary Income Statement and Balance Sheet of BISA is attached as Annex IV. At the end of 1972, BISA's resources were US$o.48 million equivalent in equity and US$3.85 million equivalent in long-term borrowings. BISA has been success- ful in obtaining long-term resources from external agencies, i.e. the US Agency for International Development (AID), the Inter-American Development Bank (IDB) and the Kreditanstalt fur Wiederaufbau (KfW). 29. Most of BISA's lending has been to private manufacturing firms. BISA has been the major source of term financing to this sector in Bolivia having made almost 700 loans. BISA has also helped clients to improve their appraisal and financial practices. BISA s interest rate to sub- borrowers is 10 percent, the ceiling established by the Government in 1972 for development loans. Most sub-loans are repayable in foreign currency or, if repayable in local currency, contain a maintenance of dollar value clause. 30. BISA has a competent and experienced management. In connection .ith BISA's entering the mining sector, its shareholders have approved new by-laws and a revised statement of lending and investment policies. Be- cause of its broadening responsibilities, the company has agreed to reinforce its staff, which will provide it with sufficient capability to appraise and supervise mining projects. 31. BISA is creditworthy and, with the proposed strengthening of its organization, a suitable intermediary.. Ihe company's prospects are good: it erpects to iencrease lending operations substantially while maintaining sournd financial situation. Profitability would remain at a rather modest evel, whi.le licuidity would continue to be good. BISA would need to mobilize considerable amounts of fresh share capital, and has received assurances to that effect from several existing and potential shareholders. It would be a condition of the effectiveness of the credit that additional subscriptions in the amount of $blO million have been received providing for $b5 million to be paid in by December 31, 1974 and $b5 million by December 31, 1975. In the Project Agreement, BISA would commit itself not to exceed a 6:1 ratio of total debt to equity. 32. BISA would receive the IDA funds for the Credit Program from the Covernment at no less than 7-1x percent and lend at no less than l-1 L! percent in foreign exchalige, resulting in a spread of 4 percent for BISA. This spread is reasonable in view of the costs and risks associated with BISA entering into a new field. SLb-loans are expected to number about 25 and would have a maximum term of 15 years, including a grace period not expected to exceed three years, with the subborrowers bearing the foreign exchange risk. BISA's repayments to the Government would be based orn a  - 10 - composite amortization schedule made up of the amortization schedules for the individual sub-loans. Considering that BISA has not had an opportunity to build up its business to an adequate level, and that it is entering foI the first time into the mining sector, BISA would be granted concessional treatment regarding commitment charges, which would accrue to the Govern- ment at 3/4 percent per annum on the sums authorized for withdrawal by IDA with respect to specific investment projects. The limit for subprojects not requiring IDA's prior approval (the "free limit") would be US$250,000 equivalent and the aggregate limit for subprojects below the free limit would be US$2 million; the first three subprojects would be submitted to IDA irrespective of their amounts. Ihis is expected to result in 8-10 sub- projects being submitted to DA for approval. 33. Sub-borrowers would come from a group of about 40 medium-size, mostly Bolivian-owned, mining enterprises which are generally capable of preparing and executing investment projects. In a limited number of sub- projects, technical assistance would be required. The potential sub- borrowers are generally financially sound and creditworthy. The proposed subprojects would include underground mine development and modernization, construction and modernization of beneficiation plants, electrification and installation of camp infrastructure, and surface mine development. 34. The subprojects are not expected to have an adverse effect on the environment. National Survey of Sia2l Mines 35. The aurvey would collect and analyze available data on the operations of small mines, suapplemented by field inspections, to identify small mi,nes whose expansion would be economically justified and which could benefit from future external financing. 36. ?reparatory work for the Survey has been initiated. The Survey would. be condbcted b-y (G,BOL, a semi-autonomous Government agency, with its ovn sta'f, in coordination with other agencies operating in the mining sec or F'ur foreigr advisors would be required to help carry it out. -he k-rvey , ouId be completed by mid-l975. 37. CiC`301L , ds established in 1960 with the assistance of the TJGeOIOeg` c L SuLrvey.'J, 7has. a -pennanent staff of approximately 250 cf whicn aboru 120 arc professionals. With the technical assistance nrcv~ded, GEOOL should be able to carry out the Survey satisfactorily, s szstance Prcgrani 30e Lanie Technical Assistance Program comprises: (a) technical assistance to, and equipment for, the Ministry of Mining and Metallurgy with the objective of strengthen- ing the Ministry;  - 11 - (b) a study of taxation of mining enterprises aiming at a more equitable tax systen, which would contribute to sector development, while at the same time assuring an adequate contribution of the sector to Government revenue; (c) preparatory work for a proposed mining exploration fund, which would supplement risk capital now only available in very limited amounts for mining exploration. The Program is expected to be completed in about three years. Foreign consultants would be employed to help carry out the Program. Procurement and Disbursement 39. Equipment for the Credit Program would be purchased by sub- borrowers from foreign sources as off-the-shelf items, mostly costing less than US$50,ooo0 BISA normally requires that subborrowers obtain quotations from at least three suppliers. Sabborrowers would use local contractors for civil works and rm-ne development who would also need to make some purchases abroad. 40. Except for diamond drills and accessories valued at about UJS$2h0,000 which would be subject to international competitive bidding, equipment for the Sirvey, owing to the large number of items, would be procured on an international basis by requesting quotations from at least three foreign countries. Advisory services required under the Survey and the Technical Assistance Program would be obtained on the basis of inter- national recruitment. Rate of Return and Project Justification 41. Because of the nature, variety, and different stages of prepara- tion of the subprojects, it is difficult to estimate in advance the imoact of -.he Credit Program on the Bolivian economy. It is estimated that the sio-rojects will have a financial rate of return ranging from 15 to 40 per- cent. The economic rate of return, however, would be higher, inter alia because of the significant contribution which the project bene7TciarTes would make towards Government revenues in the form of tax and royalty pay- ments. The Credit Program would increase substantially Bolivia's exports of antimony, tungsten and tin and, to a lesser extent, of other minerals, resulting in additional annual net export earnings of about US$7 million a year. It would also help to improve health and safety conditions in the mines and the plants, and living conditions in some camps through electri- fication, erection of housing and other social facilities. 42. The benefits from the Survey of Small Mines will be realized in the identification and preparation of projects involving small mines which could be economically expanded, thus increasing the country's mineral out- put, and in improved knowledge of the sector. The benefits of the Technical Assi.stance Program would be realized mainly in the form of greater effi- ciency and increased technical competence of the Ministry of Mines and Metallurgy. The Ministry and GEOBOL would become more effective and betWer  - 12 - equipped to plan the development of the sector, particularly exploration and small mine development which are key features of the Government's long-term plans for the mining sector. PART V - LEGAL INSTRJMENTS AND AUTHORITY 43. The draft Credit Agreement between the Republic of Bolivia and the Association, the draft Project Agreement between the Association and Banco Industrial S.A., the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement, and the text of a draft resolution approving the proposed credit are being distributed to the Executive Directors separately. rfhe draft Agreements conform to the normal pattern for credits to assist development finance companies, except that they provide for the Borrower to retain a portion of the proceeds of the Credit to help finance the National Survey of 9mall Mines and the Technical Assistance Program. 44. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOLMMENDATION 454 I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachnients jan-aar--y 2, 19T14  ANNEX I Page 1 of 4 pages COUNRY DATA - BOLIVIA AREA POPULATION DENSITY 1,09b,000 km2 5.06 million (mid-1971) 4.6 Per km2 Per km2of arable land SOCIAL INDICATORS Reference Countries Bolivia Ecuador Cameroon Pararuaw 1960 lY7(1970 1970 CM7 GNP PER CAPITA us$ (ATlAS BASIS) . 180 290 200 260 GS1RAPHIC Crude birth rate (per thousand) .. 44 /a 40 /b 40 43 Crude death rate (per thousand) 1g 7- ai 75 19 la Infant mortality rate (per thousand live births) - 154 86 *- 67 Life expectancy at birth (years) .. 45 60 .. 62 Gross reproduction rate .. 2.8 3.2 3.2 Population growth rate 2.6 3.4 2.1 3.1 Population growth rate - urban 3.5 /c 3.7 /c 5.0 /d 6.9 Ie,f 4.3 fg Age structure (percent) 0-14 42 42 48 .. 46 15-64 54 55 49 .. 50 65 and over 4 3 3 *- 4 Dennendency ratio /4 0.9 /h 1.0 Ai 1.0 .. 1.0 Urban population as percent of total 27 /c 29 /c 38 /d 22 /e 36 , Family planning No. of acceptors cumrlative (thous. .. .. No. of users (% of married wneln) ENPLOMENT Total labor force (thousands) 2,000 /j 2,300 1,800 .. 700 Percentage employed in agriculture 67 71 66 54 .. 57 Percentage unemployed 14 /j 16 9 .. 5 INCCE1 DISTRIBUTION Percent Of national income received by highest 5% - 36 22 Percent of national income received by highest 20% 59 42 Percent of national income received by lowest 20% .. 4 6 Percent of national income received by lowest 40% 13 ESTRIBUTION OF LAND OORRSHIP % owned by top 10t of owners .. .. % owned by smalleat 10% of owners .. .. HEALTAND NUTR