Bolivia - Agricultural Credit Project

Report No. 695a-BO Appraisal of the &U S.M.u Agricultural Credit Project Bolivia June 6, 1975 FILE COPY Regional Projects Department Latin America and the Caribbean Regional Office Not for Public Use U Document of the International Bank for Reconstruction-and Development International Developmnent Association 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 It may not be published, quoted or cited without Bank Group authorization.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 EQUIVAIENTS US$1 = $b 20.00 $b 1.00 = US$0.50 $b 1,000 = US$50.00 $b 1,000,000 = US$50,000 WEIGHTS AND MEASURES 1 hectare (ha) = 10,000 m 2.47 acres 1 kilometer (km) 2 = 0.62 miles 1 square kilometer (km ) = 0.39 sq.miles = 100 ha 1,000 (kg) = 1 metric ton = 0.98 long ton GLOSSARY OF ABBREVIATIONS ALPD - Agricultural and Livestock Project Division BPB - Banco Agrfcola de Bolivia BE - Banco del Estado CNECA - Commision Nacional de Estudios de la Ca?la de Azucar CB - Central Bank DESEC - Centro para el Desarrollo Social y Econ6mico LPD - Livestock Project Division MPAA - Ministry of Peasant and Agricultural Affairs NIS - National Institute of Statistics GOVERNMENT OF BOLIVIA FISCAL YEAR January 1 - December 31  BOLIVIA AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS PAge No. SUMMARY AND CONCLUSIONS ............................ i-ii I. INTRODUCTION ....................................... 1 II. BACKGROUND ......... ................................ 1 A. General .........................; 1 B. Rural Sector .................................. 2 C. Agricultural Supporting Services .... .......... 3 D. Government Policies ........................... 4 E. Performance Under IDA Credits 107-BO, 171-BO, and 261-BO ............................... 4 III. THE PROJECT ........................................ 5 A. Project Description ........................... 5 B. Detailed Project Features ..... ................ 6 C. Cost Estimates ....... ......................... 8 D. Financing ......... ............................ 10 E. Procurement ........ ........................... 12 P. Disbursement ........ .......................... 12 G. Project Administration ........................ 12 R. Accounting and Auditing ..... .................. 17 IV. PRODUCTION, MARKETS AND MARKETING, AND PRODUCER BENEFITS ...... 17 V. ECONOMIC BENEFITS AND JUSTIFICATION .... ............ 19 VI. AGREEMENTS REACHED AND RECOMMENDATION .... .......... 19 SCHEDULE - Lending Terms and Conditions This appraisal report is based on the findings of a mission which visited Bolivia in June 1974, composed of Messrs. J. Andreu (Mission Leader), F. Lucca, 0. Lafourcade (IBRD), P. Bono (FAO/CP), B. Bilbo and R. Brandeis (consultants).  TABLE OF CONTENTS (Continued) ANNEXES 1. Banco Agricola de Bolivia (BAB) Table 1. BAB Personnel Trend 2. Salary Scale Comparisons 3. BAB Lines of Credit and Interest Spreads 4. BAB Balance Sheets 5. BAB Profit and Loss Statements 6. BAB Estimated Exchange Loss 7. BAB Loans in Arrears 8. BAB Distribution of Loan Portfolio 2. Livestock Table 1. Distribution of Ranches and Herds in Tropical Areas 2. Herd Development Model 3. Cattle Ranch Investments 4. Cattle Ranch Income and Operating Costs 5. Cattle Ranch Financial Projections 6. Flock Development Model 7. Sheep Cooperative Farm Investment Costs 8. Sheep Cooperative Farm Income and Operating Costs 9. Sheep Cooperative Farm Financial Projections 3. Sugarcane Table 1. On Farm Development Costs 2. Investment Costs 3. Income and Operating Costs 4. Financial Projections 4. Potatoes, Oats and Wheat Table 1. On-Farm Development Costs 2. Investment Costs 3. Incom and Operating Coost (Coop) 4. Pinaneial Projections (Coop) 5. Grapes Table 1. On-Farm Development Costs 2. Investment Costs 3. Income and Operating Costs 4. Financial Projections  TABLE OF CONTENTS (Continued) 6. Project Administration Costs 7. Agricultural Research Costs 8. Phasing of Investments 9. Estimated Disbursement Schedule of IDA Credit 10. Incremental Financial Rates of Return 11. Project Account (CB) Cash Flow 12. Economic Rate of Return MAP   BOLIVIA AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSIONS i. Bolivia is one of the least developed countries in South America. The vast majority of its population is engaged in low-productivity traditional agriculture; only a fraction of the labor force is employed in enclave-type export activities, as in the fields of mining and petroleum. The problems of poverty and unemployment are overwhelming and living standards of the majority of the population are very low, with GDP per capita at about US$300. While Bolivia's GDP has grown in real terms at an average of 4.6% since 1965, most of the increase has been due to mining and petroleum. On the other hand, the agricultural sector experienced a much more modest growth rate, barely keeping pace with the population growth rate. The principal problem affecting the agricultural sector is the existing imbalance between population distribution and natural resources in the three main geographic regions: the High Plateau, the intermediate Valleys and the Lowlands. ii. The proposed credit would help finance agricultural investments in the three main geographic areas of Bolivia. The Project would represent a further step in broadening the coverage of the Bank group lending to the sector, as it would help finance, in addition to cattle in the northern Low- lands and sheep in the High Plateau (which are already being financed under IDA projects), sugarcane in the central Lowlands; potatoes, wheat, oats and grapes in the Valleys. Agricultural research services would be provided to Project participants. Total Project costs would be US$12 million equiv- alent and would be financed from four sources: (a) an IDA credit of US$7.5 million (62% of total cost), which would finance all foreign exchange require- ments (US$5 million, or about 40% of total cost) and about US$2.5 million of local costs; (b) a commercial banks' contribution of US$0.9 million equivalent, or about 7% of total cost; (c) a Government contribution of US$2.3 million equivalent, or 20% of total cost; and (d) beneficiaries' own resources amount- ing to US$1.3 million, or 11% of total cost. iii. Responsibility for the execution of the Project's credit component would rest with Banco Agricola de Bolivia (BAB), but initially Project execu- tion would be handled by the Agricultural and Livestock Projects Division, a fully autonomous unit within BAB, until the latter becomes an efficient and financially viable institution, which is deemed feasible by the end of 1976. Approximately 50% of the sub-loans would be channeled through commercial banks under a Subsidiary Loan Agreement with the Government, indicating lending terms and procedures. The Ministry of Peasant and Agricultural Affairs would be responsible for the research associated with the Project. iv. Participating financial institutions would extend loans covering about 80% of ranchers' and 100% of farmers' on-farm investment. With regard to rate of interest to ranchers, sugar and grape farmers, beneficiaries would  - ii - be given an option to choose between the two following alternatives: (a) 4% calculated on the outstanding balance adjusted on the basis of the La Paz cost of living index; or (b) 14% calculated on the outstanding balance adjusted on the basis of the variations of the rate of exchange between the Bolivian peso and the US dollar. The rate of interest for subsistence farmers (sheep and potatoes) would be 12% nominal. Terms of repayment would range from four to 12 years, including a grace period of two to four years. v. Procurement for vehicles required for Project staff would be secured through international competitive bidding. Other procurement would be through normal commercial channels given the diverse nature and small individual amounts of inputs required. Existing arrangements would ensure adequate com- petition. vi. Estimated financial rates of return for the various activities range from 13% to 34% and the estimated economic benefits to the country would be similar. In the case of livestock the economic rate of return would be marginally higher taking into account taxes. With appropriate assurances, the Project is suitable for an IDA credit of US$7.5 million. The Borrower would be the Government of Bolivia.  BOLIVIA AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1.01 The Government has requested an IDA credit to help finance an agri- cultural credit project which would virtually encompass the whole of the country. To date, the Bank Group has made three credits to agriculture in Bolivia. Two credits for cattle development in the Beni Department of the Lowlands for a tocal amount of US$3.4 million were made in 1967 and 1970, and a third credit of US$6.8 million for beef development in the northern Lowlands and sheep development in the High Plateau was made in 1971. Exe- cution of the first two projects was successful, but the third project has run into difficulties. 1.02 This report is based on the findings of an appraisal mission to Bolivia in June 1974 led by Mir. J. Andreu and composed of Messrs. F. Lucca and 0. Lafourcade (IBRD), P. Bono (FAO/IBRD), and B. Bilbo and R. Brandeis (consultants). II. BACKGROUND A. General 2 2.01 Bolivia, with an area of 1.1 million km , has a population of 5.5 million, two-thirds of whom are indigenous Indians. Most of these live in the countryside, the large majority on subsistence holdings. GDP at market prices at US$1.7 billion results in a per capita GDP of only about US$300 per annum, one of the lowest in Latin America. GDP growth in real terms averaged 4.6% annually between 1965 and 1972, owing mostly to the development of petroleum and natural gas, which. together with mining, represent more than 80% of exports. 2.02 , Bolivia's poverty is compounded by an income distribution pattern which is considerably uneven. The information available for 1970 (and still deemed valid) indicates that the poorest 20% of the population share only 2.5%, while the richest 5% obtain 32% of the national income. 2.03 Although there are no reliable estimates of unemployment and under- employment, there are several indications that -he latter is considerable, especially in agriculture. Moreover, the overall pattern of investment in recent years has contributed to aggravate the unemployment situation. During 1965-1972, petroleum, transport and communications absorbed over 50% of in- vestment expenditures but only 3% of additions to the labor force.  -2- 2.04 The rate of inflation, which averaged about 4.5% per year in the 1960s, increased rapidly beginning in 1971 and is estimated to be running above 40% in 1974. The exchange rate remained constant at $b 11.88 to the US dollar from 1959 to 1972, when it was set at Ab 20 to the US dollar. B. Rural Sector 2.05 Agriculture's share of GDP has fallen from about 30% in 1962 to approximately 21% in 1974. In the 1965-1972 period, agricultural output increased at 2.6% annually, barely keeping pace with population growth. It represented only about 12% of exports in 1974. Nevertheless, the sector still provides the only source of employment for over one-half of Bolivia's labor force. Considerable structural impediments and the absence of ade- quate policies have resulted in a slow growth of output and productivity. 2.06 The principal problem affecting the agricultural sector is the existing structural imbalance between demographic and natural resources in Bolivia's three main geographic regions: (i) the cold, dry and largely barren High Plateau, which comprises 44% of the country's cultivated land, holds 56% of the population and contributes only 34% of the agricultural GDP; (ii) the temperate and humid Valleys with 33% of the cultivated land, 30% of the population and 39% of the agricultural GDP; and (iii) the tropical and subtropical Lowlands with 23% of the cultivated land, 14% of the popula- tion, and 27% of the agricultural GDP. Traditional agriculture is concen- trated in the High Plateau and the intermediate Valleys, while production of crops (including cotton, sugarcane, rice and oilseeds) and beef has been developed spontaneously by private enterprise in the Departments of Santa Cruz and Beni (Map) in the central and northern Lowlands, respectively. 2.07 While unbalanced geographic population and resource distribution constitute the biggest obstacles to the sector's development, such development is also hindered by such things as lack of land tenure, legal titles, trans- portation facilities and technical and financial resources, as well as the high cost of colonization (averaging US$20,000 per family), which precludes large-scale resettlement. 2.08 Precise cadastral statistics are not available. It is estimated, however, that about 85% of the farms are less than 15 ha and cover only 30% of the land. A farm size of 15 ha, although apparently not very small, should be considered in the context of the highly eroded soils of the Altiplano, mostly suitable for only extensive grazing, which substantially reduces the economic viability of smallholdings. The agrarian reform of 1952 carried out a drastic land redistribution among peasants in the High Plateau and interme- diate Valleys (the Lowlands were uninhabited in those days), but the high and increasing population pressure on the land, together with the adverse soil and climatic conditions and the lack of supporting services, have combined to keep rural incomes low. Directed colonization projects transferring High Plateau peasants to the Lowlands and Valleys have largely failed due to lack  -3- of knowledge of geological conditions and of supporting services. Spontaneous colonization, however, continues to be carried out mostly in northern and western Santa Cruz (see Map), albeit on a modest scale (5,000 to 8,000 settlers per annum out of a peasant population of 2.3 million in the High Plateau). C. Agricultural Supportip Services 2.09 The Minister of'Peasant and Agricultural Affairs (MPAA), Banco Agricola de Bolivia (BAB), the National Community Development Services (SNDC) and private organizations provide agricultural extension services. However, shortages of funds and lack of well-qualified extension workers have made it difficult to provide adequate technical assistance to farmers. Agricultural school training is practically non-existent and the majority of the 15 to 20 students who graduate each year at university agricultural engineering schools tend to leave the country for lack of good opportunities in Bolivia. Agri- cultural research is also under MPAA and suffers from lack of funds and adequate direction. The Inter-American Development Bank (IDB) is planning assistance in the field of agricultural research and specific proposals have been made under the proposed Project for the Saavedra Station located in the Lowlands (para 3.09). 2.10 Organization of the market for agricultural products could be improved substantially. Marketing of domestically consumed commodities is handled individually by the producers themselves through local markets or by small truck operators, acting as middlemen. Marketing of export crops (cotton and sugar) is handled through producers' associations and brokers. Beef, mutton, and wool are marketed by individual owners (High Plateau) and the former also by producers' associations and private dealers (Lowlands). 2.11 Credit availability, except for large agricultural enterprises, falls far short of what is required to encourage production and raise peasant incomes. The major institutional source of agricultural credit, and, more importantly, of long-term credit, has been Banco Agricola de Bolivia (BAB) (Annex 1). Its lending volume has grown quite rapidly but it has been largely concentrated in livestock and export crops in the Lowlands, financed out of external resources. A large part of it is short term. At present no medium- or long-term funds are available to BAB, with the exception of IDA Credit 261-BO. 2.12 Other sources of institutional credit include Banco del Estado (BE), a public bank; private banks, both foreign and Bolivian, all of which con- centrate almost exclusively on short-term lending; and the Central Bank through rediscounting operations. 2.13 The establishment in 1966 of a rural cooperative network in Cochabamba (see Map) based on a central coordinating body, the Desarrollo Economico y Social (DESEC) (paras 3.30 to 3.32), together with the expansion of the Government's National Community Actions Services Agency, have served to promote cooperative movements in Bolivia.  -4- 2.14 Institutional credit is available only to the top 5% of farmers and ranchers. The bulk of credit is supplied by intermediaries who charge nominal rates of between 8% and 12% for six-month periods, but who additionally purchase crops from farmers at high price discounts, which results in sub- tantially higher effective rates of interest. The nominal annual interest rate is 10% for public banks (which are legally forbidden to charge higher rates), while private banks charge rates commensurate with the prevailing rates of inflation. The only foreign loan which is explicitly indexed (as opposed to de facto indexing through interst rate and service charges ad- justments practiced by private banks) is the IDA Credit 261-B0, whose im- plementation has been delayed mainly because of ranchers' reluctance to accept it (para 2.17). D. Government Policies 2.15 There is a lack of clearly defined policies with respect to the agricultural sector. Short-term policy decisions taken on an ad hoc basis cannot compensate for a comprehensive overall approach to the problems of the sector. In particular, the lack of financial and other incentives and support to bring about the participation of small farmers in the process of development may lead to worsening social and economic imbalances. More re- cently, a serious, although very limited, effort has been made by DESEC and other Government agencies to correct the situation (paras 3.30 to 3.32); IDB has financed two rural development/colonization projects; and a rural develop- ment project is being prepared by the Bank for the High Plateau north of La Paz. The Project would initiate a coordinated effort to help the rural poor which could later be considerably expanded. E. Performance Under IDA Credits 107-B0, 171-B0, and 261-BO (First, Second, and Third Livestock Projects) 2.16 A Livestock Projects Division (LPD) within BAB has managed the three projects. Credits 107-B0 and 171-B0 provided financing for the development of approximately 300 cattle ranches (compared to the 270 estimated at appraisal). Disbursements were made substantially ahead of schedule for the agreed purposes. The average size of sub-loan at US$12,700 equivalent was slightly smaller than planned (US$13,300 and US$14,000, respectively), and the composition of on-farm investments was remarkably close to appraisal estimates. The projects' economic rate of return is estimated at 17% to 22%, roughly as planned (see Audit Report of May 30, 1974). 2.17 Credit 261-BO for US$6.8 million was approved in 1971 to help finance: (i) the continuation of beef cattle investments in Beni; (ii) beef cattle fattening, mainly in Alto Beni and Chapare; (iii) development of sheep production in the High Plateau, and (iv) a meat marketing study and the con- struction of slaughter and freezing facilities following completion of the  - 5 - study. After a successful beginning, performance under the beef component deteriorated seriously. The main reasons were the lack of local counterpart funds to be provided by BAB, the lack of implementation of the agreement on indexing of sub-loans, and the continuing deterioration of BAB's management and financial condition. As a consequence, in late 1974, IDA requested BAB not to submit further withdrawal applications, and disbursements were sus- pended. The Project's sheep component has progressed very slowly due to the difficulties associated with organizing traditional farmers in the High Plateau. More emphasis will be placed on promotion and organization in future. Project prospects for continued implementation have recently substantially improved. The Government provided BAB with a capital contribution of US$1 million equivalenteas counterpart funds required under the Project. Recently, ranchers have accepted the indexing of sub-loans and the Government has agreed with IDA to index beef sub-loans under the present indexing system until April 24, 1975 and on the basis of the cost of living index adjusted annually after April 25, 1975. During negotiations, at the request of the Government, which was concerned about the ranchers' reluctance to borrow under indexing conditions, IDA agreed to give beneficiaries the alternative of borrowing at a rate of interest of 14% nominal with principal adjusted according to the fluctuations in the rate of exchange between the Bolivian peso and the US dollar. 2.18 The three projects have served to introduce basic principles of ranch and herd management in the Lowlands. Other benefits include bringing to the Government's attention the need to provide sufficient price incentives to producers and introducing measures to combat cattle diseases, such as rabies and foot and mouth, in the Lowlands. III. THE PROJECT A. Project Description 3.01 The proposed Agricultural Credit Project would support a two-year lending program to help develop: beef and sugarcane in the Lowlands, annual crops and grapes in the Valleys and mutton and wool production in the High Plateau. The Project would cover the costs of on-farm investments and some of the required Project administration and agricultural research. 3.02 The main objectives of the Project would be to: (i) expand agricul- tural production both for export (livestock and sugarcane) and domestic con- sumption (wool, mutton, wheat, potatoes, oats and grapes); (ii) improve the economic condition of about 3,600 families of rural poor; and (iii) begin counteracting the negative effects of past unbalanced regional growth by channelling resources to the less privileged geographic regions (High Plateau and Valleys) in higher proportions than has been the case in the past.  -6- 3.03 Farm sizes, average investment per farm and phasing of commitments under the proposed lending program would be approximately as follows: Size of Sub- Number of Total Total Investment Total Project Loans No. of Area per Family Investment Component (ha)_ Year 1 Year 2 Loans ha) US$ US$ '000 Investments: Beef 500 300 360 930 465,000 5,250 4,880 Sheep 100 600 1,000 1,600 160,000 560 880 Sugarcane 4/1 120 180 300 12,000 3,030 910 Potatoes/ wheat, oats 2 600 1,200 1,800 3,600 406 730 Grapes 2 100 120 220 440 4,090 900 Total 1,720 2,860 4,580 8,300 /1 Farm sizes average 50 ha, of which 4 or 5 ha are developed each year. Note: Figures are rounded. B. Detailed Project Features Project Area (see Map) 3.04 The Project would be executed in parts of the three main geographic regions of Bolivia (Lowlands, Valleys and High Plateau). Beef financing would take place in the Lowlands, where about 85% of the country's cattle population is concentrated (Annex 2). Sugarcane farms financed under the Project would be located in Santa Cruz, which accounts for almost all of the existing sugar production (Annex 3). Potatoes, wheat and oats would be produced in Cochabamba (Annex 4) and grapes would be financed in a traditional vineyards area (Valley of Tarija) (Annex 5). Sheep breeding would be developed in the cold, dry and largely barren highlands north and east of La Paz (Annex 2). Beneficiaries 3.05 Of a total of about 4,600 sub-loans, roughly 3,600 (mostly to sheep owners, grape and potato farmers), or more than three-fourths, would be made to farmers having annual family incomes of less than US$500 equivalent and belonging to the lowest 40% income stratum of the population. It is expected that on-farm investments for small farmers would be about 30% of the Project but total amount could be increased if the administrative absorptive capacity of the participating institutions and these farmers could handle more credit  - 7 - than is presently envisaged. Lending to small farmers is expected to be about 45% of the total farm sub-loans under the Project. 3.06 Beef ranchers in Beni and Santa Cruz would be predominately medium to large size. However, sub-loans could also be made to small ranchers who would be encouraged to form livestock cooperatives for the purpose of receiv- ing credit under this Project. Ranchers are already familiar with IDA and IDB lending procedures and this, added to the strong demand for funds, would result in a satisfactory pace of disbursements. Sugarcane farmers would have initial family incomes of about US$1,000 per annum, which places them in an intermediate income category in Bolivia. Among Project participants would be recent spontaneous settlers in the northvest of Santa Cruz, and potato and grape growers who own less than 4 ha each in Cochabamba and in Tarija. The latter would set aside an average of 1 ha for vineyards to increase their incomes substantially from the present level of less than US$200 equivalent per family. Directly Productive Investments 3.07 On-farm investments would be made in cattle and sheep breeding stock, fencing, pasture establishment, small irrigation canals, vineyard plants, stakes and wire, land preparation and other inputs during crop es- tablishment. Agricultural machinery, vehicles and equipment would be pur- chased by contractors for use in Project farms. Project Administration (Annex 6, Table 1) 3.08 Because of difficulties encountered during the implementation of the Third Project (para 2.17), the LPD of BAB would be enlarged to become the Agriculture and Livestock Projects Division (ALPD). Under the Project, a manager experienced in agricultural credit would be recruited as Director of ALPD. The Deputy Director of the Division would be internationally recruited and well qualified in livestock and agriculture. Additional vehicles, equipment, and some buildings (extension or construction of small offices or houses) would be required. Under the Third Livestock Project, only partial recording has been made of on-farm investments, incomes and expenditures, as well as of physical changes in the relevant coefficients induced by the Project. Under the proposed Project, a special unit would be created in the ALPD to carry out a systematic recording on the basis of a representative sample of participating farmers. This would reveal the real impact of the Project and improve, the effectiveness of future agricultural projects in Bolivia. Assurances on this were obtained during negotiations. 3.09 Agricultural Research (para 2.09 and Annex 7). In the Lowlands, research has been conducted at Saavedra, but results have been poor due to lack of planning and resources. Nonetheless, some experience has been gained in measuring adaptation and yields of improved maize, sorghum, oilseeds and rice varieties. Research and experimentation in crop/pasture rotation based on adaptable varieties are presently needed. Under the Project, MPAA would  - 8 - assign the necessary staff to carry out a crop/pasture rotation program. Assurances were obtained during negotiations that the assigned staff would coordinate with the Project Director to ensure that the research conforms to the needs of the Project. 3.10 Land Titling. Although the agrarian reform was started in 1952, a large number of farmers in the High Plateau have not yet received definitive title to their lands. In the Lowlands, recent spontaneous settlers have also established themselves (especially north and northwest of Santa Cruz) with- out receiving ownership titles. The lack of titles hinders the farmers' access to medium-term credit. Assurances during negotiations were obtained from Government that MPAA would give high priority to issuing titles to Project beneficiaries by providing sufficient funds and resources for such purpose. C. Cost Estimates 3.11 The total cost of the Project is estimated at US$12 million, of which US$5 million would be foreign exchange requirements. Costs have been estimated at February 1975 prices. Price contingencies of 25% for 1975, 20% for 1976 and 15% for 1977/78 are allowed for expected price inflation on the local currency component and 11% for 1975 and 7.5% annually through 1978 on the foreign exchange requirements. Cost estimates are summarized below and the phasing of investments is shown in Annex 8: % Base % Foreign Total Project Costs -------- Line Exchange Local Foreign Total Local Foreign Total Costs Costs Components ---in $b million- --in US$ million--- On-Farm Investments Beef: Breeding stock 16.3 16.3 32.6 0.81 0.81 1.63 Fencing materials 4.1 10.1 14.2 0.21 0.50 0.71 Labor 15.0 - 15.0 0.75 - 0.75 Other(water supply, soil and pasture improvement) 10.0 25.9 35.9 0.50 1.29 1.79 Sub-total 45.h 52.3 97.7 2.27 2.61 4.88 53 68 Sheep: Breeding stock 2.1 2.0 4.1 0.10 0.10 0.20 Fencing materials 1.0 1.0 2.0 0.05 0.05 0.10 Pastures 5.4 2.7 8.1 0.27 0.13 o.40 Others 2.7 0.9 3.6 0.13 0.05 0.18 Sub-total 11.2 6.6 17.8 0.55 0.33 0.88 10 9 no-it/  -9- % Base % Foreign ------Total Project Costs --- Line Exchange Crnponents Local Foreign Total Local Foreign Total Costs Costs ---in $b million- --in US$ miliion--- On-Farm Investments Sugarcane: Materials (ferti- lizers) 3.2 2.1 5.3 0.16 0.10 0.26 Labor 13.0 - 13.0 0.65 - o.65 Sub-total 16.2 2.1 18.3 0.81 0.10 0.91 10 3 Potatoes,oats,wheat: Vehicles 2.9 3.0 5.9 0.15 0.15 0.30 Fertilizers 2.0 0.9 2.9 0.10 0.0h 0.14 Seeds 2.5 o.6 3.1 0.13 0.03 0.16 Others 2.3 0.3 2.6 0.12 0.01 0.13 Sub-total 9.7 4.8 14.5 o.5o 0.23 0.73 8 5 Grapes: Plants 4.2 0.8 5.0 0.21 0.04 0.25 1 Fertilizers 2.1 1.1 3.2 0.11 0.05 0.16 1 Wires and posts 2.7 3.9 6.6 0.14 0.19 0.33 4 labor 2.2 - 2.2 0.11 - 0.11 - Others 0.7 0.2 0.9 0.04 0.01 0.05 Sub-total 11.9 6.0 17.9 0.61 0.29 0.90 10 7 Total On farm 94.4 71.8 166.2 4.74 3.56 8.30 91 92 Project Administration Vehicles, equip- ment, buildings 2.4 3.0 5.4 0.12 0.15 0.27 Staff (technical assi.stance) 7.2 1.4 8.6 0.36 0.07 0.43 Sub-total 9.6 4.4 14.0 0.48 0.22 0.70 7 6 Agricultural Research Equipment - 1.4 1.4 - 0.07 0.07 Housing 0.8 - 0.8 0.04 - 0.04 Staff 0.6 - 0.6 0.03 - 0.03 Sub-total 1.4 1.4 2.8 0.07 0.07 0.14 2 2 Total base line costs 105.4 77.0 183.0 5.29 3.85 9.14 100 100 Price contingencies 34.0 23.2 57.0 1.71 1.15 2.86 Total Project Cost 139.5 100.2 240.0 7.00 5.00 12.00  - 10 - D. Financing 3.12 The IDA credit would finance US$7.5 million, or about 62% of total Project costs (US$12 million). This would include US$2.5 equivalent of local cost financing. The Government would contribute US$2.3 million equivalent and the commercial banks US$0.9 million equivalent. The remaining US$1.3 million equivalent would come from the subborrowers' (ranchers') own resources and would cover 20% of their on-farm investment costs. Financing of various Project components would be as follows (in US$ million): Beneficia- Commercial On-Farm ries Banks Government IDA Total % of Investments Amount % Amount % Amount % Amount % Amount Category Beef 0.98 20 0.49 10 0.24 5 3.17 65 4.88 Sheep - - - - 0.31 35 0.57 65 0.88 Sugarcane - - 0.09 10 0.23 25 0.59 65 0.91 Potatoes, oats - - - - 0.26 35 0.47 65 0.73 Grapes _ - 0.09 10 0.23 25 0.58 65 0.90 Sub-total 0.98 12 0.67 8 1.27 15 5.38 65 8.30 Contingencies 0.32 0.22 - 0.41 - 1.75 - 2.70 Sub-total 1.30 0.89 1.68 7.13 11.00 92 Project Ad- ministration - - - - 0.48 68 0.22 32 0.70 Agricultural Research - - 0.07 50 0.07 50 0.14 Sub-total _ - 0.55 - 0.29 - 0.84 Contingencies - - - - 0.18 - 0.08 - 0.26 Sub-total 1.30 - 0.89 - 0.73 - 0.37 - 1.00 /1 8 Share in Total Project Cost 1.30. 11 0.89 7 2.30 20 7.50 62 12.00 100 /1 Difference in total due to rounding of figures. 3.13 The Republic of Bolivia would be the Borrower, obtain the credit on IDA terms and carry the foreign exchange risk. The Government would transfer the proceeds of the IDA credit to a Project Account to be estab- lished in the Central Bank. About US$7.1 million would support the agricultural credit program and about US$400,000 would help finance Project  - 11 - administration and agricultural research. The US$7.1 million would be on-lent to participating financial institutions (BAB and commercial banks), which would, in turn, lend to farmers. With sub-loans being made over a two-year period, the last repayment to participating institutions and the Project Account would be made 14 years after the beginning of the Project (Schedule on Lending Terms and Conditions). Sub-loan repayments from the Project would accrue to the CB Project Account and would be used for further lending for similar purposes. The Government's contribution to the lending program would be equivalent to US$1.7 million, US$0.8 million equivalent of which would be transferred to the Project Account in CB for 15 years and US$0.9 million to BAB in the form of equity (para 3.27). As a condition of effectiveness, the Government, in order to enable the participating institutions to start operations, would make available the equivalent of US$250,000 to the Project Account (CB) and the equivalent of US$250,000 to BAB in the form of equity. The Government would agree to transfer the balance, US$650,000, to BAB in the form of equity in four semestrial installments, the first not later than January 31, 1976, and would agree to transfer within 18 months of signature, sufficient amounts to the Project Account (CB) for on-lending until the equivalent of US$11 million in sub-loans had been lent to beneficiaries. The lending program is based on 50% of the loans being made by the commercial banks and 50% by ALPD (BAB). In case the commercial banks' contribution (US$0.9 million equivalent) did not materialize, either in part or in total, the Govern- ment would agree to transfer to BAB in the form of equity on a six-month basis the difference between the expected and the actual contribution of commercial banks. Assurances on the above were obtained during negotiations. 3.14 The US$400,000 from IDA funds for Project administration and agri- cultural research would be transferred as follows: about US$300,000 would go to BAB in the form of equity for Project administration to cover the cost of vehicles, equipment, buildings and internationally recruited staff and about US$100,000 would go to MPAA for agricultural research. A Government equity contribution of the equivalent of US$650,000 for Project administration would be provided to BAB over a period of two years to ensure Project implementation (para 3.27) and a contribution of US$100,000 for agricultural research to MPAA. Assurances on the above were obtained during negotiations. 3.15 The Government would on-lend through the CB Project Account to par- ticipating institutions under Subsidiary Loan Agreements. Assurances were obtained during negotiations that Subsidiary Loan Agreements would be accept- able to IDA. Such agreements would specify the types of sub-loans eligible, the percentage to be financed, the rate of interest, maturity dates, methods of repayment, procurement and audit (details in attached Schedule of Lending Terms and Conditions). The signing of such Subsidiary Loan Agreements between the Government and BAB would be a condition of effectiveness and between the Government and commercial banks, a condition of disbursement.  - 12 - E. Procurement 3.16 Procurement of investment items for farm inputs would be made through normal commercial channels, given that their wide diversity and the small individual amounts involved do not make them suitable to bulk procure- ment through ICB. Several international and local firms selling farm machinery, wire, fertilizer and seeds are well represented in the country and this would ensure an appropriate degree of competition among suppliers. Supplies of goods and services required are adequate and prices are competitive. Vehicles required for Project staff and estimated to cost about US$200,000 would be grouped and secured through international competitive bidding in accordance with the Bank/IDA's Guidelines for Procurement. Office and laboratory equip- ment totaling not more than US$110,000 would be procured in small amounts through commercial channels. Contracts for the construction of buildings, housing and other facilities for Project personnel would be placed with local firms following Government procedures satisfactory to IDA. Each contract is estimated to cost about US$30,000 and the total cost is estimated to be about US$200,000. F. Disbursement 3.17 Participating institution disbursement to subborrowers would take about four years. IDA would disburse against appropriate statements and documents of expenditures for 73% of loans made under the Project for invest- ments in farm development for beef, sheep, sugarcane, potatotes, oats, wheat and grapes. Disbursements would also be made against 40% of cost of equipment purchased locally and buildings. In addition, the reimbursement for vehicles and the salaries of internationally recruited staff would be made on the basis of actual foreign exchange costs. A schedule of estimated IDA disbursements is given in Annex 9. G. Project Administration 3.18 - Project administration (para 3.08) would be the responsibility of a newly established unit within BAB, the ALPD (para 3.28).. This body would be created by enlarging the existing LPD in both staff and responsibility. It would be responsible for Project implementation and would approve all sub-loans, including those made by participating commercial banks. It is expected that ALPD would carry out at least 50% of the lending and the commercial banks the balance (para 3.29). ALPD would provide guidance and initial technical super- vision to participating institutions' staffs, umtil these become proficient, and to subborrowers. Assurances on the above were obtained during negotiations. Banco Agricola de Bolivia (BAB) 3.19 IDA's initial position, under the previous project, was to concen- trate its efforts on LPD to ensure adequate project implementation. However,  - 13 - about two years ago when it looked as though BAB's financial problems would adversely affect performance of IDA's on-going projects, IDA's main interest and efforts shifted and focussed on Banco Agricola itself. There was full agreement with the Government that BAB had to be restored as an efficient and financially sound agricultural development bank, particularly as BAB is the only agricultural development institution of Bolivia. During the last 18 months, IDA, with the support of the Government, has directed its efforts at improving BAB's organization, financial condition, and accounting and manage- *nt procedures, including a personnel policy review. As a result of the work so far, BAB's basic structure was changed in July 1974 (para 3.22); the Government has decided to have BAB discontinue non-profitable operations (rice marketing and other activities of a social nature) on its own resources and to contribute $b 65 million (US$3.25 million) to BAB's capitalization (para 3.27); and several consulting firms have made proposals to study BAB's financial condition, reorganization, personnel and administrative requirements based on job analysis and evaluation; to study its accounting procedures; and to establish and undertake a training program for BAB's staff. The terms of reference for the employment of consultants were reviewed by IDA during negotiations and a contract is expected to be signed in June 1975. Also the Government has directed a revision of BAB's statutes to reflect the changes undertaken and to take into account any further changes which may result from the consultantst study. In February 1975, because of differences of views on the conduct of BAB's affairs, the General Manager, his Deputy, and the Board of Directors resigned. The Government has since appointed a new Board of Directors and, after consulting with IDA, appointed a new General Manager in April 1975. 3.20 General Situation. BAB was created in 1942 and reorganized in 1963 and again in 1974. It is a fully owned Government institution and enjoys day-to-day operational autonomy. Supervision of BAB is exercised by MPAA on technical matters and by the Central Bank on administrative, accounting, and legal matters. The Ministry of Finance is ultimately responsible for BAB's financial condition. BAB's stated objectives are to support agricultural development, with special attention to smallholders. 3.21 Organization and Management. The Board comprises one representative each of MPAA, Ministry of Finance, Planning Secretariat, Farm Workers' Federa- tion, farmers and ranchers, and BAB's employees. The Board's president is the Minister of MPAA. The Board sets policy, approves annual budgets and lending terms and conditions, oversees BAB's activities, approves external and internal financing, and makes structural and procedural changes. The General Manager is appointed by the President of the Republic. 3.22 Since July 1974, BAB has streamlined its structure by establishing two main operational departments: Credit and Finance/Administration. The previous organization had seven main operational units. 3.23 Staffing. BAB has 66 branches and field offices spread over the country. The staff increased from 289 at the end of 1973 to about 380 by June 30, 1974 but many of the new appointments are unwarranted because they  - 14 - do not correspond to operational requirements. Besides the recent appointees, there is a basic core of old employees whose professional qualifications may not be high, but who are experienced and necessary to BAB until more efficient employees are recruited. Job description and evaluation (as well as a new remuneration system) should be introduced, and staff with corresponding qualifications should be reallocated or recruited to improve BAB's perform- ance. This would be done on the basis of the consultants' proposed study (para 3.19). Assurances were obtained during negotiations that BAB would adopt and implement within six months of the consultants' recommendations an overall staff development plan mutually agreed with IDA, including staff reallocation in line with its operational needs, and proposals for salaries and benefits improvements. 3.24 Policies and Procedures. BAB's policies and procedures are ade- quate but cast in general terms. The levels of responsibility for loan approval are appropriate and loan terms and conditions are set on the basis of the nature of investments being financed. 3.25 Under the previous management, BAB's normal policies and procedures have not been followed: (i) lending has been concentrated among large farmers in the Lowlands and loans have been given without adequate prior analysis; (1i) short-term loans have been given to finance medium-term investments; and (iii) loan collection has been substantially weakened. As of March 31, 1974, delinquent loans amounted to $b 168 million (US$8.4 million equivalent), 30% of loan portfolio. During negotiations, assurances were obtained that an analysis of arrears by category of borrowers would be undertaken, classifying debts by age and probability of collection; that recoverable loans would be collected and uncollectable debts would be segregated and written off; and that a financial medium-term plan based on realistic expectations and sound financial principles would be presented to IDA for agreement not later than 12 months after signing of the Credit Agreement. In addition, it has been agreed that BAB would issue, in consultation with IDA, within one year of Credit Agreement, revised statutes governing BAB's future operations. 3.26 Accounts and Auditing. Data are incomplete and not compiled in accordance with acceptable banking criteria. Internal and external auditing are consequently deficient, as often mentioned in recent external auditing reports. The terms of reference of the consultants who will reorganize the accounting procedures of BAB call for them to pay particular attention to the quality of data collection and statements of accounts. 3.27 Financial Condition. Resources, amounting to about $b 690 million at the end of 1973, are divided as follows: loans (including interest and commissions payable), $b 614 million; and equity, $b 76 million, or only 11%. The main sources of financing have been multilateral and bilateral public institutions and private foreign banks (50%), as well as Central Bank (23%). BAB has suffered a gradual decapitalization as a result of increasing losses (from $b 1.3 million in 1971 to $b 11.9 million in 1973), due mainly to the devaluation of the Bolivian peso (which affected BAB's loan repayments in foreign currencies), rice marketing activities (recently transferred to a  - 1S - specialized outside agency), projects of a subsidized nature, narrower in- terest spreads and increasing administrative expenditures. The debt/equity ratio increased from 1.2 (1970) to 6.5 (1973). This is excessive, especially in view of the high risk level of the portfolio. Overdue loans represented about 30% of loan volume outstanding March 31, 1974 and there is a lack of reserves against bad debts. A minimum of $b 65 million (US$3.25 million) would be required from the Government as equity participation to maintain BAB operations. The Government has already contributed to BAB capital the equivalent of US$500,000 and it has agreed during negotiations to contribute the balance of the required US$3.25 million equivalent in semestral install- ments within two years of the date of the Credit Agreement. This contribution, jointly with the US$900,000 (para 3.13) and the US$650,000 (para 3.14) to be made available as Project Government counterpart, amount to a total of US$4.3 million to be provided to BAB in the form of equity over a period of two years. Agriculture and Livestock Projects Division (ALPD) 3.28 ALPD would handle all Project day-to-day matters and would report directly to BAB's new General Manager, who would exercise overall supervision. ALPD's Director would be an experienced high level administrator who would have as his Deputy Director an agricultural and livestock expert. Assurances were obtained that the Director and his Deputy would be appointed on terms and conditions mutually agreed between IDA and the Government. The appoint- ments would be conditions of effectiveness. ALPD's headquarters and regional offices would have their own staffs and would work independently of BAB's regional offices. Project funds would be used exclusively for Project purposes and disbursements would have to be authorized by ALPD's Director. The above structure and procedures are designed to guarantee the efficiency of Project management and would be maintained until BAB's organizational and financial positions have been strengthened. The financial and managerial autonomy of ALPD and its possible integration within BAB would be reviewed within 18 months of the signing of the Credit Agreement. Assurances on the above were obtained during negotiations. Participating Institutions 3.29 A group of 10 commercial banks, including Cochabamba, Santa Cruz, Beni Livestock and Mercantile, operate in the Project areas and their clientele include many would-be subborrowers under the Project. The banks have expressed interest in participating in the Project subject to an agreement with Government on suitable financial, administrative and technical conditions. The participation of these institutions under the Project would introduce competition, provide added flexibility to agricultural credit, and spread geographically the impact of the Project. As few of these commercial banks have agricultural staff, the ALPD would assist them initially in preparing sub-loan applications. Also, DESEC, specialized in working with small farms, would participate and assist ALPD as well as the commercial banks in loan processing.  - 16 - The Center for Social and Economic Devel2pment (DESEC) 3.30 DESEC is a non-profit private organization established in 1966 under Bolivia's cooperative law. It is a member of the Pan American development foundation which provides assistance to the socially oriented foundations of the Western Hemisphere. DESEC's principal functions are to promote and organize cooperatives in the rural areas, carry out feasibility studies and coordinate its own operations with its four affiliates. Its budget, averag- ing about US$1 million p.a., is financed mainly from external contributions made by charitable organizations. DESEC's most active affiliate is the association which provides technical assistance to farmers and rural artisans (ASAR), followed by the association in charge of the construction of rural housing (VIPO), provision of health services (SEPSA) and education (ICE), and that portion of the rural poor which DESEC has helped to organize into about 200 cooperative centers (ARADO). 1/ ARADO has a membership of about 3,000 families mainly in Cochabamba, Santa Cruz, the Altiplano and the Yungas. DESEC's staff consists of about 33 members, responsible for the cooperative centers and the execution of feasibility studies being financed from local and external sources. In 1974, DESEC assisted the FAO/CP in a study for a rural development project in the province of Ingavi (Altiplano), which is expected to be financed by the Bank. Profits generated from services rendered by DESEC are transferred to support the operation of ASAR and the other affiliates working with the 200 cooperative centers. ASAR has a staff of about 38 people who are directly involved in providing agricultural extension and marketing services to the 200 cooperative centers. Given its limited financial and human resources, ASAR has concentrated its efforts since 1970 on helping small farmers and about 200 families to grow potatoes, wheat and oats in Cochabamba. 3.31 DESEC, through ASAR, has established an integrated system whereby it helps associations obtain loans from private banks and supervises disburse- ments and repayments. The latter are facilitated because ASAR markets the produce of association members, which, in turn, enhances the creditworthiness of the peasants. 3.32 Under the Project, ASAR plans to assign a Project Director, six agricultural extension workers, one marketing expert and one promotor of co- operatives to provide technical assistance in the valleys of Cochabamba to Project-beneficiaries receiving loans directly from ALPD or from participating commercial banks. This assistance would be provided on the basis of a com- mission or fee to be paid out of the margin obtained by participating institu- tions. Lending Policies and Procedures 3.33 Participating institutions would assist farmers in the preparation of farm plans, would make their own evaluation of the creditworthiness of an 1/ Action Rural Agricola de Desarrollo Organizado.  - 17 - individual or group of applicants, would appraise investment sub-projects with their own technicians, and bear the full credit risk. ALPD would assist and train commercial bank technicians in sub-project appraisals, when needed. All sub-loans to be refinanced out of the Project Account would require ap- proval by ALPD's Director. He may delegate such authority, at his discretion, to his deputy or to participating commercial banks. 3.34 With inflation reaching 35% in 1973, and about 45% in 1974, indexing was introduced under Loan 261-BO. Adjustments on principal were previously made on the basis of the lower of two indexes: the La Paz food price or the Trinidad (Beni) meat price (para 2.17). As inflation has been declining in recent months, it was agreed during negotiations to leave to the subborrowers the option of choosing between the following alternatives: (i) interest rates of 4% calculated on the outstanding balances adjusted on the basis of the cost of living index compiled by the National Institute of Statistics (NIS); or (ii) interest rate of 14% calculated on the outstanding balances adjusted on the basis of the variations of the rate of exchange between the Bolivian peso and the US dollar. Sub-loans to subsistence (sheep and potato) farmers would bear a 12% nominal interest. Assurances on the above were obtained during negotiations. During negotiations, it was also agreed that issuance of a Supreme Decree by Government to permit lending to agriculture at an interest rate of 14% would be a condition of effectiveness. H. Accounting and Auditing 3.35 Separate Project accounts would be kept at the Central Bank and at each of the participating institutions, and ALPD would supply IDA with period- ic reports on Project operations. BAB would have its accounts and those of ALPD audited by independent auditors acceptable to IDA. The Project Account within Central Bank would be audited according to auditing procedures accept- able to IDA. The participating banks would have their accounts audited by independent firms of standing. The audited statements of accounts and the auditors' report would be sent to IDA within four months of the fiscal year of the various institutions. Assurances on the above were obtained during negotiations. IV. PRODUCTION, MARKETS AND MARKETING, AND PRODUCER BENEFITS 4.01 A wide range of crops would be produced by farmers participating in the Project. Only beef and sugar would be produced partly for export, as international market prospects (Chile and Peru for beef) appear adequate for these two products. Assurances were obtained from Government that it would maintain a price policy aimed at increasing agricultural production and at providing adequate incentives to farmers.  - 18 - 4.02 Part of beef and sugar incremental production, as well as mutton, wool, potatoes, wheat, oats (all of which would represent less than 5% of present national production) and grapes, would be consumed locally. Grapes (representing about 15% of total production at peak levels) would be pro- duced mostly for the fresh market, except in Tarija where about one-half of the production would be used to make wine. Wool production would be sold in the main cities of the High Plateau and would help reduce current imports. 4.03 Marketing of potatoes, wheat and oats would be handled by ASAR. Grapes, wool and mutton would be sold either directly by individuals or through cooperatives; sugarcane would be marketed under present arrangements with mills and beef through producers' associations as at present. 4.04 A summary of producers' benefits derived from the Project models of production is shown in the following table: Beef Sheep Sugar Potatoes Grapes Number of families 930/1 1,600 300 1,800 220 Average size of farmer (ha) 500 100 40 2 2 Investment cost (US$) 5,250 560 3,030 406 4,090 Net income (US$) At present 1,205 0 485 100 105 At full development 4,625 337 2,855 345 2,040 Increment (US$) 3,420 337 2,370 245 1,935 Incremental financial rate of return (Annex 10) 22 27 34 13 27 (Annex 2)(Annex 2)(Annex 3)(Annex 4) (Annex 5) /1 Assuming only 50-cow herds. The sheep net income relates only to sheep breeding. The overall family income from other sources for sheep farmers at present is estimated at US$200 equivalent. This, together with the family incomes for potato and grape farmers, falls within the 40% lowest income stratum of the population. The incremental financial rates of return would be sufficiently high to make on-farm investment attractive. The Project cash flow is given in Annex 11.  - 19 - V. ECONOMIC BENEFITS AND JUSTIFICATION 5.01 The economic rate of return would be similar to the financial returns for the various activities. In the case of livestock, the economic rate of return would be marginally higher, taking into account taxes (Annex 12). 5.02 The Project would give full employment to some 4,000 smallholders and seasonal employment to no less than 8,000 workers whose present average family incomes are of the order of US$350 per annum and would help consolidate the financial position of participating marginal producers. Additionally, land titles would be provided to participating farmers, and input supplies and marketing would be improved as a result of cooperative efforts made by producers' associations. VI. AGREEMENTS REACHED AND RECOMMENDATION 6.01 During negotiations, assurances were obtained on the following principal points that Government would: (i) contribute as Project counterpart US$0.8 million equivalent to the Project Account in the Central Bank in sufficient installments to ensure Project implementation as scheduled (para 3.13); (ii) contribute Project counterpart US$0.9 million equivalent to BAB in the form of equity in sufficient installments to ensure Project implementation as scheduled (para 3.13); (iii) transfer to BAB in the form of equity on a six-months' basis the difference between the expected and the actual contribution of commercial banks in case the participation of such banks should not materialize, either in part or in total (para 3.13); (iv) transfer about US$300,000 of IDA proceeds needed for Project administration to BAB and about US$100,000 to MPAA (para 3.14); (v) contribute the equivalent of US$650,000 in the form of equity to BAB to ensure Project implementation over two years and transfer the equivalent of US$100,000 to the MPAA for agri- cultural research under the Project (para 3.14);  - 20 - (vi) regulate lending terms and procedures through a Subsidiary Loan Agreement with participating institutions acceptable to IDA, as outlined in attached schedule (para 3.15); and (vii) contribute to BAB in the form of equity $b 65 million (US$3.25 million) within two years of the date of the Credit Agreement (para 3.27). 6.02 During negotiations, assurances were obtained on the following principal points that BAB would: (i) establish a special unit within the Agricultural and Livestock Projects Division (ALPD) to determine the impact of IDA lending in the Project areas and help improve the effectiveness of future agricultural projects (para 3.08); (ii) enlarge the present LPD to become the Agricultural and Live- stock Project Division (ALPD) with responsibility for Project implementation (para 3.18); (iii) adopt an overall reorganization plan, including staff develop- ment, based on the recommendations of the consultant and in agreement with IDA, and start implementing the plan within six months after the consultants' recommendations (para 3.23); (iv) make an analysis of arrears by category of subborrowers, collect recoverable debts and write off uncollectable debts, and prepare a medium-term financial plan within 12 months of signing of the Credit Agreement (para 3.25); and (v) review with IDA within 18 months of signing of the Credit Agree- ment a possible integration of ALPD into BAB, depending on BAB's reorganization and financial condition (para 3.28). 6.03 Conditions of effectiveness of the credit would be that: (i) a contribution of the equivalent of US$250,000 had been made to the Project Account in the Central Bank (para 3.13); (ii) a contribution of the equivalent of US$250,000 had been made to BAB In the form of equity (para 3.13); (iii) the Government and BAB had signed a Subsidiary Loan Agreement acceptable to IDA (para 3.15); (iv) the Director and the Deputy Director of ALPD had been appointed on terms and conditions mutually agreed between IDA and the Government (para 3.28); and (v) Government had issued a Supreme Decree to permit lending to agriculture at an interest rate of 14% (para 3.34).  - 21 - 6.04 A condition of disbursement would be that the Government and commercial banks had signed a Subsidiary Loan Agreement (para 3.15). 6.05 With the indicated assurances, the proposed Project is suitable for an IDA credit of US$7.5 million. June 6, 1975   SCHEDULE Page 1 BOLIVIA AGRICULTURAL CREDIT PROJECT Banco Agricola de Bolivia (BAB) Lending Terms and Conditions A. IDA to Government 1. Commission of 0.75% on outstanding balance. 2. Repayment of credit in 50 years, including a 10-year grace period. 3. The Government would carry the foreign exchange risk. 4. IDA would disburse 73% of eligible loans disbursed by participating institutions. B. Government (Central Bank) Project Account to ALPD and Participating Institutions 1. Repayment of loans would be the same as from farmers to ALPD and participating institutions. 2. Under the alternative of indexing based on the La Paz cost of living, no interest would be paid to the Government on sub-loans to ranchers and grape and sugar farmers. 3. In the case of the alternative based on the variations of the Bolivian peso/US dollar exchange rate, interest of 9% would be charged for sub-loans to ranchers and grape and sugar farmers. 4. All sub-loans to potato and sheep farmers would bear a 6% interest rate. 5. Discounts on sub-loans of ALPD and participating institutions to farmers would be in the following pecentages: 1/ 1/ See attached explanatory table for details.  SCHEDULE Page 2 Commodity % Beef 75 Sugarcane and grapes 80 Potatoes and sheep 100 6. Participating institutions and ALPD would have responsibility for sub-loan appraisal on the basis of farm plans and would assume credit risk for loans to beneficiaries (individual farmers or group of farmers). 7. Central Bank discounting to commercial banks would need ALPD's approval on technical and financial aspects of farm plans. 8. Any sub-loan which by itself or with an earlier sub-loan to the same subborrower, under this or previous IDA projects, is in excess of US$50,000 equivalent would require IDA's approval. C. ALPD and Particpta_in& Institutions to Subborrowers 1. In case of the alternative based on the La Paz cost of living index, interest rate of 4% per annum on outstanding principal adjusted on cost-of-living index (compiled by Instituto Nacional de Estadisticas, INE) would be charged for sub-loans to ranchers and grape and sugar farmers. 2. In case of the alternatives based on the exchange rate varia- tions, interest rate of 14% per annum would be charged for sub--loans to ranchers and grape and sugar farmers. 3. Interest rate of 12% nominal per annum would be charged for sub-loans for potato and sheep farmers. 4. In case of indexed sub-loans, adjustments and payment of interest and principal on adjusted outstanding balances would take place on the anniversaries of the first disbursement. 5. .Not more than 50% of any beef sub-loan should be used for the purchase of breeding cattle. 6. Ranchers and farmers under the Project would be required to take adequate animal health measures, particularly against brucellosis, rabies and foot-and-mouth disease. 7. The technical staff of ALPD and participating institutions would ensure, through periodic visits, that the funds provided are used for the intended purposes.  SCHEDULE Page 3 8. ALPD regional offices would be authorized to approve sub-loans unless otherwise decided by the Project Director. All sub- loans above $b 100,000 would be approved by ALPD's Director. 9. Farmers growing sugarcane on farms exceeding 50 ha and grape on farms exceeding 4 ha would not qualify for loans under this Project. 10. Repayment and grace periods would not exceed the following: Loan Period Grace Period Cattle ranches 12 4 Sheep 12 4 Sugarcane 6 3 Potatoes 4 2 Grapes 8 4 11. Participating institutions would ensure that sufficient funds, including seasonal requirements of working capital, are provided to subborrowers so as to enable them to carry out their invest- ments as provided in the farm plans. May 27, 1975  EXPIANATORY TABLE DISCOUNTING PERCENTAGES FOR COMMERCIAL BANKS AND AlPD FROM (CB) PROJECT ACCOUNT (1) (2) (3) (4) (5) Commercial Central loan Banks % Bank % Government % IDA f Commercial Banks Beef 1.95 0.49 25 1.46 75 0.04 2 1.42 73 Sheep 0.44 - 0 0.44 100 0.11 27 0.33 73 Sugarcane o.45 0.09 20 0.36 80 0.03 7 0.33 73 Potatoes 0.36 - 0 0.36 100 0.09 27 0.27 73 Grapes o.45 0.09 20 0.36 80 0.03 7 0.33 73 Total 3.65 0.67 2.98 0.30 2.68 73 ALPD Beef 1.95 0.49 25 1.46 75 0.04 2 1.42 73 Sheep 0.44 - 0 0.44 100 0.11 27 0.32 73 Sugarcane 0.45 0.09 20 0.36 80 0.03 7 0.33 73 Potatoes 0.36 0 0 0.36 100 0.09 27 0.27 73 Grapes o.45 0.09 20 0.36 80 0.03 7 0.33 73 Total 3.65 0.67 2.98 0.30 2.68 73 Financing of Loans to Farmers by Participating Institutions (1) = Loan to farmer. (2) - Amount financed from commercial banks or ALPD. (3) = Amount obtained from Project Account in Central Bank. (1) = (2) + (3). Financing of Project Account in Central Bank (3) (4) - Government's share. (5) - IDA's share. (3) - ) + (5) All percentages are calculated in relation to the loan shown in Col(l) equal to 100%. Price contingencies amounting to about US$2.4 million to be added proportionally. April 2, 1975  ANNEX 1 Page 1 BOLIVIA AGRICULTURAL CREDIT PROJECT Banco Agricola de Bolivia (BAB) General Situation and Objectives 1. BAB was created in 1942 and reorganized in 1973 and in 1974 (the latter following IDA's recommendations). It is a fully owned Government institution and enjoys day-to-day operational autonomy. Supervision of BAB is exercised by MPAA on technical matters and by Central Bank regarding administrative, accounting and legal matters. The Ministry of Finance is ultimately responsible for BAB's financial condition. BAB's objectives are to support agricultural development in general with special attention to smallholders. Organization and Management 2. As a consequence of a series of measures undertaken by the Govern- ment to reorganize BAB in early 1975 the Board of Directors, the General Managers and the Deputy General Managers have resigned. According to present statues the Board comprises one representative each of "PAA, Ministry of Finance, Planning Secretariat, Farm Workers' Federation, farmers and ranchers, and BAB's employees. The Board's president is ipso facto the Minister of MPAA. The Board: (a) sets policy; (b) approves annual budgets and lending terms and conditions; (c) oversees BAB's activities; (d) approves external and internal financing; and (e) makes structural and procedural changes. The general Manager is appointed by the President of the Republic. He is BAB's main executive officer and had traditionally exerted his powers and influence fully. Since 1970, however, four general managers have been appointed in rapid succession. The last manager was not able to work at his job full time in view of his other responsibilities, which resulted in very weak and improper management. The Deputy General Manager position was created and filled a few months ago under prodding by IDA. The Deputy General Manager was expected to assume direct responsibility for the credit and financial departments. These objectives have not been fulfilled because of the delays in approving the reorganization plan, and lack of support by the General Manager. 3. Overall Organization. BAB's six main operational units were con- solidated into two main departments recently, e.g., credit and finance/ administration. Credit is, in turn, subdivided into agriculture and livestock projects divisions. The latter (LPD) has been, and is, responsible for managing the IDA-financed projects. A loan collection unit has been estab- lished in the finance department. This is important, since it will centralize  ANNEX 1 Page 2 this responsibility at a high level at a time when a serious problem of arrears must be faced (paras 24 to 28). 4. Planning and data collection divisions have been recently created to handle project preparation and economic studies; and an improved flow of financial and accounting data, respectively. 5. BAB has presently 66 branches and offices covering the whole country. In many of these areas the lending is minimal and staffing super- fluous, thereby producing net operating losses. One important result of the study shortly to be undertaken by Arthur Young would be the reduction of losses through the consolidation of a number of agencies. 6. Staffing. BAB's staff number 289 at the end of 1973 (Table 1). This represented an increase of 33 staff or 12% since end 1972. However, the staff size increased to 380 or by 31% through June 30, 1974. This was unjustified on the basis of lending activities and given BAB's present financial difficulties (para 16). With some notable exceptions, the staff is generally of low caliber. There is a basic core of old employees whose professional qualifications may not be high, but whose services are necessary at this stage in view of their banking experience in the agricultural field. Most of the recent appointees (see above) lack both experience and profes- sional qualifications. Salaries are about 30% below those paid by other public, and by private,, banks and this is related to the poor quality of the staff (Table 2). 7. Policies and Procedures. In the past, BAB has had two sets of credit lines, one using its own resources, the discount facilities of the Central Bank and the funds of Brazilian and Argentinian banks (regular lines); and the other using funds from bilateral and multilateral international financial agencies, such as USAID, IDA and IDB (special lines). The terms and conditions of loans under the various lines of credit differed markedly; and specifically those of "regular" loans (many of which are given exclusively on the basis of the security offered), were totally unrelated to the produc- tion and income-generating capacity of the activities financed. This led to financing medium-term investments with short-term credit and consequently to situations of borrowers' illiquidity, loan arrears and defaults. Another unfortunate result of the distinction between regular and special loans was that the staff were assigned to one or the other line exclusively, which led to their underemployment and to haphazard supervision. Such distinctions were not warranted and, therefore, new and standard loan terms and conditions have been approved in principle based on the financial requirements of diffe- rent types of investments. 8. BAB makes mostly "specialized" loans, e.g., for cotton, sugar, mutton, beef (Table 3) and each of them in a specific geographic area which forces farmers/borrowers to apply elsewhere (often to private money-lenders at very high interest rates and with excessively short repayment periods)  ANNEX 1 Page 3 for obtaining the funds needed to finance supplementary basic requirements, such as other subsistence/c.^sh crops and/or livestock production. This weakens unnecessarily the financial condition of farmers and results in a waste of time, frustration and different and sometimes incompatible loan terms and conditions. Under the basic reorganization already approved, financing will be made available by BAB on the basis of the overall financial needs of farmers and ranchers. 9. At present BAB is encountering difficulties in lending to small- holders in the High Plateau and the lowlands because of: (a) lack of land titles; and (b) lack of cooperatives or farmers' associations to channel the credit and to assume collective responsibility for loan repayments. A more intensive promotion and organizational effort by BAB is required and coor- dination with MPAA is needed for accelerating land titling in areas where BAB's lending is potentially important. 10. Loan approval authority is as follows: $b US$ Equivalent Legal Up to 50,000 Up to 2,500 Provincial Agent 50,001 to 220,000 2,501 to 11,000 Regional Agent 220,001 to 450,000 11,001 to 22,500 Chief of Credit Department 450,001 to 750,000 22,501 to 37,500 Executive Committee at Headquarters Above 750,000 Above 37,500 Board The above structure is deemed adequate under present circumstances but the upper limits at the provincial and regional levels might be increase sub- stantially as soon as warranted by the quality of the staff. 11. BAB has been charged by the Government in the past with the responsibility of administering programs which were either heavily subsidized and hard to manage, e.g., rural development and colonization, or were of a commercial nature, e.g., rice purchasing and marketing. As a result of the nature of these activities and/or of BAB's total lack of expertise in these fields, BAB has: (a) committed to them an unduly high proportion of its manpower resources; and (b) experienced heavy financial losses which have not been covered through Government allocations. Under BAB's reorganization plan, a decision was made to create the National Rice Board and to transfer BAB's rice activities to the Board. As for projects of social nature, Government funding in advance is presently required to absorb the probable losses resulting from these Projects. 12. Accounts. BAB keeps separate accounts for each of the different programs it handles, but these accounts are inadequate for analytical and decision-making purposes because of incompleteness and errors. Accounting  ANNEX 1 Page 4 data is not analyzed sufficiently so as to give, among others: the current position of the portfolio and debt; aging of the portfolio; and details of loans in arrears. Of equal concern is BAB's inability to use available data for current and long-term financial planning. The improvement of data collec- tion would be handled by consultants under a contract signed by BAB. 13. Auditing. Internal auditing is extremely deficient. External auditing which legally should be the responsibility of the Central Bank, is entrusted to private firms. Auditing has been hampered by inadequate and erroneous data (para 12). The mDst recent audit as of June 30, 1973: (a) does not show a reconciliation of its estimated balance sheet with the one prepared by BAB; (b) expresses no opinion as to the adequacy of the provision for bad debts; and (c) is otherwise incomplete by the standards required by IDA. This gives an idea of the task to be performed by the consultants (para 12). Financial Condition 14. Resources. During the last four-and-a-half years the composition of BAB's resources has changed as follows: BAB's Resources (in $b million) -----------------------June 30------------------------ 1970 1971 1972 1973 Dec. 31, 1973 Z of % of Z of X of % of Amount Total Amount Total Amount Total Amount Total Amount Total IDA 22.3 10.2 28.4 9.7 33.5 8.8 50.4 8.5 52.0 7.5 IDB 27.7 12.6 30.2 10.3 29.7 7.9 64.7 10.9 67.5 9.8 USAID 14.8 6.7 27.1 9.3 37.1 9.8 65.9 11.1 65.7 9.5 Central Bank 26.7 12.2 56.1 19.1 108.8 28.7 212.7 35.8 157.0 22.8 Banco do ) Brasil ) 29.7 7.8 19.0 3.2 150.0 21.8 Other Liabi-) lities ) 41.6 18.9 68.0 23.1 59.4 15.7 105.0 17.7 121.2 17.6 Own Equity 86.3 39.4 83.6 28.5 80.6 21.3 76.1 12.8 75.9 11.0 Total Liabilities and Equity 219.4 100.0 293.4 100.0 378.8 100.0 593.8 100.0 689.3 100.0 BAB has relied increasingly on loan funds, its equity decreasing from 39.4Z of the total resources as of June 30, 1970 to 11% at the end of 1973. During this period, BAB has relied heavily on the refinancing facilities provided by the Central Bank, as well as on term loans by IBRD, USAID and IDA. Short  ANNEX 1 P age 5 term loans by the Banco do Brazil, Argentinian banks and Bank of America have also been made. These institutions had contributed a total of about $b 960.5 million, as of March 31, 1974, of which an estimated $b 350.0 million was outstanding and about $b 167.0 million was still undisbursed. 15. Financial Structure. BAB's FY/70-73 financial statements are given in Tables 4 and 5. They show that BAB has suffered a gradual decapitalization as a result of increasing losses. There has also been a sharp increase in the debt-equity ratio as shown below: Debt Equity Ratio (in $b million)