Ecuador - Seeds Project

Report No. 964-EC Appraisal of FILE COPY a Seeds Project RETURNOTO Ecuador REPORTS En- 7 WITHIN March 5, 1976 O EE Regional Projects Department ONE WEEI'A, Latin America and Caribbean Regional Office FOR OFFICIAL USE ONLY International Bank for Reconstruction and Development International Development Association This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  RETUtjP p 'To F2.-FP S TXESK CURRENCY EQUIVALENTS ROOAI, A ,jY: SUCRE 5 3/ US$1 - S/ 25 S/ 1 - US$0.04 S/ 1,000 a US$40 S/ 1,000,000 - US$40,000 WEIGHTS AND MEASURES 1 quintal (qq) - 45.5 kg 100 lb 1 ton * 22qq a 1,000 kg 2 2,200 lb 1 hectare (ha) - 10,000 m 2.47 ac. GLOSSARY OF ABBREVIATIONS MAG - Ministry of Agriculture and Livestock INIAP - National Agricultural Research Institute DCS - Department of Seed Certification EMS - Seeds Corporation CB - Central Bank BNF - National Development Bank NSC - National Seeds Council SEED TERMINOLOGY (As Used Under the Project) Breeder's seed - Seed of high genetic purity produced by the plant breeders at INIAP research stations. Basic seed - Progeny of breeder seed produced at INIAP research stations. This seed mast keep the genetic identity and the varietal purity. ReRistered seed - Progeny of basic seed also obtained at INIAP research stations. It should reasonably maintain the same qualities of the variety. Certified seed - Progeny of registered seed produced by selected farmers under contract. It must satisfactorily maintain the genetic identity and varietal purity and its production must be supervised and approved by the Department of Seed Certification (DCS). Field production of certified seed must be processed before sale to farmers. The processing consists basically of diying, cleaning, selecting, disinfecting, and packing. Dockage - Portion of seed lots classified at field production level as certified seed and later discarded during screening selection at the processing plants, because of under size or impurity. GOVERNMENT FISCAL YEAR January 1 to December 31  FM OFFICIL USE ONLY ECUADOR SEEDS PROJECT Table of Content. page No. SUMMARY AND CONCLUSIONS ................................ i-ili I. ITrMODUCTION ................................. ....... 1 II. BACKGROUND .......................................... so....... 1 A. General ........................................ 1 B. The Agricultural Sector .0.. ... . ..... . .. .............. 2 C. The Existing Seeds Industry .................... 4 III. THE PROJECT .**......................*................. 6 A. Objectives and Brief Description ............... 6 B. Detailed Features .............................. 7 C. Cost Estisates ......................................... 9 D. Financing ............................ 11 E. Procurement and Disbursement ..................o. 12 TV. ORGANIZATION AND MANAGEMENT . ....... . . . . . . ......... ..... 13 A. Project Coordination and Administration .... o.. 13 B. National Donelop eont Bank ............ o ........ 13 C. Executing Participating Entities ....... o.. oo... 14 D. Accounts and Audits ...o..o ...... oo ............ 14 E. Monitoring and Key Indicators ....... .o. 15 V. SEEDS PRICING AND FINANCIAL PROJECTIONS ..* .......... 15 A. Seeds Pricing .......o ...... ..... ... ...-.... .-.. 15 B. Financial Projections ...o ...... . ............... 16 VI. BENEFITS AND JUSTIFICATION ..............a-*.......... 17 VII. AGREEMENTS REACHED AND RECOMMENDATIONS ............... 18 This-report Is based on pl,eparation work done by an FAO/IBRD Cooperative Program mission that visited Ecuador in March 1975 and on the findings of an appraisal mission, consisting of Messrs. J. Bazo and J.A.N. Wallis (IBRD); P.P. Maleki (PAO); and B. Bullock (consultant), that visited Ecuador in August 1975. I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) ANNEXES 1. THE AGRICULTURAL SECTOR Table 1 - Crop Areas, Yields and Production; 1966-74 Table 2 - Farm Size Distribution; 1968 Table 3 - Value and Percentage Distribution by Activities of Loans Provided by Banco Nacional de Fomento (BNF) to the Agricultural Sector; 1970-74 Table 4 - Agricultural Credit Provided by Banco Nacional de Fomento (BNF); 1973-74 Chart - (IBRD-15182) Ministry of Agriculture and Livestock (MAG) Organization Chart 2. THE SEEDS INDUSTRY Table 1 - Varieties Eligible for Seed Certification in 1975 Table 2 - National Institute of Agricultural Research (INIAP) Experiment Stations for Basic Seed Production Table 3 - Production Goals for Registered Seed of Selected Crops; 1975-77 Table 4 - Certified Seed Distributed by the Seeds Corporation (EMS) in 1974 Table 5 - Existing Seeds Distribution Centers Table 6 - Technical Coefficients Used in Projections Table 7 - Projections of National Total Areas Under Project Crops - Years 0-5 Table 8 - Project Targets for Certified Seed - Years 0-5 a. Percentage of National Total Seed Requirements b. Area to be Sown with Certified Seed c. Certified Seed Requirements Table 9 - Projections of Foundation Seed Requirements Table 10 - Projections of Registered Seed Requirements a. Requirements for Clean and Bagged Seed b. Requirements for Field Production c. Requirements for Area of Production Table 11 - Projections of Field Requirements for Certified Seed a. Requirements for Field Production b. Requirements for Area of Production Chart 1 - (IBRD-15184) National Institute of Agricultural Research (INIAP) Organization Chart Chart 2 - (IBRD-15185) "EmLsemillas" Seeds Corporation (EMS) Organization Chart Chart 3 - (IBRD-15183) Seeds Certification Department (DCS) Organization and Staff Chart Chart 4 - (IBRD-15179) Project Organization and Operational Flow Chart  Table of Contents (Continued) ANNEXES (Continued) Chart 5 - (IBRD-15181) Seed Processing Flow Chart Chart 6 - (IBRD-15180) Crop Sowing, Harvesting and Seed Processing Chart 3. TERMS OF REFERENCE, GUIDELINES AND FELLOWSHIPS 4. ESTIMATED PROJECT AND FOREIGN EXCHANGE COSTS Table 1 - Investment and Operating Costs of the National Seeds Council Table 2 - Incremental Project Investment and Operating Costs of the Seeds Certification Department Table 3 - Incremental Project Investment and Training Costs of the National Institute of Agricultural Research Table 4 - Summarized Incremental Project Investment and Training Costs of the Seeds Corporation (EMS) Table 5 - Detailed Investment Costs for Three Seed Processing and Storage Plants for the Seeds Corporation (EMS) Table 6 - International Technical Assistance Costs Table 7 - Annual and Total Project Capital Cost for Participating Entities Table 8 - Annual and Total Incremental Recurrent Costs for Participating Entities 5. ESTIMATED SCHEDULE OF DISBURSEMENTS 6. INITIAL PROJECT IMPLEMENTATION SCHEDULE 7. SEED PRICES Table 1 - Seed Prices (July 1975) a. Commercial Grain Prices b. Price to Seed Growers c. Seeds Corporation (EMS) Sales Price for Certified Seed Table 2 - Projected Prices for Seeds Corporation (EMS) Sales Price for Certified Seed Table 3 - Incremental Benefit to Farmers as a Result of Using Certified Seed 8. ANALYSIS OF FINANCIAL RETURNS TO CONTRACT GROWERS OF CERTIFIED SEED Table 1 - Rate of Return for Certified Wheat Seed Production Table 2 - Rate of Return for Certified Hard Corn Seed Production Table 3 - Rate of Return for Certified Soybean Seed Production Table 4 - Rate of Return for Certified Rice Seed Production  ANNEXES (Continued) 9. ANALYSIS AND FINANCIAL PROJECTIONS FOR THE SEEDS CORPORATION (EMS) Table 1 - Projected Purchases of Field Production by the Seeds Corporation (EMS); Years 1-5 Table 2 - Projected Sales of Clean and Bagged Certified Seed by the Seeds Corporation (EMS); Years 1-5 Table 3 - Projected Sales of Dockage by the Seeds Corporation (EMS); Years 1-5 Table 4 - Projected Annual Operating Costs of the Seeds Corporation (EMS); Years 1-5 Table 5 - Streams of Costs and Revenue to the Seeds Corporation at Alternative Levels of Sales Prices for Clean, Certified Seed; Years 1-20 Table 6A - Projected Cash Flow for the Seeds Corporation (EMS); Years 1-12, assuming 12% Increase for Certified Seed Prices Table 6B - Projected Cash Flow for the Seed Corporation (EMS); Years 1-12, assuming 15% Increase for Certified Seed Prices Table 7 - Balance Sheet of EMS, 1974 10. ECONOMIC EVALUATION Table 1 - Incremental Quantity of Production Generated by the Project Table 2 - Incremental Expenditure by Farmers for Seed Under the Project Table 3 - Incremental Net Financial Benefits Generated by Project Table 4 - Streams of Costs and Benefits of the Project; Years 1-20 Table 5 - Project Cash Flow MAPS IBRD - 11860 Production AIeas for Certified Seed IBRD - 11861 Seed Processing and Distribution Centers  ECUADOR SEEDS PROJECT SUMMARY AND CONCLUSIONS i. Agriculture remains the most important sector of Ecuador's economy in terms of output, employment, and foreign exchange earning, even though its relative contribution to GDP has been overshadowed by recent developments in the oil sector. Agriculture employs 55% of the country's labor force and, despite the surge in oil exports, still provided 39% of export earnings in 1974. Because of the nature of the economy, moreover, and the uncertainties in the oil sector, agriculture remains at the heart of Ecuador's economic growth. Consequently, serious problems confront Ecuador in that agricultural production has been unable to expand fast enough to meet the needs of the growing population (7.1 million in 1975), rising at a rate of 3.4% annually, or to satisfy the increased food demand resulting from the recent improvement in incomes. Government policy is now focused intensively on promoting in- creased agricultural production and reducing the impact of rural poverty. Organized schemes to produce and distribute the main agriculture inputs such as high quality seeds and fertilizer would enhance substantially the Govern- ment's chances of pursuing this policy to a successful conclusion as well as increase the benefits to be derived from technical assistance and credit services. ii. The existing seeds industry in Ecuador has the framework necessary to support an operation that would make a substantial impact on the agri- cultural productivity of the country. What is needed mainly is proper co- ordination of efforts and a strengthening of the institutions involved in performing the different tasks required by the seeds industry. The National Institute of Agricultural Research (INIAP) does some work on production of new varieties and basic seed, the Department of Seeds Certification (DCS) is charged with seed certification and quality control, and a newly estab- lished Government-private sector Seeds Corporation (EMS) has the respons- ibility for processing, storing and distributing certified seed that is produced by selected farmers under contract. iii. Previous Bank/IDA-financed operations in Ecuador include a national livestock development program financed through a loan (501-EC) and two credits (173-EC and 222-EC); an irrigation and small farmers' settlement project at Milagro in the coastal area (Credit 425-EC); and a fisheries project (Loan 555-EC). The execution of these projects has generally been satisfactory, although the objectives of the fisheries project will not be fully achieved. Future Bank lending is aimed at strengthening the institutional framework for development policy and resource allocation in agriculture and, with consider- ably new emphasis, in rural development. The latter has become a main focus for Government efforts, principally in terms of increased public expenditures and improved coordination of economic policies. In addition, the Government has started to prepare several integrated rural development projects, some of  - ii - which figure significantly in the plans for future Bank lending. These should serve as a useful forum for consideration of important overall economic as well as sector policy changes required to overcome the recent unsatisfactory agricultural performance. iv. The main objective of t:he proposed project is to develop a modern seeds industry, capable of producing and delivering to the bulk of farmers substantial quantities of high quiality seeds for most of the country's basic food crops and pastures. The specific target would be to make available by year 5 some 8,800 tons of certified seed to meet about 30% of total seed requirements (for project crops), compared to the 14% that is presently covered. The project would increase the availability of certified seed for wheat, rice, hard corn and barley and would produce for the first time certified seed for soft corn, soybeans, other oilseeds, beans and pastures. v. To attain its objective, the project would finance technical serv- ices, and physical facilities to strengthen the three existing institutions-- INIAP, DCS, and EMS--and the establishment of a coordinating National Seeds Council (NSC). The bulk of project investments would be for the installa- tion of three large-scale seed processing plants to be operated by EMS, but an important component would be the provision of a two-man team of experts-- for three years--and 24 man-months of short-term consultants to assist in specialized fields. Staff trainirng within the country and overseas would also be provided. vi. The Bank loan of US$3 million would finance the foreign exchange cost of the project (60%), while the local cost, amounting to US$2 million, would be financed by the Government and EMS (23% and 17%, respectively). The Bank loan would be at the prevailing interest rate at the time of loan approval, for a term of 15 years, including four years of grace. vii. The borrower would be the Government. Loan proceeds would be channeled to participating entities through the National Development Bank (BNF), which would act as the borrower's financial agent. About 50% of the loan proceeds would be relent by the Government to EMS over about a 12-year period, including four years of grace, and at a 9% annual interest rate. Project costs of the other participating Government agencies would be absorbed by the Government in the form of non-reimbursable contributions. The foreign exchange risk of the Bank loan would be borne by the Government. viii. The Ministry of Agriculture and Livestock, on behalf of the Gov- ernment, would hold overall responsibility for the project, but it would del- egate this to the NSC, which would act as the project administrative committee. A Project Executive Director would be in charge of the day-to-day tasks of project implementation and serve as the liaison executive between the NSC and participating institutions. He wouLd also handle all project transactions with BNF and the Bank related to the management of the Bank loan proceeds. ix. Procurement of civil works, machinery, equipment and installation for the processing and storage of seeds would be carried out by international competitive bidding, in accordance rith Bank guidelines. Contracts for goods  - iil - and services not exceeding US$100,000 equivalent would be procured under locally advertised competitive bidding in accordance with local procedures, satisfactory to the Bank. The Project Executive Director would bulk items under US$100,000 in value whenever possible. x. The main benefits from the proposed project would be the higher crop yield and net returns that a substantial number of farmers would ob- tain from the use of certified seed. The incremental production of commer- cial grain, attributable solely to the use of the additional certified seed to be marketed by EMS as of Year 5 of the project, and annually thereafter, would be estimated to amount to 25,000 tons, valued at about US$4.3 million. The project would benefit the majority of farmers, of whom the main users of soft corn, bean and barley seed would be the small farmers of the highlands. It is expected that the economic rate of return of the project would be about 48%. If yield increases estimated under the project were to be reduced by half, the rate of return would still be 16.5%. xi. During negotiations assurances were obtained, which provide a suit- able basis for a Bank loan of US$3 million, for a term of 15 years, including a grace period of four years.   ECUADOR SEEDS PROJECT I. INTRODUCTION 1.01 The Government of Ecuador has requested a Bank loan to help finance the establishment of a modern seeds industry. The project, the first of its kind in Ecuador, would provide technical and financial assistance mainly to strengthen existing institutions that are already working on seed development and handling, although on a limited scale. It would also make an important contribution to the achievement of the Government's plans to increase produc- tion and productivity of priority crops, such as wheat, rice, corn, barley, beans and oilseeds, as well as cultivated pastures to increase the output of beef and milk. 1.02 Previous Bank and IDA activities in the agriculture sector in Ecuador consist of a nationwide livestock development program, including pasture research (Loan 501-EC and Credits 173-EC and 222-EC); the Milagro irrigation project in the Coast near Boliche (Credit 425-EC); and a fish- eries project (Loan 555-EC). Execution of these projects has generally been satisfactory, although the objectives of the fisheries project will not be fully achieved. 1.03 This report is based on the preparatory work of an FAO/IBRD Cooperative Program mission that visited Ecuador in March 1975 and on the findings of an appraisal mission, consisting of Messrs. J. Bazo and J.A.N. Wallis (IBRD); P.P. Maleki (FAO); and B. Bullock (consultant), that visited Ecuador in August 1975. II. BACKGROUND A. General 2.01 Ecuador's overall economic position has improved substantially since the export of petroleum began in 1972. From then to 1974, gross domestic product (GDP), which had been increasing, in constant terms, by about 5% annually from 1969 to 1971, rose by an average of 10% annually. Ecuador, however, continues to be one of the poorest countries in Latin America with a per capita income equivalent to about US$415 in 1974 and a large proportion of the people living under conditions of absolute poverty. Population, at 7.1 million in 1975, rose at a rate of 3.4% a year from 1960 to 1973.  -2- B. The Agricultural Sector 2.02 Agriculture, including forestry and fisheries, remains the most important sector of the economy in terms of output, even though its contri- bution to GDP at factor cost declined from 33% in 1965 to 22% in 1974. The sector employs over 55% of the labor force and, up to 1971, provided over 85% of export earnings. It contintues to be the prime source of employment for the bulk of the labor force and. the source of subsistence for thousands more. Moreover, the prospects of the oil sector are unclear, even as early as 1980. Because of Ecuador's fundamental reliance on agriculture, there is a basic problem in that the sector has been unable to expand its production fast enough to meet rising demand, especially for wheat, rice, and edible oils, from the growing population or to satisfy the increased demand by the seg- ment of the community that has benefitted from the higher real income re- sulting from the rapid development of the petroleum industry. In 1974 imports totalled some 155,000 tons of wheat (US$35.5 million), 20,000 tons of rice (US$9.1 million) and 15,000 tons of edible oil, of which 11,300 tons of soybean oil was valued at US$8.6 million. Rice has been exported during 1975, and provided that water control and grain handling and storage facil- ities are improved, rice exports could be considerably expanded in the future. 2.03 According to the 1968 agricultural survey, there were 633,000 farm holdings in the country, some 74% being less than 5 ha in size and occupying no more than 10% of the total farm land. Most farmers produce only for family subsistence and so remain outsidle the market economy. By Bank definition, 1/ in 1974 between 50% and 66% of the rural population were "absolutely poor" and 75%, "relatively poor." A special program of land tenure reform and settlement was started in 1964 but so far only some 60,000 families have benefitted. 2.04 The rural population :Ls divided almost equally between the Pacific coastal region --Costa-- and the central Andean highlands --Sierra-- with very few people living in the lowlands of the Amazon basin --Oriente. Tem- perate climate crop and dairy production is concentrated in the Sierra where there are both medium and small sized farms. Tropical crops, including the main export items --bananas, cacao and coffee-- and beef, are raised mainly in the Costa and, to a limited extent, also in the Oriente. The area with the most potential for increasing cropland is in the Costa, and it is prob- able that an extensive portion of the Oriente, close to the Andes, could be developed as grassland; there are only limited opportunities for incorporating additional land in the Sierra for crops and livestock production. Current national average yields are generally low in comparison with adjoining coun- tries, although improved varieties and management systems have been developed for the main crops (para 1.01). Factors such as shortages and poor distribu- tion of seed of the improved varieties, insufficient fertilizer supplies, inadequate water control practices, and deficient pricing policies have de- layed improvements in productivity, but Government policy is now focussing on promoting increased agricultural production and reducing rural poverty. 1/ Report No. 588 Rural Development and Bank Policies; A Progress Report December 2, 1974.  - 3 - Organized schemes to produce and distribute the main agriculture inputs such as high quality seeds and fertilizer would enhance substantially the Government's chances of pursuing this policy to a successful conclusion as well as increase the benefits to be derived from technical assistance and credit services. To make large amounts and varieties of improved seeds available to farmers by means of large scale imports is not a viable solu- tion. In economic terms it would be impracticable to import the necessary seeds in advantageous conditions. For successful and nationwide crop pro- duction the basic solution is the local production and well organized dis- tribution of certified seeds that would match the different micro-climates existing in Ecuador and that would be resistant to the plant diseases that also exist in Ecuador. The proposed seeds project would be one part of this effort. Other measures would be required to overcome the unsatisfactory performance of the agricultural sector. The Bank is assisting Ecuador to prepare projects for the increased domestic production of other commodities. In that connection, the proposed project enhances the prospect for a fruitful dialogue with the Government on important overall economic as well as sector policy changes needed to bring about more positive results. 2.05 Several corrective steps have already been taken to encourage greater production efforts. The flow of credit has been increased, rising from S/ 579 million (US$23 million) in 1972 to S/ 2,621 million (US$105 million) in 1974, and the National Development Bank (BNF) has recently made considerable progress in extending its credit and agricultural supply serv- ices to more remote and small-scale farmers. Additionally, import duties on agricultural inputs were entirely removed in April 1974 and farm production reference prices have been raised substantially. Although the performance of the sector in 1974 was still disappointing in spite of these incentives, it appears that the downward trend was halted. Some encouraging increases in production were registered for cassava, cotton, and sugarcane. Other factors besides those mentioned in the previous paragraph that are believed to have restrained expansion include the higher cost of inputs; uncertainties concerning the implementation of the 1973 Agrarian Reform Law; problems of water control; dissatisfaction with farm-gate prices actually received; and the greater attraction of investment in urban properties and commercial en- terprises than in rural operations. Other weaknesses in the sector have been inadequate marketing and storage facilities for the main products and insufficient integration of the various farm advisory services of the Ministry of Agriculture and Livestock (MAG), and limited transference of the technical information available from the National Agricultural Research Institute (INIAP) to the farmers. 2.06 The proposed project would seek to accelerate the transference of the results of crop and pasture breeding work from INIAP to the farming com- munity at large by strengthening the system for the production, certification and distribution of improved seed. The crops selected for inclusion in the project are those which are of national importance to improve the food supply (corn and beans), reduce imports (wheat, barley, edible oil crops, and pasture seed), and provide larger exportable surpluses of rice. Further information on the agricultural sector is contained in Annex 1. Meanwhile, the Government has stepped up its past efforts to address the problem of widespread rural  - 4 - poverty in Ecuador. It announced its intention of allocating a greater share of public expenditures to rural development activities, notably the improve- ment of social services and infrastructure in disadvantaged areas. This new emphasis also has made possible some progress towards a more effective co- ordination of policies and government operations affecting the rural popula- tion. At the same time, the Government has started to prepare several in- tegrated rural development projects, especially in the Sierra. In an attempt to expand these initiatives, in late 1974, the Government asked for the Bank's counsel in applying its irnternational experience in rural development to the alleviation of Ecuador's problem. In addition to providing a report to the Government on this subject, the Bank has defined a program which would extend substantial support in this field. This entails plans for an initial technical assistance project and integrated rural development projects in Tungurahua Province, the Quevedo area, the Lower Guayas-Naranjal zone and possibly the Esmeraldas River Basin. C. The Existing Seeds Industry 2.07 The existing institutions concerned with seeds production in Ecuador provide the elements essential to a sizable seeds industry (Annex 2). There is a lack, however, of overall coordination and direction of these institu- tions, and there are inadequate facilities for processing and distributing improved seed in the quantities necessary for a significant impact on the productivity of the agricultural sector. In 1974, about 3,400 tons of im- proved seed of rice, hard corn, wheat and barley were distributed--sufficient to plant about 14% of the national area under project crops. 2.08 INIAP has developed and tested improved varieties of all the crops of major importance in Ecuador and has the technical capacity and facilities to maintain a regular flow of breeder's seeds of new improved varieties. INIAP keeps a permanent relationship on technical matters with three important inter- national agricultural research centers: CIMMYT in Mexico for wheat and corn programs; CIAT in Colombia for activities related to programs for beans and rice production, and swine and cattle raising; and CIP in Peru in connection with potatoes production. However, INIAP does not have enough suitably located land to produce all the registered seed which would be required under the proposed project. Some registered seed is now being grown by farmers under contract with INIAP, but this procedure is not advisable because of the amount of technical control and supervision required. 2.09 Legislation was enacted in 1972 establishing a Department of Seeds Certification (DCS) within MAG, and establishing seeds rules and standards. DCS has made a modest but satisfactory start and has sufficient personnel and facilities for the current level of activity. In some cases, however, it has lacked sufficient support to carry out fully its responsibilities, and the lack of a high level coordinating body for the entire seeds industry, plus some gaps and other defects in the legislation have reduced its effec- tiveness as a quality control agency.  -5- 2.10 A Seeds Corporation (EMS), the first in Ecuador, was established in April 1973 as a joint Government-private sector enterprise. Its main ob- jectives are to acquire and operate plants to process certified seeds, sell the processed certified seed to farmers, and promote the use of certified seed among all farmers. Initial capital was S/ 7 million (US$280,000), but in August 1975 it was raised to S/ 27 million (US$1.1 million) in shares worth S/ 100 each, held by BNF, 48%; MAG, 26%; Comision de Valores (Government Finance Company), 22%; and about 20 private persons, 4%. Even though EMS is registered as a private company in the Public Registry, it enjoys a number of privileges granted by the Government, including importation of machinery and equipment duty free and use of BNF short-term credit at a preferential in- terest rate of only 1% per annum. The corporation is controlled by a Board of Directors appointed by the shareholders, a General Manager with a staff of 10 agronomists, four professionals in administrative positions, and 18 other personnel working on a permanent basis at Quito headquarters and at offices in Guayaquil, Cayambe, Riobamba, Guarandas, and Cuenca. Its first year of operations (1974) was successful in terms of recruiting contract seed growers and setting up certified seed distribution and sale centers ( Annex 2). During that period, EMS had contracts with 40 seed growers, selected on the basis of their know-how and creditworthiness, who, with BNF and private bank financing for their farm operations, produced enough certified seed to permit EMS to process and sell the 3,400 tons mentioned in paragraph 2.07. Some seed was processed in the old rudimentary plants handed over by MAG as its capital contribution to EMS and some was processed by INIAP under contract at the small modern facilities it maintains to handle the registered seed produced at its research stations. 2.11 In recognition of the key importance of the production of improved seeds and their further use by farmers to its strategy to raise agricultural productivity, the Government has given such production and use of improved seeds the highest priority for agricultural credit from BNF. As a promotional measure to get farmers to use improved seed, Government payments to wheat producers have been partly in cash and partly in vouchers exchangeable only for certified seed and fertilizers. This system has been used only for wheat so far, but it has worked fairly well and may eventually be extended to cover other important crops as well. As another important promotional measure for the use of improved seeds by farmers, BNF would also play a major role by making the purchase of certified seed a condition of production loans to farmers, as well as make adequate provision for their credit requirements. 2.12 The Government now wishes to extend the scope of the seeds industry to include all major food crops and to increase substantially the proportion of the national areas of the crops sown with improved, certified seed. Such an expansion will, however, require strong coordination at the center, addi- tional investment in processing facilities, technical assistance and training, and a considerable promotional campaign. The proposed project is designed to meet these needs.  -6- III. THE PROJECT A. Objective and Brief Description 3.01 The proposed project would aim at developing a modern seeds industry, capable of producing and deliver:Lng to farmers substantial quantities of high quality seeds for most of the cotntry's priority crops. Production and dis- tribution targets for such crops to be attained by year 5 of the project would total some 8,800 tons of certified seed, broken down as follows: about 2,400 tons of wheat, 1,000 tons of barley, 400 tons of soft corn, 500 tons of hard corn, 3,000 tons of rice, 700 tons of soybeans, 200 tons of other oilseeds, 450 tons of beans, and 120 tons of pasture seeds. This volume would permit the sowing of about 160,000 ha of crops, or about 33% of the total area devoted to the kinds of crops included under the project. The project would operate on a commercial scale in two of the three geo- ecological regions of the country (IBRD Map 11860)--the Costa and the Sierra. Operations in the Oriente would be limited since the area is not extensively cultivated. 3.02 The project would finance the necessary technical services, physical facilities and initial incremental operating costs to: (a) establish a National Seeds Council; (b) develop a seed variety release system; (c) produce registered and certified seed; (d) establish three large-scale certified seed processing and storage plants (two in the Sierra and one in the Costa); (e) strengthen the existing seeds certification department and related regulatory works for seed quality control; (f) construct and improve some 25 seed distribution centers; and (g) train personnel in different aspects of the seeds industry. 3.03 The Ministry of Agriculture and Livestock (MAG) would have overall responsibility for the project. Funds would be channeled to the participating entities--the National Agricultural Research Institute (INIAP), the Seeds Corporation (EMS), and the Department of Seeds Certification (DCS)--through a special account to be administered by the National Development Bank (BNF). Actual implementation of the project would be in the hands of the National Seeds Council (NSC) through a project unit with an Executive Director, assisted by a Project Technical Adviser (Arnex 2, Chart 4). Technical assistance would also be provided.  -7- B. Detailed Features Project Administration 3.04 A National Seeds Council would be set up by the government under the project to exercise overall direction of the seeds industry and policy matters. It would operate under the jurisdiction of MAG and be chaired by the Minister of Agriculture and Livestock or by the Director General of Agricultural Devel- opment. The Council would otherwise consist of the Director General of INIAP, Technical Manager of BNF, one representative of the seed processing enterprises and one representative of the seed growers. The Director of DCS would perform the functions of Secretary of the Council. The Council would monitor and advise the Government among other points on (a) the prices paid to farmers for producing certified seed; (b) the prices paid by farmers for purchasing certified seed; (c) the needs for seed supplies of various crops, to be used in defining national targets for seed production; (d) seed varieties eligible for certified seed production; and (e) coordination of the activities of the various Government agencies involved in the seeds industry. (Details of NSC functions are contained in Annex 3.) The establishment of the Council would serve to provide the improved central coordination required and a better basis for greater flexibility and responsiveness in dealing with all matters affect- ing the seeds industry than now exists. The NSC would also serve as the administrative entity responsible for the direction of the project (para. 4.01). Establishment of the NSC in accordance with the guidelines as shown in Annex 3 would be a condition of effectiveness of the loan. Seed Certification (DCS) 3.05 Since farmers' demand for certified seed would depend on their previous experience with such higher priced seed, efficient quality control would be fundamental to the success of the seeds industry. To enable the DCS to perform a more effective job in this respect, the project would finance the purchase of vehicles, testing equipment, label printer, and promotion equipment, as well as training, local and foreign (para 3.12), but the hiring of additional personnel would be financed separately by the Government (para 4.05). Basic Seed Production (INIAP) 3.06 Under the project, INIAP plant breeders would continue to be respon- sible for the provision of breeder's seed and for the production of basic and registered seed at its experimental stations (Annex 2). INIAP has the neces- sary technical staff for the task but more land would be required for the Santa Catalina (Sierra) station for production of all the registered wheat seed called for under the project. Financing would therefore be provided for purchase of 150 ha to provide the area required to meet project demands. During negotiations assurances were obtained from the Government that, within one year of effectiveness the said land acquisition would be completed. Addi- tionally, the project would finance enlarging INIAP's storage facilities at  -8- Santa Catalina (by 400 tons), Boliche (by 50 tons), Pichilingue (by 50 tons) and Portoviejo (by 100 tons). All four plants would also be provided with basic testing equipment, and the seed processing plant at Santa Catalina would get an additional cleaner, scale and bagging machine. Seed Processing, Storage and Distribution (EMS) 3.07 Production of certified seed for project crops would be undertaken by selected farmers (para 2.10) under contract with EMS. It is anticipated that, to fulfill project targets, about 100 farmers, with an average area of 50 ha devoted to seed growing, would be engaged in this activity by the fifth year of the project. Certified seed production for oilcrops and pastures would be carried out by EMS and INIAP jointly in the initial years of the project because of the lack of experienced seed growers for these crops. The Government has given MAG about 400 ha in the Coastal region (Portoviejo), some 150 ha of which would be transferred to INIAP for the expanded production. 3.08 Three large-scale processing and storage centers would be constructed and equipped under the project to handle the increased certified seeds produc- tion. These centers would be owned and operated by EMS and they would handle the seed produced by the contract seed growers. Two of the plants, located at Sierra (Quito area) and Costa (Guayaquil area), would turn out 4 to 5 tons of processed seeds per hour and each site would have facilities capable of storing 500 tons of seeds in bags and 1,000 tons in bulk. The third plant, to be installed in Austral Region, would be smaller, with a rated output of 2 to 3 tons per hour and storage facilities for 250 tons of seeds in bags and 500 tons in bulk. It is estimated that the Sierra and Costa plants could each process up to 5,000 tons of seed during a five-month processing period, work- ing eight hours a day, while the third plant would process about 3,000 tons over the same period. The plants would be fully equipped for the processing operations, which call mainly for facilities for weighing and receiving, drying and conditioning, cleaning and grading, treating, bagging and labeling, quality control testing and storing. Processing and storage operations would take place between harvest and sowing in the respective plants' areas of in- fluence. Plants would be designed to permit processing of different types of seeds. The rated capacity of the plants would be about 50% above the requirements projected for year 5 of the project, to allow for subsequent increase in demand for certified seed. 3.09 Construction and installation works for the Sierra and Costa plants would be started as soon as possible after the project effectiveness date, and, depending on procurement speed, should be operating in 16 to 20 months. Con- struction on the third plant would be started in the second year of the project; operations would begin in the third year. EMS, during the first 18 months of the project, would continue processing seeds using the facilities at INIAP's research stations under contract. Soybean seeds would be processed by contract for at least the next four years at: a new INIAP processing plant now under construction at the Portoviejo Research Station. Details regarding all aspects of the seed processing and storage component of the project are given in Annex 2.  - 9 - 3.10 Stocks of certified seed processed by EMS would be delivered to farmers at 25 different locations--12 in the Sierra and 13 in the Costa (IBRD Map 11861). Distribution centers would be the EMS processing plants and the INIAP plant at Portoviejo (for soybean seeds), and some 25 warehouses belonging to EMS, MAG, and BNF (Annex 2). The project would finance construction of 10 of these warehouses for EMS, each capable of storing about 100 tons of bagged seeds. Finance would also be provided for the purchase of three trucks to move seed stocks. Technical Assistance 3.11 Two technical experts, internationally recruited, would be financed under the project. They would be contracted for three years, one to serve as Technical Adviser of the project and as specialist in seed processing and storage, and the other in seed production, certification and quality control matters. In addition, a total of 24 man-months of short-term consultant services would be provided to take care of specific problems, such as pasture seeds work. Annex 3 gives details on their terms of reference. Training 3.12 Organized training in all technical aspects of the seeds industry would be an important component of the project. In-country training, to be provided by the consultants and senior local staff of the participating in- stitutions, would be made available to some 50 participants (including seed producers) per year. Advanced and specialized training would be provided to the staff of the participating entities through overseas fellowships. A total of about 200 man-months of these fellowships would be financed under the project (para 4.05 and Annex 3). C. Cost Estimates 3.13 The total cost of the project is estimated at S/ 126.3 million (US$5 million equivalent), of which about S/ 75.3 million (US$3 million) would be the foreign exchange component. The project costs include incremental operating costs amounting to about US$0.5 million, to be financed by the Gov- ernment during the three-year period of project implementation. The Government will continue to finance recurrent costs thereafter. Details of project costs are given in Annex 4 and summarized below:  - 10 - SuriTarx of Project Costs Foreign Local Foreign Total Local Forei -n Total Exchanr?e T_ Sucres S000--) - 'oooXT 1. ProLect Administration (NSC) Administration 4,278 - 4,278 171.1 - 171.1 - Office equip. and vehicles 151 193 344 6.o 7.7 13.7 56 Operation & maint. of vehicles 80 34 1114 3.2 1.4 4.6 30 Travel 720 - 720 28.8 - 28.6 - Consultants _956 5,h7o 6.426 38.2 218.8 257.0 85 Sub-total 6,185 5,697 11,882 27. 227.9 475.2 7 2. Seed Certification (DCS) Technical Personnel 1,920 - 1,920 76.8 - 76.8 o Equipment and vehicles 390 3,010 3,400 15.6 - 120.4 136.0 89 Operation & maint. of vehicles 1,051 450 1,501 42.0 18.0 60.0 30 Training 1 700 1 800 3,500 68.o 72.0 140.0 51 Sub-total ,'T 5 ,260 10,321 202.1 210.14 7 412.8 3. Basic Seed Production (INIAP) Land 6,000 - 6,ooo 240o0 - 240o0 0 Buildings 540 360 900 21.6 14.4 36.0 40 Machinery and equipment 365 3,285 3,650 14.6 131.4 146.0 90 Training 150 1 350 1 500 6.o 54.0 60.0 90 Sub-total 7,055 t2,95 105o 2 12990. 19,8 20 4. Seed ProcessinR. Storage and Distribution (S -Land 1,200 - 1,200 48.o - 48.o 0 Buildings 8,0148 5,365 13,413 321.9 214.6 536.5 40 Processing equip. (installed)3,506 26,617 30,123 140.1 1,064.8 1,204.9 88 Vehicles 165 1,485 1,650 6.6 59.4 66.o 90 Pasture seeds combines 75 675 750 3.0 27.0 30.0 90 Training 90 810 900 3.6 - 32.4 36.o 90 Consultant 928 5,259 6,187 37.1 210.4 247.5 85 Sub-total 114012 02 531 2,168.3 77 Base Total Cost Estinate 32,313 56,163 88,476 1,292.2 2,246.7 3,538.9 63 5. Contingencies Physical 10,% 3,231 5,616 8,847 129.2 224.6 353.8 63 Price - Local 15,4714 - 15,474 618.9 - 618.9 - - Foreign - 13,519 13,519 - 514.8 540.8 100 Sub-total l7F 19.135 37.810 718.1 765.4 1,513.5 _ TOTAL PROJECT COST 51.C18 75,298 126,316 2,040.3 3,012.1 5,052-14 60  - 11 - 3.14 The cost estimates are based on July-August 1975 prices including quotations cif Ecuadorian ports for equipment expected to be imported. Physical contingencies of 10% have been added to the baseline costs, and price contingencies of 30% have been added to the baseline costs plus the physical contingencies. Price contingencies are based on assumed interna- tional inflation rates of 10.8% in 1975, 8.8% in 1976, 8% in 1977 and 7.5% in 1978 for the foreign exchange costs, and inflation rates for local costs of 19% in 1975, 17% in 1976, and 16% during 1977 and 1978. The price con- tingencies have been calculated from July 1975 to the mid-point of the dis- bursement periods, i.e. January 1977, 1978 and 1979. D. Financing 3.15 The Bank loan of US$3 million would finance the foreign exchange cost of the project (60%) over a three-year investment period. The local costs, amounting to about US$2 million equivalent, would be covered by the Government (23%) and EMS (17%). Proposed financing arrangements would be as follows: 1/ Bank Government EMS Total ----_US$'000 (rounded)------- Administration - NSC 10 210 - 220 Seed Certification - DCS 135 135 - 270 Registered Seed Production - INIAP 145 275 - 420 Certified Processing, Storage and Distribution - EMS 1,370 - 520 1,890 Technical Assistance and Training 590 110 40 740 Sub-total 2,250 730 560 3,540 Contingencies 750 420 290 1,460 Total 3,000 1,150 850 5,000 3.16 Government would be the borrower and would bear the foreign exchange risk. The Bank loan would be made at the current Bank lending rate at the time of loan approval, for a term of 15 years, including four years of grace. NSC, DCS and INIAP depend entirely on Government budgetary support to finance their operations, while EMS has the status of a commercial institution and operates with its own capital and commercial credit. The Government, there- fore, would contribute, as a grant, the foreign and local project costs of 1/ Same figures as table in para. 3.13 with "technical assistance and training" identified separately.  - 12 - the NSC (including the cost of the Project Unit and its Executive Director), DCS, INIAP and the overall technical assistance and training component. The approximately US$2 million equivalent for EMS foreign exchange project invest- ment costs including contingencies would be made available by a subloan from the Government to EMS, repayable over 12 years; including four years of grace, with an annual interest of 9%. EMS project local costs would be financed with EMS' own resources and short-term credit from local banks. E. Procurement and Disbursement Procurement 3.17 International competitive bidding in accordance with Bank Guide- lines on Procurement would be required for the civil works, machinery, equipment and installations for the three proposed EMS plants (estimated at about US$1.7 million, exclusive of contingencies). Bids would include (a) detailed designs for the seed processing flow, for the buildings needed to house the processing equipment, for the storage building, and for the layout of the storage bins; (b) dletailed list of machinery and equipment called for in seed flow design; (c) direct supervision of assembly and in- stallations of machinery and equLpment; and (d) test runs to insure satis- factory operations. Bids would be called for supplies and civil works for one, two or all three plants on a single contract or alternatively for separate contracts for the civil works component alone. Machinery and equipment other than that mentioned above and vehicles would be procured under international bidding whenever the size of individual contracts exceeded US$100,000. Pro- curement of items in amounts less than US$100,000 equivalent and civil work contracts under a similar value would be carried out on the basis of competi- tive bidding advertised locally in accordance with local procedures, satis- factory to the Bank. However, the Project Executive Director would bulk such items together into larger contracts whenever possible. Assurances were obtained from the Government that all contracts in excess of US$100,000, technical specifications, draft tender documents, bidding invitation documents, and bid evaluations would be approved by the Project Technical Adviser prior to submitting them to the NSC for its approval. The two consultants chosen would would be satisfactory to the Bank. Disbursement 3.18 The proposed loan of US$3 million would cover the foreign exchange component (60%) of the project. The Bank loan would be disbursed over a period of about four years against: (a) 100% of the total c.i.f. cost of the processing and storage equipment f'or the EMS plants; (b) 40% of the local costs of transport, assembly, installation and test operations of the items financed under (a) (equivalent to the foreign exchange component); (c) 100% of the cif cost of imported project machinery other than that in item (a), equipment, vehicles and imported items; (d) 40% of the total costs of civil works (equiv- alent to the foreign exchange component); and (e) 100Z of the foreign expendi- tures for technical assistance and overseas training. Because short-term  - 13 - consultants may be required to initiate certain project actions immediately, retroactive financing, not to exceed US$100,000, is recommended to cover their costs and those for other technical services provided after January 30, 1976. Disbursements would not be made against costs of land, administration, opera- tions and maintenance and local costs for the consultants and training. Any balance left in the loan account after completion of the project would be cancelled. The Schedule of Disbursements is in Annex 5. IV. ORGANIZATION AND MANAGEMENT A. Project Coordination and Administration National Seeds Council 4.01 MAG would be the official representative of the Government and therefore responsible for the overall aspects of the Seeds Project; it would, however, delegate responsibility for implementation of the project to the NSC. The Council would meet at least once a month to review progress of the project and take necessary actions and decisions (para 3.04). Project Executive Director 4.02 The Project Executive Director would be responsible to the National Seeds Council for the day-to-day implementation of the Seeds Project. He would be assisted by the Technical Adviser (consultant, para 3.11) and would have a Project Unit with a small staff (about seven), consisting of an account- ant, an administrative assistant, secretaries and clerks. The Executive Director would be particularly concerned with administrative, technical, financial and economic aspects of the Seeds Project. He would be the regular channel of all project financial transactions between NSC, the executing participating entities, BNF, and the Bank. He would see that the necessary approvals were obtained and that project funds were properly disbursed. His duties and responsibilities are further detailed in Annex 3, and the Initial Implementation Schedule is in Annex 6. 4.03 A Project Unit would be established and its Executive Director would be appointed by the Government (MAG), on the recommendation of the NSC, who would select a qualified candidate in consultation with the Bank. Assurances were obtained at negotiations to this effect. The appointment of the Executive Director would be a condition of effectiveness. B. National Development Bank 4.04 BNF would participate in the project by serving as fiduciary agent on behalf of the borrower for channeling the loan funds to participating enti- ties. The Government would enter into an agreement with BNF, under terms and  - 14 - conditions satisfactory to the Bank, in which procedures and regulations governing BNF disbursements for project investment costs and withdrawals for reimbursements from the Bank loan would be set out. The signing of the agree- ment, satisfactory to the Bank, between the Government and BNF would be a condition of effectiveness. C. Executing Participating Entities 4.05 The entities executing operations financed under the project would be INIAP, EMS and DCS. BNF and private banks would not be provided with project funds, but would participate indirectly by financing out of their own resources short-term credit to EMS and the credit needs of seed and crop pro- ducers (para 3.07). Assurances were obtained at negotiations that BNF would make adequate provisions for the credit requirements of such producers, of seed growers and EMS, as well as make the purchase of certified seed a condi- tion of production loans to farners (para 2.11). INIAP's present organization is capable of absorbing project activities in breeder's seed research and seed multiplication development with minimum additional assistance, which would be provided under the project by short-term consultants (para 3.11). INIAP would also be allotted fellowships for specialized staff training overseas. Local training of technicians and seed growers would be conducted at INIAP research stations. Chart 1 of Annex 2 shows the INIAP organization. EMS would manage the three new certified seed processing plants to be financed under the project. The present staff, assisted by the consultants to be con- tracted with project funds (para 3.11), would be sufficient for the initial year. Besides additional local trainirng, the project provides for foreign fellowships for the EMS staff in the fields of seed production, processing and storage, and quality control. Chart 2 of Annex 2 shows the EMS organization. The DCS is also well staffed for the initial year, but additional personnel would be provided for Year 2 of the project, and also fellowships would be financed for overseas training in field inspection techniques, seed testing, seed pathology, and seed certification works. Chart 3 of Annex 2 shows the DCS organization. D. Accounts and Audits 4.06 Separate project accounts would be established by BNF and by the participating entities receiving project funds. BNF accounts are subject to internal audits, and the Superintendence of Banks does the external auditing, which would be acceptable to the Bank. EMS, however, operates under private commercial legislation. An independent firm, acceptable to the Bank, would therefore be required to audit accounts. Project contributions as Government grants to NSC, INIAP and DCS would be reflected in BNF's project accounts in the case of foreign exchange payments, and local cost contributions would be part of the MAG annual budget auelited by the General Controller of the Govern- ment. EMS accounts would be mairntained so as to reflect, in accordance with  - 15 - sound commercial accounting practices, its entire operations and financial condition. Aesurances were obtained during negotiations that these institu- tions would: (a) establish and maintain such accounts, (b) have the above accounts audited annually by independent auditors acceptable to the Bank, and (c) send audited BNF project accounts and EMS accounts and their audit reports to the Bank within four months after the close of each fiscal year. E. Monitoring and Key Indicators 4.07 The NSC would be responsible for establishing and maintaining a system, acceptable to the Bank, for monitoring the impact of the proposed project and the adequacy of certified seed supplies to meet the farmers' needs for such certified seeds. Under this system, it is envisaged that DCS would be required to assemble information each season from a sample of repre- sentative farms and from other sections of MAG relating to the area sown with certified seed and the yields obtained using certified seed. Projected technical coefficients are given in Annex 2. Assurances were obtained at negotiations that a monitoring system acceptable to the Bank would be established by the NSC, and submitted to the Bank within a period of 12 months. V. SEEDS PRICING AND FINANCIAL PROJECTIONS A. Seeds Pricing 5.01 Under the project there would continue to be three sets of prices for seed, one for registered seed produced and processed by INIAP, one for certified seed produced by contract seed growers for EMS, and one for the processed certified seed sold by EMS to farmers (Annex 7 Tables 1 and 2). INIAP-Registered Seed and Contract Growers 5.02 The price for registered seed, as set by INIAP, taking into account the production and processing, would be 5% to 30% higher than prices projected for certified seed. However, registered seed is planted only by the certi- fied seed growers, and, as shown in Annex 8, Tables 1 to 4, its cost has little effect on total certified seed production costs. Certified seed produced by contract growers would be priced at the commercial grain level at the time of harvest, plus premiums ranging from a minimum of 15% to a maximum of 30%. The Annex 8 tables also show that a 15% premium for certified seed produced by contract growers would permit returns of at least 30% on the marginal investments that have to be made by farmers to produce certified seed, which would make seed production sufficiently profitable to be attract- ive. Rice seed now brings a premium of 30% over the commercial price, which seems unnecessarily high, but it is in line with the present price policy.  -16- EM'S Certified Seed 5.03 EMS prices for some certified seed (after dockage, 1/ processing, treatment and packaging) would have to be increased by about 12% over current prices to cover all costs and still allow EMS a satisfactory rate of return on its investments without any sort of subsidy. Current prices have been determined on the basis of subsidized short-term credit for seed stocks and other operating costs. They do not include a return on investments consist- ing of the old processing facilities transferred to EMS from MAG. Projected prices for EMS cerSified seed (Annex 7) would represent differences of about 65% to 75% over the prevailing grain market prices for wheat, soybeans and beans; 90% to 100% over barley, soft corn, sesame, and peanuts; and 210% to 230% for rice and hard corn. T'he wide range is due partly to the different amounts of dockage, which range from 15% to 20% for wheat and rice seed to 60% for hard corn seed. The prices for pasture seeds are based on current prices for imported seeds. All prices are established at distribution centers and include transportation costs to these points (Annex 9, Tables 1 and 2). 5.04 The yield increases per hectare that a farmer could expect to obtain by switching to certifie,l seed (Annex 2, Table 6) while making no other change in his traditional production practices indicate that, except in the case of barley, certifiedl seed prices could be increased substantially and still remain a very attract:Lve investment to farmers (Annex 7, Table 3). Assurances were obtained at negotiations that an annual price review would be made by the National Seed Cotncil (NSC) in connection with its function of monitoring the impact of the project, which report would be assessed by the Minister of Agriculture. Assurances were obtained also that, in the light of the said price reviews the Government would effect the necessary adjustments in the prices paid by farmers for certified seeds supplied by EMS and adopt other measures necessary to: (a) enable EMS to have an annual rate of return of not less than 10% on its net assets, and (b) ensure that farmers would have the necessary incentive to utilize certified seeds. B. Financial Projections Contract Seed Growers 5.05 Contract seed growers would require no long-term investments beyond those they have already made for the production of commercial grain. They would, however, have higher production costs per hectare for certified seed growing due to intensive land preparation, more agro-chemicals, higher cost of basic seed and more labor than for commercial grain production, but reve- nues would be higher as a result of higher yields and higher prices paid for certified seed, including dockage. Annex 8 shows that, for all crops under 1/ Discarded seeds not acceptable undertified seed standards.  - 17 - the project, the revenues obtained by contract growers from the sale of seeds exceed the costs by amounts sufficient to make seed growing under contract an attractive business. Seed Corporation (EMS) 5.06 EMS (para. 2.10) would account for over 60% of total project costs, mainly for investments related to the construction of its three processing plants, and it would be the only entity that would receive project funds on loan. Its repayment capacity would be related to its revenues from the sale of processed certified seed and from the sale of dockage resulting from the seed purchased from contract growers. Revenues from the sale of seeds have been estimated assuming a 12% increase over existing sale prices. Based on these assumptions and the projected volume of certified seed sales, the financial rate of return on EMS investments would be about 12% (Annex 9). Since the intention is that EMS' operations be on a commercial basis, seed price projections and financial forecasts would be prepared and updated annually. Not less than two months before the start of each financial year, the forecasts would be reviewed by its directors in conjunction with the latest available accounts. In making its review, EMS would take note of the rate of return on capital employed. Assurances were obtained at negotia- tions that EMS would make these financial reviews. 5.07 The projected cash flow for EMS, given in Annex 9, shows that the Corporation would be financially viable to receive the proceeds from the Bank loan channeled to it through the Government, to be repaid in 12 years, including four years of grace. Interest has been set at 9% per annum, which is the prevailing rate in Ecuador for this type of loan. Short-term credit for the seed stocks and operating costs, which would be provided by BNF, is set at 9% interest. This is the interest rate applied to all agricultural loans in Ecuador, except that, in the case of Bank Loan 222-EC, sub-loans in excess of US$25,000 equivalent carry a 12% interest rate. The 9% although negative in the light of last year's rate of inflation, constitutes a substantial increase over the 1% rate charged to EMS by the BNF until now. The Government favors the 9% rate so as to make seeds available at moderate prices. VI. BENEFITS AND JUSTIFICATION 6.01 The main benefits from the proposed Seed Project would be the higher crop yields that a substantial number of farmers would obtain from the use of certified seed. Annex 2, Table 6, details selected technical co- efficients under the project and shows estimated yield increases for project crops attributable to the use of certified seed alone, assuming that the farmer does not change his cultural practices. These increases range from 12% in the case of soybeans, to 20% in the cases of wheat, barley, and corn, and 25% in the case of rice. The use of fertilizers, which the Government intends to promote among farmers benefitting from certified seed, would add substantially to these projected increased yields.  - 18 - 6.02 The incremental production attributable only to the use of the additional 5,400 tons of certified seed to be marketed by EMS in Year 5 of the project, would be of the order of 25,000 tons annually, valued at US$4.3 million (S/ 108 million). The total amount of certified seed to be marketed by Year 5, amounting to some 8,l300 tons (para 3.01), would be sufficient to sow about 152,000 ha (31% of the about 490,000 ha expected to be under proj- ect crops in that year). This woould compare to 68,000 ha (14%) sown with certified seed produced without the project. The incremental production would be directly responsible for helping to reduce imports of wheat and oilseeds and indirectly respons:Lble for lowering imports of corn. It would also increase the exportable surplus of rice. 6.03 So far, only progressive farmers and cooperatives of rice producers have profited from the use of certified seed produced in the country (hard corn, rice, wheat and barley). Under the project, however, seed would be made available for the first time, through 25 seeds outlets, for crops grown mainly by small farmers, such as soft corn and beans. Certified seeds for oil crops would also be produced for the first time. Furthermore, it is ex- pected that the availability of seeds for typical small farmers' crops and the experience already gained would make it possible to introduce the use of certified seed to a great number of small farmers quickly so that they could reap the benefits in a relatively short time. Planting this seed would jus- tify the use of fertilizer and would maximize the effect of extension and credit. 6.04 It is unlikely that th,e project would adversely alter the ecology of the areas in any way. The use of organo-mercurial seed dressing in seed processing has been prohibited in Ecuador, due to its possible harmful effects, so it would not be used under the project. 6.C5 Using the cost and benefit assumptions of this report the economic rate of return of the project would be of about 48%, but if benefits were to be reduced by 50% the economic rate of return would still be satisfactory at 16.5%, and it would also remain high when various other alternatives assumptions are tested, as shown in Annex 10. The project benefit stream was obtained by subtracting the increased seed expenditures generated by the project from the gross value of the increased production. The project cost streams include the investments (exclusive of price contingencies) and the operating costs of the entities financed under the project (also see Annex 10). VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 During negotiations, assurances were obtained from the Government that: (a) Within a year of effectiveness the additional 150 ha of land needed by INIAP would be acquired (para 3.06);  - 19 - (b) all contracts in excess of US$100,000, technical specifica- tions, draft tender documents, bidding invitation documents, and bid evaluations would be approved by the Project Technical Adviser prior to submitting them to the NSC for its approval (para 3.17); (c) the ProJect Unit would be established and the Executive Director would be appointed on the recommendation of NSC, who would select a qualified candidate in consultation with the Bank (para 4.03); (d) BNF would make adequate provisions for the credit requirements of crop producers, seed growers and EMS as well as make the purchase of certified seed a condition of production loans to farmers (para 4.05); (e) BNF and participating institutions would: (i) establish and maintain separate project accounts, (ii) have such accounts audited annually by independent auditors acceptable to the Bank, and (iii) send audited BNF project accounts and EMS accounts and their audit reports to the Bank within four months after the close of each fiscal year (para 4.06); (f) NSC would establish a monitoring system, acceptable to the Bank, to measure project impact and the adequacy of certified seeds supplies to meet the farmers' needs, and submit it to the Bank within a period of 12 months after effectiveness (para 4.07); and (g) unless the Bank otherwise agrees, the Borrower would, from time to time, adjust the prices paid by farmers for certified seed supplied by EMS and adopt other measures necessary in order to: (a) enable EMS to achieve in Fiscal Year 1977 and thereafter a rate of return of not less than 10% on its net assets, and (b) ensure that the farmers will have the necessary incentive to utilize certified seeds. To these effects it was also agreed: (A) that EMS would review on a yearly basis its financial results for the previous fiscal year as well as make financial forecasts for the following fiscal year, and (B) that NSC would review the prices paid by farmers for certified seed, at least once a year, obtaining MAG's assessment of such review (paras 5.04 and 5.06). 7.02 Conditions of effectiveness of the loan would be that: (a) the NSC has been set up in accordance with the guidelines shown in Annex 3 (para 3.04); (b) the Executive Director had been appointed (para 4.03); and  - 20 - (c) BNF and the Government has signed an agreement, satisfactory to the Bank, setting out disbursement and reimbursement procedures and regulations (para 4.04). 7.03 It is recommended that retroactive financing not to exceed US$100,000 be allowed to cover costs of consultants and other technical services incurred after January 30, 1976 (para 3.18). 7.04 With the indicated assurances obtained, the project is suitable for a Bank loan of US$3 million, for a term of 15 years, including four years of grace.  ANNEX 1 Page 1 ECUADOR SEEDS PROJECT The Agricultural Sector Introduction 1. Ecuador's economic position has changed substantially since 1972, due to the recent development of petroleum production and exports, which has had a dramatic effect on the country's internal and external financial position and has accelerated the rate of economic growth. A basic question now is how fully will the country be able to utilize its considerably increased financial resources to strengthen its economic structure. Only by expanding, diversify- ing and raising the productivity of the non-petroleum sector can Ecuador create the necessary opportunities for employment of its rapidly growing labor force and raise the living standards of th2 broad mass of the population. In constant terms, the Gross Domestic Product (GDP) at factor cost increased on average by 5% annually from 1969 to 1971, by 7% in 1972, by 13% in 1973 and by about 10% in 1974. The rapid rate of economic growth in recent years has been accompanied by price inflation, particularly in 1974; however, the rate of inflation declined from 28% (12 months ending March 1974) to 14% (12 months ending June 1975). Agriculture's Role in the Economy 2. Agriculture, including forestry and fisheries, remains the most important sector of the Ecuadorian economy, although its contribution to the GDP declined from 33% in 1965 to 22% (preliminary) in 1974. The sector employs over 55% of the labor force and, up to 1971, provided over 85% of export earning; relative participation in the total export value then declined rapidly as the value of petroleum exports increased. Preliminary figures for 1974, based on export permits totalling US$1,050 million - 93% more than 1973 - show that petroleum exports amounted to US$615 million (59% of total), products of agricultural origin, US$414 million (39% of total), and manu- factured goods, not of agricultural origin, US$21 million (2% of total). Import permits issued in 1974 totalled US$958 million - 80% higher than for 1973. There remains considerable uncertainty as to the total value of im- ports of food items and inputs for the agricultural sector, but, these categories probably amounted to between 20 and 25% of the total value of imports in 1974. 3. A recent study by the Center for Demographic Analysis has shown that of the total population of 6.5 million (1974), 5.4 million fall within the category "low economic status and social prestige" and, of these, 3.4 million live in rural areas. According to Bank standards 1/ in 1974, between 50 and 66% of the rural population (1.5 to 2.5 million) could be described as "absolutely poor" and 75% (2.8 million) were, by Bank standards, "relatively poor." 1/ Report No. 588 Rural Development and Bank Policies: A Progress Report (December 2, 1974)  ANNEX 1 Page 2 4. Agricultural production in Ecuador has neither kept up with the 3.4% increase (1960-73) in population nor has it been able to satisfy the increased demand from the sector which has benefitted from the higher real income resulting from the rapid development of the petroleum industry. In recognition of the importance of increasing the food supply for urban areas and checking the spread of poverty in rural areas, the Government designated 1974 as the "Year of Agriculture." The Government has devoted particular attention to encouraging production through raising minimum prices, removing import duties on agricultural inputs and increasing the flow of credit to the agricultural sector. In spite of these incentives, the performance of the sector in 1974 was disappointing, although it appears that the previous down- ward trend was halted (Table 1). Factors which are believed to have limited the expansion of agricultural production during 1974 include the high cost and shortages of inputs, particularly fertilizers; uncertainties concerning the implementation of the 1973 Agrarian Reform Law; dissatisfaction with farm-gate prices; the greater attraction of investment in urban properties and commercial enterprises and inadequate marketing and storage facilities. Natural Resources 5. Ecuador covers about 27 million ha, of which the eastern 49% lies in the lowlands of the Amazon basin --the Oriente-- and the remainder is equally divided between the mountainous highlands of the Andes --the Sierra-- and the Pacific coastal lowlands --the Costa. The rural population of some 4 million is almost evenly divided between the Sierra and the Costa, but few people live in the Oriente. 6. As shown below, the riain potential for increasing the area under crops lies in the Costa while an extensive area of the Oriente could probably eventually be developed under grassland. In the Sierra, there is a much more limited potential for incorporating additional land for crop or livestock pro- duction. Costa Sierra Oriente Total ----------- million ha ----------------- Grassland Actual 1.2 1.6 0.4 3.2 Potential 1.2 2.0 3.8 7.0 Arable land Actual 0.8 0.7 Negligible 1.5 Potential 1.8 1.1 0.8 3.7 Total Actual 2.0 2.3 0.4 4.7 Potential 3.0 3.1 4.6 10.7  ANNEX 1 Page 3 7. High rainfall areas, receiving over 5,000 mm a year, are located in the northern part of the Costa and in the piedmont section of the Oriente between Puyo and Tena. Most of the farming areas receive between 1,000 and 2,000 mm of 7iin annually (Map, IBRD 11860), which is generally concentrated in the early part of the year. In the Costa and parts of the Sierra, second crops are grown often with irrigation during the mid-year sumer season. The wide range of altitudes and broken terrain of the Sierra produce a multi- tude of climatic conditions throughout the farming areas. Soil fertility and physical conditions also vary widely, from young volcanic ash to deep well- developed soils of high agricultural potential. The diversity of micro- climatic and soil conditions in Ecuador make it necessary to develop a range for varieties of the principal crops and pasture plants to suit the various ecological micro-regions within the main areas of production. Farm Sizes and Rural Population Density 8. The National Agricultural Survey of 1968 included 633,000 holdings on some 7 million ha out of the 11 million ha in the country believed to be suitable for crop or livestock production. At the time of the survey, 74% of the holdings were less than 5 ha and occupied 10% of the area, while farms over 100 ha accounted for 2% of the total number and 47X of the total area (Table 2). During the 10 years in which there has been a Government program on agrarian reform (1964-74), the form of land tenure has been changed on about 0.2 million ha, and 0.8 million ha of previously unexploited land has been colonized under official schemes. These two types of agrarian reform have affected nearly 60,000 families, or rather less than 10% of the number of holdings covered by the 1968 survey. 9. It is probable that some improvement in agricultural productivity could be achieved through the more rational allocation of land, but this alone could not raise production sufficiently to meet the national require- ments for food and other products of the land. In 1974 the rural population density averaged up to eight persons per ha of cultivated land (Tungurahua Province); in the Sierra, it averaged three persons and in the Costa two persons per ha. Even if all suitable land were to be incorporated into farms, these man-land ratios might be reduced to two persons per ha in the Sierra and one person per ha in the Costa assuming the rural population remained at the 1974 level. It is evident therefore that the productivity per unit of land must be raised substantially if total agricultural production is to be raised significantly. Intensification of Production 10. The Government has recently promoted an ambitious mechanization program, and, by abolishing import duties on agricultural inputs, has encouraged the importation of tractors and farm machinery, fertilizers and plant protection chemicals. This has lead to a proliferation of tractor brands and the accumulation of fertilizer imported at 1974 prices, which were considerably higher than prevailing a year later; however, these difficulties were in the course of being resolved in July 1975.  ANNEX 1 Page 4 Agricultural Credit - Banco Nacional de Fomento 11. The main channel for credit to the agricultural sector has been through the Banco Nacional de Fomento (BNF), which has very substantially increased its lending to the sector from SI 579 million (US$23 million) in 1972 to S/ 1,129 million (US$45 million) in 1973 and then S1 2,621 million (US$105 million) in 1974 (Table 3). The number of loans made has also increased sharply, from 26,000 (1973) to 41,000 (1974) (Table 4), although the latter is only about 6X of the number of farm holdings enumerated in the 1968 survey. The average loan size and loan amount per ha increased considerably between 1973 and 1974, as shown below: Average Loan Size Loan per ha Year S/ US$ S/ US$S Crops included in the 1973 39,003 1,560 2,465 99 proposed project 1974 61,517 2,461 4,831 193 All crops 1973 36,586 1,463 2,853 114 1974 56,095 2,244 5,292 212 Pasture 1973 40,196 1,608 - - 1974 65,995 2,640 - - Agricultural Credit - "Fondos Financieros" 12. On July 14, 1975, the Monetary Council (Junta Monetaria) issued Regulation 781, which consolidates and amends all previous Regulations govern- ing Development Funds scheme (Fondos Financieros) established as part of Central Bank (CB) in 1973 to promote the development of crops, livestock, artisans, small industries, fisheries and tourism. The Development Funds are formed by the resources of private Banks; credit lines of the CB; a Special Fund of the Government for the development of certain semi-permanent and permanent crops, the purchase of breeding cattle and fixed investments neces- sary for beef and dairy production; and revenue from the sale of Development Bonds by the Central Bank to private banks, which, with effect from August 31, 1975. The Development Funds have also received disbursements from external loans and credits from the US Agency for International Development. 13. Regulation 781 fixes 9% as the maximum interest rate for all opera- tions of the Development Funds, with the exception of the livestock develop- ment program, which is partially financed by Credit 222-EC. In only this case, 12% may be charged for loans of over US$25,000 equivalent, unless the sub-borrowers are members of cooperative societies established and approved by the Land Reform and Colonization Institute (IERAC). The maximum terms of loans which may be financed under the provisions of Regulation 781 are as follows:  ANNEX 1 Page 5 (a) seasonal, short-term crops, 360 days; (b) the purchase of inputs and young stock for livestock production, working capital for artisans, small in- dustries, fisheries and tourism, two years; (c) semi-permanent crops, five years; (d) the formation and acquisition of fixed assets, seven years; and (e) long-term crops, 10 years. The Central Bank will re-discount at 3% interest up to 100% of the loans, but for loans over two years, it will provide re-discount facilities for only the final two years of their terms. 14. Additional details on the provisions of the Development Funds for the agricultural sector are given by Regulation 781. An annex lists crops for which loans may be rediscounted at the Central Bank and includes all the cereal and grain legume crops that are proposed for seed production under the project, and in another annex for the livestock sub-sector, there is provision for financing the sowing and improvement of pastures. The limit for redis- counting was set at S/ 1,000 million (US$40 million) for crop production and S/ 180 million (US$7.2 million) for livestock production. Agricultural Research 15. All official agricultural research in Ecuador is the responsibility of the Instituto Nacional de Investigaciones Agropecuarias (INIAP), which was created in 1959 although it did not commence functioning until January 1962. The main station, "Santa Catalina," was established in 1962, 14 km south of Quito, and, in the same year, a sub-station was opened 12 km south of Porto- viejo. In the following year, INIAP took over from the Inter-American Cooperative Service the station located 14 km south-east of Pichilingue established in the early 60ts and it also set up a sub-station 38 km west of Santo Domingo. Work started in 1969 on the Boliche sub-station 26 km east of Guayaquil and it was opened in 1971. INIAP has evolved as an institution of major importance in Ecuador and has attracted the support of the Rockefeller Foundation and bilateral and international agencies. In 1974 the professional staff totalled 190 engaged in plant breeding, agronomic and plant protection research, studying the feeding and management of livestock and research into agricultural economies. Thirteen years of research have provided a good tech- nical basis for practical advice on increasing agricultural productivity, and, during this period, INIAP has developed and tested improved varieties of mDst of the major crops which should be included in the project, although intensified research should be devoted to produce improved varieties of soft corn, beans and pasture species.  ANNEX 1 Page 6 Extension Services 16. The Ministry of Agriculture and Livestock (MAG) includes Bureaus (Direcciones) for Crop Development, Livestock Development, Forestry, Market- ing and Rural Development (see Chart). Coordination of the various types of advice given is not yet satisfactory and many small-scale farmers and farmers distant from provincial capitals still do not have access to technical advice on farm management. However, for the proposed seed project, the following existing development "Programs" should be capable of ensuring that the limited objectives of the project are achieved within five years. Programs of the Bureau for Crop Development Crops Promoted Rice and hard corn Rice and hard corn Temperate grains and forage crops Wheat, barley, soft corn and highland pastures Agricultural diversificatLon Peanuts, soybeans and sesame Pulses Beans Programs of the Bureau of Livestock Development Pastures Promoted Agricultural Development Funds Highland and lowland pastures (Credit 222-EC) Animal nutrition service Highland and lowland pastures In addition, INIAP runs regular courses for farm managers and all types of agricultural agents. These courses will play an important part in disseminat- ing information on the advantages of using certified seed of improved varieties of crops and pasture species. Agricultural Prices 17. The lack of a consistent price policy for the main agricultural products has been an important constraint to agricultural development. The Government recognizes this fact and has taken steps to improve the situation by forming two entities with special responsibilities in this field. A Price Supervision Agency (Superintendencia de Precios-SP) has been established to set minimum reference prices and to regulate price margins in the marketing channels for all important products. A National Agricultural Storage and Marketing Corporation (Empresa Nacional de Almacenamiento y Comercializacion Agropecuaria-ENAC) has been created to stabilize the price of the main agri- cultural products by intervening in the market, however so far it has not been very effective as it lacks sufficient storage facilities and experience  ANNEX 1 Page 7 in marketing. These new agencies provide a framework for the implementation of price policies, but further improvement is necessary in the determination of the policLes and in particular the relationship of domestic to inter- national prices. For example, the current domestic reference minimum price for soybeans in S/ 520 per quintal (US$457 per ton) while the international indicator price for Jan-June 1975 was US$225. 1/ Since oilseed crushers can import soybeans freely, the actual farm-gate price is considerably below the official minimum price. Considerable improvements have been made recently to the wheat price structure and, in this case, the farm-gate price is prob- ably close to the official reference price. For the 1974/75 season, the wheat price to producers was S/ 250/quintal (US$220/ton); S/ 200 were payable in cash, S/ 30 in a voucher valid for the purchase of fertilizer and S/ 20 in a voucher valid for the purchase of certified seed. The Ecuadorian authorities are considering whether or not this type of payment might be used for other crops to promote increased production through the more wide-spread use of fertilizers and improved seed. Export Crops 18. Bananas continue to be the most important export crops earning US$113.5 million from 1,357,000 tons exported during 1974 (US$126.1 million from 1,370,000 tons in 1973). The main production area has moved progressively from the northern and central parts of the Costa to the eastern parts of the Provinces of Guayas and Los Rios as the Gros Michel variety has been replaced by the Panama-disease resistant Cavendish variety. Other farming activities are required in the former main areas of production. Cocoa exports in 1974 brought in a record US$102.9 million (US$27.1 million in 1973) since an unusually large crop of about 90,000 tons coincided with exceptionally high world market prices. More intensive attention is required to rehabilitate and replant cocoa trees in the best areas of the Costa and to improve on-farm processing and the internal marketing system. Coffee export value in 1974 was US$67.4 million (US$66.7 million in 1973). This crop is grown in parts of most Provinces, but principally in the Costa. As in the case of cocoa, attention is required to improve the productivity of coffee, which is a crop of importance to many small-scale farmers. Sugar cane production is estimated to total 5 to 6 million tons a year, but much of this is used for the produc- tion of panela 2/ and alcohol. For the May 1974 to April 1975 season, centri- fugal sugar production from the seven main mills totalled about 305,000 tons (270,000 tons in 1973/74). The value of exports during 1973 was US$12.1 million but this rose to US$39.5 million in 1974, despite the fact that Ecuador was able to fill only about two-thirds of the import quota assigned by the United States (about 60,000 tons out of 96,754 tons). Castor beans are produced almost exclusively in Manabi Province of the Costa in association with corn, peanuts, cotton, cassava and coffee. In 1974, exports totalled 19,331 tons valued at US$5.8 million, while production was about 39,000 1/ US cif Rotterdam. 2/ Non-centrifugal sugar.  ANNEX 1 Page 8 tons. Abaca (Manila hemp) production rose from 6,557 tons in 1973 to about 9,500 tons in 1974. Exports of vegetable fibers, principally 7,000 tons of abaca, brought in US$5.7 million in 1974. Pyrethrum production in the Sierra has declined from 612 tons of dry flowers in 1973 to only 338 tons in 1974. Production in 1968 amounted tc about 4,000 tons of dry flowers but since then production has fallen rapidly, although world demand for pyrethrins has recently recovered. Other export items from the agricultural sector include annatto seed (US$0.3 million in 1974), vegetable ivory (US$0.3 million in 1974), hides and skins (US$0.1 in 1974) and also smaller values of tea, honey- dew melons, mushrooms, sun flowers, and woven "toquilla" straw (Panama hats), which, together, in 1974, brought in an additional US$4.3 million. Forestry products such as balsa bamboo and other woods, earned less than US$0.2 million in 1974, but the value of exports from the fisheries sub-sector totalled US$17.1 million (US$30.0 million in 1973). With the exception of tea and bananas, and possibly Panama hats, the prospects are favorable for increasing exports of all items mentioned above. Domestic Consumption Products 19. The domestic requirements for wheat in 1974 were considered by MAG to have totalled about 225,000 tons; however, the supply amounted to no more than 205,000 tons made up of 55,000 tons of national production and about 155,000 tons imported at a total cost of US$35.5 million (US$229/ton). In the national development plan published in December 1972, 1/ it was projected that domestic production would rise to 129,000 tons by 1977. In the proposed seed project, it has been assumed that the area under wheat will not increase in the immediate future because production costs are high and, at current prices and yields, the profit margin is not sufficiently attractive to bring new areas into production. Existing wheat farmers are expected to benefit through using improved seed; and, over the five-years of the project, it is expected that the national average yield will increase from 936 kg/ha to nearly 1,100 kg/ha. The area under barley has steadily declined, from an average of 136,000 ha (1962-70) to 98,000 ha (1971-74). The area harvested in 1974 totalled 61,000 ha producing about 56,000 tons (918 kg/ha). In addition, imports of 6,300 tons of malting barley a year were required by the brewing industry. Approximately two-thirds of the total supply of barley is used for human consumption and the balance goes for stock feed (3,000 tons), brewing, seeds and waste. 20. INIAP has ready for release a new variety of two-row barley it considers suitable for brewing; however, the local beer industry maintains that it would prefer to continue to import barley from Chile and Colombia. 1/ Plan Integral de Transformacion y de Desarrollo 1973-77. Junta Nacional de Planificacion y Coordinacion Economica.  ANNEX 1 Page 9 About half the area of wheat and of barley is grown on farms of less than 10 ha and only 22% to 26% of these crops are grown on farms of over 100 ha, which constitute only 1% of the number of growers (see below): Less than 10 ha 10 to 99.9 ha 100 ha and Over % of X of % of % of X of % of Harvested Number of Harvested Number of Harvested Number of Farm Size Area Growers Areas Growers Areas Growers Wheat 46.2 84.6 32.3 14.3 21.5 1.1 Barley 54.1 90.4 20.0 8.6 25.9 1.0 21. Rice production has fluctuated considerably from year to year in response to changes in prices, land tenure policies and climatic variations. The 1974 crop totalled 152,000 tons of milled rice, which was the highest quantity recorded for one year, but a record amount of about 21,000 tons of all forms of rice was imported during 1974 at a cost of US$9.1 million. Assuming that there was no significant change in stocks, the apparent con- sumption in 1974 was 172,000 tons. There can be no doubt that this quantity could be produced in Ecuador, which should also be able in the future to regularly export significant quantities of rice. The main areas for develop- ment are in the Guayas River Basin. Grain handling and storage facilities require considerable expansion and improvement. 22. According to the 1968 survey, 41% of the rice area was on holdings of over 100 ha and only 24% was on small farms - under 10 ha. Since that time, the relative importance of small-scale farmers has increased, but since the 1974 Agricultural Census results are not yet published, no more recent information is available. 23. During 1974, about 62,000 tons of edible fats and oils were consumed in Ecuador. In addition, about 24,000 tons of soap were produced in the same year. Approximately 97,600 tons of edible vegetable oilseeds were processed in 1974 (71,400 tons in 1973). The production of oil was as follows:  ANNEX 1 Page 10 1973 1974 Preliminary 1975 Estimate Field Crude Field Crude Field Crude Production Oil Production Oil Production Oil Palm fruit bunches 51.0 - 68.0 - 88.0 - Palm oil - 7.8 - 11.0 - 14.0 Palm kernals 5.0 - 2.7 - 3.7 - Palm kernal oil - 2.2 - 1.3 - 1.8 Cottonseed 8.2 - 14.5 - 18.0 - Cottonseed oil - 1.4 - 2.5 - 3.0 Sesame 1.5 - 1.7 - 1.7 - Sesame oil - 0.7 - 0.8 - 0.8 Peanuts 0.5 - 1.5 - 1.5 - Peanut oil - 0.2 - 0.6 - 0.6 Soybean 3.7 - 8.2 - 13.7 - Soybean oil - 0.5 - 1.5 - 2.5 Fish oil - 0.7 - 2.2 - 2.5 Other oilseeds 1.5 - 1.0 - 1.0 - Other oils - 0.7 - 0.5 - 0.5 Totals 71.4 14.5 97.6 3.4 127.6 25.7 Imports of edible oils in 1974 amounted to about 15,000 tons, of which 11,300 tons was soybean oil costing US$8.6 million. Other imports of vegetable oils and greases included 7,500 tons of choice white grease, 1,000 tons of Paraguayan palm oil and 3,000 tons of inedible tallow for the manufacture of soap. The balance of the requirements for domestic consumption and the manufacture of soap are presumed to have been derived from the livestock sec- tor, mainly in the form of butter and lard. There has been a rapid increase in the production of oil from African palms and recently the production of soybeans has begun to increase and contribute significantly to the local supply of edible oil. 24. Cotton has been an important import crop but, in contrast, the 1974 production was equal, and, in the case of long staple cotton, in excess of domestic requirements. The 1974 harvest totalled almost 42,000 tons of seed cotton compared with under 20,000 tons in 1973. This sharp increase was also of importance in increasing the local production of edible oils. 25. Tobacco production in 1974 recovered somewhat from the depressed levels of 1972 and 1973 and amounted to about 2,000 tons. This was mainly the black native variety, but also included some flue-cured, burley and cigar leaf tobacco. Imports of manufacturing tobacco increased to 635 tons in 1974 (481 tons in 1973) and, in addition, 97 million packs of cigarettes were im- ported (78.5 million packs in 1973) and approximately 80.5 million packs were manufactured in Ecuador during the year.  ANNEX I Page 11 Crop and Livestock Products for Domestic Consumption 26. There are major discrepancies between various estimates of corn production in Ecuador. The data in Table 1 are from the Bureau of Planning of MAG, but they differ considerably from production estimates of the appro- priate programs of MAG, as shown below: Bureau of Planning Corn Program Ha Tons Ha Tons Soft Corn 109,615 76,252 61,960 36,935 Hard corn 161,640 185,628 78,826 78,769 All corn 271,255 261,880 138,786 115,705 For the purposes of the proposed project, it has been assumed that the esti- mates of the specialized programs are more accurate than those of the Bureau of Planning of MAG. Seed requirements have been calculated with reference to a total 75,000 ha a year of soft corn and two sowings of hard corn a year totalling 85,000 ha. Soft corn is grown exclusively in the highlands of the Sierra, mostly (85%) on farms of less than 10 ha although in 1974 about 7% of the crop was grown on farms of over 100 ha. Hard corn is grown mainly in the Costa and the lower slopes of the Sierra. According to the MAG program, 7,323 large farms, 8,868 individual small farms and members of 88 cooperative societies produced hard corn in 1974. 27. Pulses play an important part in the farming system and the diet of the inhabitants of the Sierra (see bleow): 1973 1974 Ha Production Ha Production tons tons Beans 66,335 31,961 66,181 28,001 Broad beans 17,447 12,352 14,850 11,652 Peas 15,506 8,961 14,460 9,384 Lentils 3,580 1,541 3,700 2,275 Edible lupins 2,260 685 2,041 723 Total 105,128 55,500 101,232 52,035 28. According to the MAG figures given above, the total production of pulses in 1974 was about 3,500 tons (6.2%) less than in 1973. The 1968 survey showed that 40% of the area of beans was grown on farms of less than 5 ha and 22% was on farms of over 100 ha, the balance of 38% being on farms of between 5 and 100 ha.  ANNEX 1 Page 12 29. Tubers and roots provide a major source of carbohydrates for domestic consumption; potatoes in particular play an important part in the farming sys- tem of the Sierra. 1973 1974 Ha Production, tons Ha Production, tons Cassava 54,111 741,265 48,895 837,666 Potatoes 43,573 539,198 39,138 503,340 Sweet potatoes 2,187 8,371 2,110 10,617 Total 99,871 1,288,834 90,143 1,351,623 30. The production of potatoes dropped by 6.7% between 1973 and 1974 as a consequence of adverse weather conditions and restrictions in the use of fertilizers by the commercial farms because of shortages and higher prices. Potato prices fluctuate sharply each year and until a proper system of storage has been developed, it is unlikely that production will expand sufficiently to assure the market of a regular supply throughout the year. The Inter- national Potato Center (Lima,-Peru) is cooperating with INIAP in a potato storage research project and has also provided funds for specialized train- ing in potato production and potato seed technology. The total budget for 1975 and 1976 is US$25,400. It is hoped that this work will lay the basis for the inclusion of "certified" potato seed production in the national seed project at a later date. Pastures and Livestock 31. According to the 1968 survey, there were 1.2 million ha sown or planted pastures in Ecuador at that time - 0.3 million ha in the Sierra 0.8 million in the Costa, and 0.1 million ha in the Oriente. In the Sierra, the most common species sown have been Italian and perennial rye grass (Lolium multiflorum) and (L. perenne) and white or red clovers (Trifolium repens L and T. pratense). Alfalfa (Medicago sativa) is usually grown in a pure stand. All upland pastures tend to be invaded by Kikuyu grass (Pennisetum clandestinum). In the lowlands of the Costa, Guinea grass (Panicum maximum Jacq.) is the most common type in. improved pastures, although elephant grass (Pennisetum purpureum) is also important. There has been only limited success with mixtures of grasses and legumes, but the perennial soybean (Glycine wightii) has been found to be a legume suitable for inclusion with Guinea grass. 32. Livestock statistics are not reliable but it is to be hoped that, when published, the 1974 agricultural census will provide a better basis for herd analysis and planning. The following information is derived from a report of the USDA-FAS, which accepts the projection made in 1973 by the JUNAPLA that the national herd of cattle is increasing annually by 2.5%.  ANNEX 1 Page 13 1973 1974 Total number of cattle ('000) 2,580 2,645 Gross annual increase % 15.39 15.64 Annual slaughter % 12.89 13.14 Net annual increase % 2.50 2.50 Per capita consumption of meat and offal kg 9.96 9.85 33. The above projections would imply that in 1974 meat and offal pro- duction totalled about 69,000 tons. During the same year, milk production is estimated to have been 279 million liters--equivalent to 43 liters per capita. Assuming the population growth rate for sheep at 26.2% and annual slaughter at 24.2%, the 1974 sheep population would have been about 2.06 million head, and, if the per capita consumption of mutton and lamb and offal continued at 1.2 kg, their total consumption would have been about 8,475 tons in 1974. The 1974 production estimate for clean wool was about 800 tons. The pig pop- ulation is reported by JUNAPLA to be increasing at 7.5% a year, which would indicate a total of 2.35 million head in 1974, of which approximately 42% would have been slaughtered. 34. The dairy industry, sheep and pigs are concentrated mainly in the Sierra while the main beef production areas lie in the Costa and the Oriente. December 23, 1975  ECUADOR SEEDS PROJECT Crop Areas, Yields and Production Average Average PRODUCTS UNITS 1966 1967 1968 1969 1970 1966-70 1971 1972 1973 1974 1971-1974 CEREALS 1. Barley Area/'OOO ha 143 144 135 126 134 136 120 119 93 61 98 Yield kg/ha - - - - - 618 - - - - 707 Production '000 t. 77 81 76 78 110 84 69 73 79 56 69 2a. Corn (soft) Area/'OOO ha - - - 215 211 213 241 250 124 110 181 Yield kg/ha - - - - - 728 - - - - 673 Production '000 t. - - - 141 168 155 140 171 100 76 122 2b. Corn (hard) Area/OOO ha - - - 77 80 79 111 102 141 162 129 Yield kg/ha - - - - - 1,165 - - - - 1,088 Production 'OOO t. - - - 81 102 92 121 101 153 186 14u 2. Corn (total) Area/'000 ha 267 364 255 292 291 294 352 352 265 272 310 Yield kg/ha - - - - - 697 - - - - 844 Production '000 t. 175 228 129 222 270 205 261 272 253 262 262 3. Rice (milled) Area/'OOO ha 1ll 114 112 92 87 103 57 91 85 103 84 Yield kg/ha - - - - 942 - - - 1,409 Production '000 t. Ill 111 65 83 117 97 82 105 134 152 118 4. Wheat Area/'000 ha 65 80 79 100 76 80 76 56 47 56 59 Yield kg/ha - - - - - 1,000 - - - - 936 Production '000 t. 63 79 83 94 81 80 68 51 45 55 55 FIBRES 5. Abaca Area/'OOO ha - - 2 2 2 2 3 7 7 5 >F Yield kg/ha - - - - - 2,000 - - - - 1,200 O F Production '000 t. - - 4 4 4 5 4 7 9 6 6. Cotton (seed Area/'000 ha 24 24 21 22 9 20 8 14 23 46 23 cotton) Yield kg/ha - - - - - 800 - - - - 934 4 Production '000 t. 18 16 14 24 8 16 11 12 20 42 21 Source: Ministry of Agriculture and Livestock, Quito: Estimacion de la superficie cosechada y de la produccion agricola del Ecuador 1962-1973 1974 September 8, 1975  ECUADOR SEEDS PROJECT Crop Areas, Yields and Production Average Average PRODUCT TNITS 1966 1967 1968 1969 1970 1966-70 1971 1972 1973 1974 1971-1974 TUBERS AND ROOTS 7. Cassava Area/'000 ha 28 27 27 35 35 30 37 41 54 49 45 Yield kg/ha - - - - - 10,633 - - - - 12.370 Production '000 t. 276 323 234 390 371 319 383 277 741 838 560 8. Potatoes Area/'000 ha 44 48 49 41 47 46 53 38 44 39 44 Yield kg/ha - - - - - 9,804 - - - - 12,620 Production '000 t. 347 399 511 457 542 451 681 473 539 503 549 0, Sweet Fotatoes Area/'000 ha 3 2 2 3 3 3 2 3 2 2 2 Yield kg/ha - - - - - 2,900 - - - - 3,900 Production '000 t. 8 8 7 11 10 9 7 9 8 11 9 PULSES 10. Beans Area/'000 ha 82 79 86 85 82 83 67 62 66 66 65 Yield kg/ha - - - - - 458 - - - - 444 Production '000 t. 36 38 35 38 41 38 30 26 32 28 29 11. Broad Beans Area/'000 ha 35 34 34 21 24 29 23 13 17 15 17 Yield kg/ha - - - - - 586 - - - - 706 Production '000 t. 21 20 20 11 15 17 15 9 12 12 12 12. Lentils Area/'000 ha 3 3 2 2 2 2 3 2 4 4 3 Yield kg/ha - - - - - 383 - - - - 390 Production '000 t. 1 1 1 1 1 1 1 1 2 .2 1 13. Lupins (edible) Area/'000 ha 3 3 3 3 4 3 3 3 2 2 2 Yield - - - - - 845 - - - - 553 Production '000 t. 3 2 3 1 3 3 2 2 1 1 1 14. Peas Area/'000 ha 31 31 41 23 30 31 23 17 16 14 18 m a Yield kg/ha - - - - - 581 - - - - 586 X Production '000 t. 18 18 22 11 21 18 14 9 9 9 10 0 Source: Ministry of Agriculture and Livestock, Quito: Estimacion de la superficie cosechada y de la produccion agricola del Ecuador 1962-19n September 8, 1975  ECULADC)R SEEDS PROJECTI Crop Areas, Yields and Production Average Average PRODUCT UNITS 1966 1967 1968 1969 1970 1966-70 1971 1972 1973 1974 1971- 1974 OIL SEEDS 15. African Palmi Area/'000 ha - _- - - 7 8 9 11 9 Yield kg/ha - - - - 1,629 Production '000 t. - - - - - - 12 15 13 17 14 16. Castor Beans Area/'000 ha 24 22 16 23 16 20 31 26 46 44 37 Yield kg/ha - - - - - 1,000 - - - - 1,014 Production '000 t. 25 23 9 24 17 20 35 23 52 39 37 17. Peanuits Area/'000 ha 15 12 14 6 6 11 10 12 15 19 14 Yield kg/ha - - - - - 711 - - - - 886 Production '000 t 12 0 6 5 7 10 11 13 17 13 18. Sesame Area/'000 ha 2 2 3 2 3 2 2 3 1 2 2 Yield kg/ha - - - - - 771 - - - - 830 Production '000 C. 2 1 2 2 2 2 2 2 1 2 2 19. Soybeans Area/'000 hi - - 1 1 1 1 1 1 1 3 1 Yield kg/ha - - - - - 948 - - - - 1,318 Production '000 t. - - 1 1 1 1 1 1 2 4 2 MISCELLANEOUS 20. Pyrethrum Area/'000 ha 8 9 9 4 3 7 3 2 1 1 2 Yield kg/ha - - - - - 394 - - - - 420 Production '000 t. 3 4 4 2 1 3 1 1 1 1 1 21. Tea Area/'000 ha - - - 1 1 1 2 2 2 2 2 Yield kg/ha - - - - - 684 - - - - 4,125 Production '000 t. - - - 1 1 1 4 8 9 12 8 22. Tobacco Area/'000 ha 1 2 3 2 2 2 2 1 1 2 2 Yield - - - - - 818 - - - - 907 D 1- Production '0(0 t. 2 1 1 1 2 2 2 1 1 2 1 a >< - 0 Source: Ministry of Agriculture and Livestock, Quito: Estimacion de la superficie cosechada y de la produccion agricola del Ecuador 1962-197"I September 8, 1975  ECUADOR SEEDS PROJECT Crop Areas. Yields and Production Average Average PRODUCT UNITS 1966 1967 1968 1969 1970 1966-70 1971 1972 1973 1974 1971-1974 MAIN EXPORT CROPS 23a. Banana (Total) Area/'OOO ha 187 203 195 190 190 194 181 171 162 152 167 Yield kg/ha -- - - 17,691 - - - - 20,132 Production '000 t. 2,744 2,937 3,920 3,870 3,688 3,432 3,512 3,296 3,203 3,397 3,352 23b. Banana Area/'O00 ha 164 160 157 148 124 151 111 101 93 92 99 (Export type) Yield kg/ha -- -- -- - - 13,517 - - - - 21,636 Production '000 t. 1,965 1,812 2,068 2,260 2,098 2,041 2,093 2,088 2,070 2,315 2,142 24. Cacao Area/'O00 ha n.a. n.a. n.a. 228 228 228 219 218 213 222 218 Yield kg/ha - - - - - 224 2/ - - - - 308 Production '000 t. n.a. n.a. n.a. 48 54 51 49 67 62 91 67 25. C-offee Area/'000 ha 218 208 191 215 215 209 215 221 227 232 224 Yield kg/ha - - - - - 306 - - - - 275 Production '000 t. 74 66 63 56 60 64 59 58 52 77 62 26. Sugarcane Area/'O0O ha 113 108 122 n.a. n.a. 114 3/ n.a. 88 89 101 93 4/ Yield kg/ha - - - - - 76,202 3/ - - - - 63,669 4/ Production '000 t. 9,004 7,528 9,529 n.a. n.a. 8,687 3/ - 5,576 5,477 -6,647 5,900 4/ 1/ National Banana Program, Guayaquil. 2/ 1969-70. 3/ 1966-68. 4/ 1972-74. Source: Ministry of Agriculture and Livestock, Quito, Estimacion de la superficie cosechada y de la produccion agricola del Ecuador 1962-1973 1974 e September 8, 1975 M -10  ANNEX 1 Table 2 ECUADOR SEEDS PROJECT Farm SDize Distribution, 1968 Farm Size ha Number of Farms Area 000 '000 ha % Less than 4 470 74.3 709 10.2 5 to 9.9 69 10.8 466 6.7 10 to 99.9 84 13.3 2,480 35.8 100 and over 10 1.6 3,282 47.3 Total 3 100.0 6 937 100.0 Source: Agricultural 9urvey, 1968. October 3, 1975  ECUADOR SEEDS PROJECT Value and Percentage Distribution by Activities of Loans Provided by Banco Nacional de Fomento to the Agricultural Sector, 1970-74 1970 1971 1972 1973 1974 Value _p Value Value , Valuie , Value e S/'OOO1 S/'OOO- S/'OOO S/''OOO S/'OOO Crops 224,293 46.o 253,816 44.1 221,775 38&3 593,391 52.6 1,405,282 53.6 Livestock and Pastures 195,529 40.0 242,934 42.1 278,421 48.1 412,015 36.5 856,621 32.7 Agricultural Machinery 46,996 9.6 46,226 8.0 44,589 7.7 82,100 7.3 259,850 9.9 Land Improvements 21.301 4.4 33.428 5.8 34.638 5.9 41.020 3.6 92.730 3.8 Total 438.119 100.0 576,404 100.0 579.423 100.0 1,128.526 100.0 2.621.483 100.0 Source: Banco Nacional de Fomento. September 17, 1975 H1F  ECUADOR SEEDS PROJECT Agricultural Credit P)rovided by Banco Nacional de Fomento 1973 1974 Number Average Total Average Number Average Total Average of Total Value per Area Value of Total Value per Area Value Loans Value Loan Financed per ha Lo ans lue Lodn Financed Per ha S/'000 ha S/'OOO S/'OOO S/'ooO ha 8/1000 Wheat 923 23,227 25,165 9,770 2,377 1,249 30,814 24,671 10,171 3,030 Barley 218 12,548 57,560 6,956 1,804 404 22,235 55,037 6,845 3,248 Corn 2,436 66,889 27,459 29,158 2,294 5,159 181,934 35,265 53,030 3,431 Rice 4,735 225,501 47,624 87,729 2,570 6,559 613,422 93,524 iO5,835 5,796 Soybeans 42 2,293 54,595 506 4,532 85 14,260 167,765 2,652 5,377 Pearuts 43 :1,541 '35,837 203 7,591 445 10,379 23,324 2,063 4,983 Ses=ae 106 2,666 25,151 1,364 1,955 73 14,018 55,wo4J 720 5,581 Beans _ ';1 2.L79 17.56J2 _ 34 9.270 21.359 2.1z L 338 Sa-total os648,6 337,1=1. 39,003 )36,753 Z 1 8 6 r83s473 ' All other crop loans 7j5 256.247 332828 71.256 3,596 10.644 518,950 48,755 82.095 6.321 1. Total for Crops 16,219 5930391 36,586 208,009 2,853 25,052 1,405,282 56,095 265,568 5,292 Pastures 1,593 64,033 40,196 1,888 124,598 65,995 All other livestock loans . 1 7.282 46.578 117 732.023 63.220 2. Total for Livestock and Pastures - 9,064 412,015 45,456 13,4k07 856,621 63,609 3.. Total for Agricultural M*,chinery 778 82,100 105,527 2,129 259,850 122,053 14. Total for Lan,; Development _ 2 409 41.020 100.293 479 99 730 208.205 OveraJj Total 26,470 1,128,526 42,634 41,127 2,621,483 63,741 So,urce: Bui3to Nacional de Foner.to, Quito. September 17, 1975  ECUADOR SEEDS PROJECT Ministry of Agriculture and Livestock (MAG) Organization Chart |Agricultural Council -iNISTER Technicaf Committee Sub-Secretary n Bureau of | | General Planning | Coordination ........|. International Technical Assistance - _ ~~~~~~~~~~~~~~~~~~~I E RAC ~ Bureau of ___L* I _ Audit l !| Bareau of | |Legal AffairBeasuof Bureau of Rural ~~Forest Bureau, ofIEH - elations Adminitreato n Developmei t Developmen Marketin 1 t ura Bu reau iLCRM r . f ................... . .. .. .. .... .of Program for Rice, riculture Livestock Hard Corn and ENP Control of Mills , D |Sub-Director SbDrco rogram of Temperate - irect Cimate Grains : _ and Pastures Technical Admn e |Dvsfation & ................ Assistance aSeices [ v el en . Assistance Services Cacao Development am~~~~~~~~~~~~~~~~~~~~~rmFr Program of Ban a nsi rp D seaed Foontro an M h Livestock Animal and Tr aCertcation Cr D C . Management Breeding Wvatiees~~~~~~~~~~~~~~~~~~Nee-iu Program nf Cott aboratory and Fibres : II Service * - * ' ' I ~~~~~~~SoIls S Agricultural I ivestock L I Aia -F,ograrn of r u M achinery |Developmentr Nuito | I Cane and * | Derivatives |j | Crgrmof f ee| Plant | Animal PrCoffee o Health Health Program for the Promotion of . |Agricultural Companis Key: Direct control 0Z Indirect control . World Ban k-15182 Statutory bodies ________ H8,   ANNEX 2 Page 1 ECUADOR SEEDS PROJECT The Seeds Industry A. Present Situation 1. The production of improved seed was started in Ecuador shortly after the creation of the National Agricultural Research Institute (INIAP) (Chart 1). Initial efforts were concentrated on the development and introduction of im- proved varieties of cereals and later other crops were included in the research program. Basic and registered seed production of various crops was started by INIAP in the mid-1960s, followed by further stages of multiplication of INIAP seed by some of the specialized crop programs of the Ministry of Agriculture and Livestock (MAG), which were also responsible for seed distribution. There were three main programs involved: (a) the Grain Program, which was respon- sible for wheat, barley, oats and soft corn; (b) the Rice and Hard Corn Program; and (c) the Agricultural Diversification Program, which was respon- sible for oilseeds, including soybeans, peanuts, sesame and castor beans. In 1966, the Seeds Certification Department (DCS) was created and given the re- sponsibility for regulating certified seed production and the administration of seed quality control measures on a national scale. The DCS did not become operational until 1969 when the first seed regulations and standards were officially prescribed. The introduction of new varieties and basic seed pro- duction by INIAP increased rapidly between 1962 and 1972 but the growth and effectiveness of other components of seed programs lagged behind. The DCS was unable to fulfill its responsibilities because it lacked sufficient auton- omy and resources. The specialized programs lacked the institutional and technical capabilities necessary for a well defined and organized system of seed production and distribution. Furthermore, there was no coordination at the national level to provide the guidance and direction essential for the progressive development of a seed program. 2. A major breakthrough in organized seed production and distribution took place when the Seed Corporation (EMS) -- a joint enterprise supported by the Government and private capital -- was established (Chart 2). EMS, created in 1973, became operational in 1974 as the first seed company in Ecuador. The company's major activities are the production of certified seed (through con- tract seed growers), processing, storage, and the distribution of certified seed, wheat, barley, hard corn, rice and oats. It has been agreed that the specialized crop programs of MAG will no longer be concerned with seed produc- tion activities, except those related to oilseeds, still to be handled by the Agricultural Diversification Program. The Government is, however, considering whether to transfer the production of seeds of oil crops to EMS or to create another seed company specifically for this purpose.  ANNEX 2 Page 2 Variety Development and Introduction 3. LIproved varieties for most of the main crops are available from INIAP. However, the inflow of new ones has been slow. A number of existing wheat varieties are no longer suitable for seed production and need to be replaced due to susceptibility to diseases (mainly stem rust) and varietal mixture. Furthermore, intensified research is needed for the development of suitable varieties of soft corn, pastures and beans. The current list of varieties eligible for seed certification and recommended by INIAP is given in Table 1. Basic and Registered Seed Production 4. Basic and registered seed for most of the mjaor crops are produced by INIAP at four major stations (Santa Catalina, Boliche, Pichilingue and Portoviejo) (Table 2) in quantities which exceed the present requirements. Registered seed supplies for wheat and barley are produced under contract with INIAP by farmers in the Sierra because of the lack of sufficient land on INIAP stations to grow the range of varieties required for the widely differ- ing climatological conditions of the country. Contract growing of basic and registered seed production is not a desirable practice under present circum- stances in Ecuador because of the technical supervision by trained specialists needed. Therefore, INIAP requires more land for raising its own basic and registered seed at suitable altitudes (Table 2). Since seed production acti- vities by INIAP have not been subject to adequate quality control in the past, basic seed for wheat and barley is presently not up to the standard required and substantial improvements are needed. Current (1975) and projections by INIAP of production of registered seed for the next two years are given in Table 3. Certified Seed Production 5. Organized production of certified seed was started in 1974 by EMS when limited quantities of certified seed of wheat, barley, hard corn, rice and oats were produced by a group of about 40 selected seed growers under contract with EMS. The program could not cover other crops such as oilseeds, soft corn, pastures and beans, due mainly to lack of resources as well as technical and institutional requirements. These growers are well established and progressive farmers who meet the following criteria, which EMS has set up as its main guidelines: (a) Farm location: ecological zone, accessibility to main roads and general relation to other farms for the same crops; (b) Farmer's competence and reliability; (c) Availability of farm machinery such as tractors, combines, and seeders, (d) Farm size and credit rating of the farmer with agricultural credit entities (mainly BNF); and  ANNEX 2 Page 3 (e) Availability of irrigation facilities (mainly for the Costa) and seed storage. Processing and/!Storage 6. INIAP has three small seed processing plants in Santa Catalina, Boliche and Pichilingue and another plant is under construction at the Portoviejo station. Processing facilities of INIAP are capable of handling all registered seed requirements, with the exception of Santa Catalina where some supplementary equipment is required. Storage facilities at INIAP stations are inadequate and should be increased. Processing and storage of certified seed is the responsibility of EMS. Available processing and stor- age facilities of EMS are all in the Sierra and are very inadequate. They consist of five seed cleaners and treaters, located, respectively, in Quito, Cayambe, Riobamba, Guaranda and Cuenca, and very limited storage space. At the present, EMS utilizes INIAP processing and storage plants, under contract, in Boliche and Pichilingue for handling rice and corn. Quantities of certi- fied seed produced by EMS in 1974 are given in Table 4. Distribution 7. Certified seed is distributed by EMS through warehouses located throughout the major production areas. The main centers for Sierra are the seed plants in Quito, Cayambe, Riobamba, Guaranda and Cuenca. In addition, there are 24 stores belonging to Banco Nacional de Fomento (BNF) and MAG used by EMS as seed distribution points for which it pays a charge of about 2% of sales value. The distribution network in terms of national coverage is fairly satisfactory and requires only minor improvements. The name and location of the distribution centers are given in Table 5 and indicated on the map (IBRD 11861). Prices 8. There are different sets of prices for each stage of seed produc- tion; registered seed (INIAP), certified seed produced by contract seed growers, and processed certified seed sold by EMS. The prices for registered seed are determined by INIAP based on production costs and in relation to prices for certified seed. Seed growers' prices are usually commercial prices at harvest time plus a predetermined premium which for wheat, barley and corn is 15% and for rice is 30% of the commercial prices. The prices for certified seed (processed, bagged and treated) is determined by a special commission in the Ministry of Finance (Superintendencia de Precios). The seed prices have been subject to frequent fluctuations in recent years. The prices for commercial crops, registered and certified seeds for 1975/76 are given in Annex 7, Table 1. The proposed National Seeds Council would make regular - at least annual - recommendations to the Superintendencia de Precios, through the Ministry of Agriculture and Livestock, on seed price structures for the following season.  ANNEX 2 Page 4 Quality Control 9. The DCS is the agency responsible for quality control measures of seed programs and its main act:ivities are field inspection and seed testing (Chart 3). Crop and seed standards for certified seed, as well as methods and procedures for crop inspection, are officially prescribed in the General Regulations that were established in 1969. The standards for certification cover 12 major crops--wheat, barley, oats, rye, rice, maize, cotton, soybeans, potatoes, sesame, peanuts, and. beans. There are two seed testing laboratories, one in Quito and one in Guayaquil. Both are well equipped to meet present and near future requirements, but the technical level of staff would require substantial improvement. There are about 24 technical staff under DCS, of whom 17 are field inspectors. Proper training of field inspectors and seed analysts and provision of seed promotion equipment as well as transportation are the major requirements for the improvement of DCS. B. Seeds Industry Under the Project Seed Crops 10. The project would cover mainly the following crops in the two main agro-climatical regions, as listed below: Sierra Costa Wheat Rice Barley Hard corn Soft corn Soybeans Ryegrass Peanuts Alfalfa Sesame Beans Guinea grass Perennial soybeans Beans Consideration was given for the possibilities of including potatoes under the project due to its importance as a major food crop and also its major role in the farming system of Sierra. However, it was not found feasible to cover potatoes, mainly because additional research is needed for the develop- ment of a proper system for seed storage. Until such a system is developed, increased and expanded production of potatoes would be unlikely (Annex 1). Technical Coefficients 11. A series of technical coefficients has been used for seeding rates, yields with and without project, and seed processing dockages. Yield assump- tions under the project and for crops planted with project seed have been  ANNEX 2 Page 5 made on a very conservative basis. The technical coefficients used through- out this report in calculating production estimates, seed processing outputs and the like are given in Table 6. Reference Areas for Project Crops 12. Considerable efforts were made to determine the existing total areas and possible trends for the next five years for the crops to be covered by the project. The mission's best estimates are given in Table 7. The data presented do not necessarily correspond in all cases with the statistics published by the Government. The basis for mission estimates has been a combination of sources which include statistics made available by different crop programs, information supplied by different agricultural missions in Ecuador and mission's own investigations during visits to differ- ent production areas. As illustrated, only areas under rice and soybeans are expected to increase modestly. In the case of rice, the projected in- crease is due to the continuous increase in demand and profitability of its production. Furthermore, the area under rice has shown steady increase for the past several years. For soybeans, there has been a substantial price increase by the Government which is intended for expanded production in order to substitute imports with local production. Production targets, as des- cribed below, are determined in direct relation to reference areas. Project Targets for Certified Seed Production and Distribution 13. Project targets are determined on the basis of expected need for certified seed supplies in relation to total seed requirements for crops under consideration on the national scale. Pasture seed production under the project ts aimed at substituting current imports by local production by Year 5. The targets are expressed in terms of the estimated percentages of total seed requirements (except for pasture seeds) as well as correspond- ing areas to be sown with certified seed (Table 8). The targets are based on a number of factors, the combination of which results in different ex- pected targets for different crops. The factors which are considered include the following: (a) The economic importance of the crop; (b) Total production in relation to national requirements; (c) Farm size and distribution; (d) Response to certified seed; (e) Need for increase in productivity; (f) Seed supply and demand;  ANNEX 2 Page 6 (g) Availability of improved and adapted varieties; and (h) Past experience. The target estimates for wheat, hard corn, rice and soybeans are higher (in percentage terms) than others. In the case of wheat, for example, possibili- ties for expansion of production areas are quite limited, while increased production is needed to reduce imports. The most practical and effective increase would therefore be higher productivity per unit area. Therefore, more areas are expected to be planted with certified seed in order to obtain increased production. The provision of certified seed should lead to con- siderable yield increases. Initially it is expected that the main benefici- aries will be the larger scale farmer; however, as the credit system becomes more accessible to small farmers and groups of small farmers, they should also derive substantial benefit from the project. As is shown in Annex 1, 46% of the wheat and 54% of the barley area harvested in 1974 was from plots of less than 10 ha. Rice growers are predominantly medium to large size farmers and they have already experienced much higher production with certified seed; therefore, about 50% of the area is expected to be planted with certi- fied seed by Year 5. In the case of soybeans, the program is quite new and seeds have had to be imported or obtained from INIAP. The number of growers would be limited and, since certified seed is highly essential for optimum production, 50% of the area is expected to be planted with it. Beans and soft corn are usually planted by large numbers of small size farmers spread over a wide area. These farmers do not have much access to credit or other means for improved production so it is expected that a smaller portion of the areas under these crops would be planted with certified seed. The acreages that can be sown with the target levels of certified seed production are shown in Table 8b. National Seeds Council 14. The National Seed Cotncil (NSC) would be responsible for overall supervision and coordination for the seed industry, including implementation of the Seeds Project (Chart 4). It would be created by the Minister of Agri- culture and be responsible, as the highest authority at the national level, for all policy matters and related activities concerning seed requirements for all major crops in the country. A Project Executive rirector under the NSC would be appointed for the administration and coordination of all project activities and he would be assisted during the course of the Project by the Project Technical Adviser. Details regarding NSC and the Executive Director's functions are given in Annex 3. p National List of Varieties 15. General. Variety development and introduction is a continuous process through which superior new seed varieties are introduced. A well defined system for the introduction of new varieties is an essential require- ment for efficient and sound seed programs. All varieties, whether locally  ANNEX 2 Page 7 developed or introduced from outside, must undergo a number of well estab- lished trials and tests, prior to their release for commercial production. The internationally accepted system for the release of varieties is their inclusion in a National List of Varieties which is published by the highest authority within the public sector concerned with the policy matters of national seed programs. 16. Designated Authority. The NSC would be the only authorized source for the release of new varieties for commercial crop production through a National List of Varieties, which would be published annually. The list would cover all the seed varieties eligible for certified seed production and dis- tribution. Seed legislation would make it illegal for any agency to intro- duce, either through importation or local development, any seed variety which is not submitted to INIAP for evaluation and thereafter to NSC for considera- tion before it is released. Likewise, it would be illegal for any person to produce and market seed under the certified label from varieties which are not included in the National List of Varieties. 17. Recommended Procedures for Variety Release. Procedures for variety evaluation through field trials and other tests are well established within INIAP and conform with the international standards. All seed varieties and planting materials would be subject to the required evaluation work by INIAP prior to submission to the NSC for consideration. This includes all seed varieties which may be imported into the country. After the completion of the evaluation work and upon availability of satisfactory results, by INIAP, the new variety would be submitted to the NSC with the following in- formation for every recommended variety: (a) Variety name and species; (b) Variety characteristics (height, tillering, and such); (c) Origin; (d) Number of years (or seasons) tested and locations; (e) Detailed data on agronomic performance (yield, disease resistance, and such); (f) Comparative data on the performance. of the newly recommended variety with the existing ones for the same species; (g) The agrc-climatical and soil requirements; and (h) Any other relevant infermation.  ANNEX 2 Page 8 18. The NSC would reviewr the detailed data and recommendations submitted by the INIAP and would consequently determine the eligibility of the submitted varieties for inclusion in the National List of Varieties. For a new variety to be included in the List, it must be superior in one or more characteristics to the existing varieties of the same species for the same agro-climatical conditions. The National List of Varieties would be reviewed on an annual basis and the necessary amendments, if any, would be incorporated. Registered Seed Production 19. General. The project requirements for all classes of seed prior to csrtified seed class would be produced directly by the INIAP. This would in- clude breeder seed, basic seed and registered seed according to the estab- lished classification in EcuadDr. Plant breeders in different experiment stations would provide the breeder seed for different crops to the seed pro- ductioi. departments of INIAP, which, in turn, would multiply them for the production of basic seed in qu.intities according to project requirements. The basic seed would be furthe:r multiplied to produce the required registered seed supplies for the production of certified seed. Field production of basic and registered seed would be carried out in the five INIAP experiment stations which are distributed' in various ecological zones of the country. The relevant data for the INIAP experiment stations which would be associated with the project are given in l'able 2. 20. Production and Seed Supply Targets. Registered seed production for all project crops would be available from Year 1 except for beans, which would be started in Year 2. Additional work on variety development is being carried out, and production of basic seed is expected for 1976. Projections for registered seed requirements of the project are given in Tables 9 and lOa, respectively. Provision would be made for the purchase of 150 ha of suitable land in the Sierra for project production needs. In addition, three tractors, one combine, and two trucks would be provided as supplementary machinery to INIAP for production of registered seed of wheat and barley under its direct management. 21. Registered Seed Processing and Storage. The INIAP plant in Santa Catalina would be provided with an additional cleaner, scale and bagging machine, and the existing seed processing and drying plants would receive technical improvements prior to the commencement of the project. Financing would also be provided for 400 t:ons of storage in Santa Catalina, 100 tons for Portoviejo and 50 tons for ]Boliche and Pichilingue by the project. Additional financing would be provided for basic and registered seed testing equipment in the four major stat:ions. Certified Seed Production (Contract Growing) 22. The production of certified seed for most of the major crops would continue to be undertaken by EMS through selected seed growers in different  ANNEX 2 Page 9 regions of the country. Selection of the growers would be in accordance with criteria EMS has been following (para 5). Seed growers would be registered with BNF and EMS and the latter would encourage and promote the formation of a seed growers' association which would facilitate representation of seed growers in NSC, more favorable credit lines from BNF, a better quality control system for production and many other advantages which could be derived from organized ventures. 23. Production, Quality Control and Seed Procurement. EMS would enter in contracts with the selected growers for the needed certified seed production of different crops according to the targets established under the project. Total areas and expected production for each crop and for each year of the project are given in Table 11. The registered seed stocks needed for the planting requirements of the given areas would be produced by INIAP (Table 10) and sold to EMS at cost prices. EMS would, in turn, sell the registered seed supplies to the growers at cost. Details of crop production conditions, quality control and the purchase of the seed crops by EMS would be covered under the terms of contract between EMS and growers. Major pro- visions of a contract between the EMS and a selected seed grower would call for the following: (a) Name, address of the grower and location of the farm; (b) Name of the crop species and variety(ies) to be grown by the grower; (c) Exact area(s) to be planted with the registered seed stocks for the production of certified seed; (d) Sale of the needed registered seed supplies by EMS to the grower at INIAP prices (transportation costs would be extra); (e) Agreement by the grower to follow the recommended cultural practices with regard to seeding rate and method, isolation, fertilization, insect and disease control, irrigation (if applicable), rogueing, and other operations needed for optimum production; (f) Agreement by the grower to have his crop inspected at three differ- ent stages by an official field inspector, who would advise him of the needed measures for crop purity and maintenance in conform- ity with crop certification standards; (g) Agreement by EMS to provide the grower with technical assistance with regard to cultural practices outlined under (e); (h) Agreemsnt by the grower to inform the DCS when the crop was ready for final field inspection prior to harvest;  ANNEX 2 Page 10 (i) A final field inspection by DCS, which would issue an official certification report, with copies to the grower and EMS. Com- pliance with crop certification standards would be the basis for the purchase of growers' seed crop by EMS; (j) Supervision of the harvest by EMS, which would provide the bags for the collection of seed and stocks; and (k) Purchase of the seed crop by EMS at an agreed premium over and above the existing commercial prices at the time of harvest. Such premium at present is 15% for wheat, hard corn, barley, oats and 30% for rice. 24. Credit for Certified Seed Production. The BNF would be the main source of credit for seed growers. The seed grower must be registered with EMS to be eligible for credit. Present arrangements include credit by BNF up to 80% of the total investment and operating costs at an interest rate of 9%, with up to seven years of amortization. No provisions would therefore be made by the project for investment or operating credit for seed growers. Certified Seed Processing and Storage (EMS) 25. General. The production of seed with a high degree of physical purity and quality would be a major objective of the project. All quanti- ties of certified seed, produced by contract seed growers, would be properly processed and stored in three large-scale seed processing and storage centers that would be established under the project. These centers would be con- structed for EMS and would consist of processing plants, storage facilities for seed in bag and bulk, seed testing laboratories and offices. They would be centrally located in relation to the areas where the bulk of certified seed would be grown. In addition to processing and storage operations, the three centers would also function as the main distribution points for EMS and would be utilized for training purposes in their respective areas. 26. Geographical Distribution and Locations. The geographical distri- bution of seed processing and storage centers would be based on four major categories of crops and their respective production regions, as shown on the maps. Two centers would be established for the Sierra region, one which would serve mainly the provinces of Pichincha, Imbabura, Carchi, Cotopaxi and Tungurahua where seed growers for wheat, barley and highland pastures would be located, and one to serve mainly the provinces of Bolivar, Chimborazo, Canar, Azuay and Loja where contract seed growers for wheat, soft corn and highland beans would be located. The third center would be established in the Costa where seed growers for rice, hard corn, beans and oilcrops are located. Major provinces involved would be Guayas, Los Rios and Manabi. A fourth seed processing center may be required in the future for oilseed crops, mainly soybeans, in the province of Manabi. The inclusion of such facilities under the project was not considered necessary since INIAP has under construction a seed processing plant at its P'ortoviejo Station with adequate facilities and capacity to handle the initial project requirements. Furthermore, USAID  ANNEX 2 Page 11 would finance cold storage facilities for oilseeds; therefore, no such facilities would be financed by the project. 27. Major Requirements and Specifications. The establishment of the three seed centers would involve three distinct and inter-related phases: (a) designing and construction of the needed buildings; (b) procurement of machinery and equipment; and (c) installation of equipment and test runs. Specifications would call for: (a) One plant of 4 to 5 tons per hour output capacity to be erected in the Sierra Region for the processing of wheat, barley, alfalfa and rye grass, with a total of 1,500 tons of storage facilities (500 tons in bags and 1,000 tons in bulk); (b) One plant of 2 to 3 tons per hour output capacity to be erected in the Austral Region for the processing of wheat, soft corn and beans, with a total storage capacity of 750 tons (250 tons in bags and 500 tons in bulk); and (c) One plant of 4 to 5 tons per hour capacity to be erected in the Costa Region for the processing of rice, corn, soybeans, beans, guinea grass and perennial soybeans, with a total storage capacity of 1,500 tons (500 tons in bags and 1,000 tons in bulk). All plants would be of one-story design, with all equipment supported from the floor area. A detailed list of equipment and corresponding specifications are given in Annex 4, Table 5. A seed flow chart is shown on Chart 5. Total seed quantities that could be processed would be about 4,000 to 5,000 tons for the Sierra and Costa plants and 2,000 to 3,000 tons for the Austral plant. 28. Processing and Storage Criteria. Processing and storage operations (Chart 5) would be conducted between harvest and sowing. Periods available for processing and storage are given in Chart 6. The design criteria of the plants would facilitate processing of different types of seeds simultaneously. Major operations would involve the following: (a) Weighing and Receiving. Harvested seed stocks would be brought to the seed processing plants in bags. Trucks would be weighed on a platform scale and the information recorded for payment to growers and dockage (mainly discards from cleaning and grading) calculations. On delivery, the seed may be transferred to storage bins for temporary storage or immediately put through the processing lines.  ANNEX 2 Page 12 (b) Drying and Conditioning. Most of the harvested seed supplies would require drying in order to reduce their moisture content to the desired level for safe storage, which is usually 12 to 14% for most seeds. The seed plants would be equipped with the needed seed driers. In case of certain seeds such as barley, corn and alfalfa, special conditioning of seed would be required before it could be dried and processed. Such operations involve de-awning barley, shelling corn and hulling alfalfa. In some cases, seed stocks would be pre-cleaned before drying in order to remove straws and other large size contaminants. (c) Cleaning and Grading. Fine cleaning of all seeds would be by air- screen cleaners, which are the most widely used machines in seed plants. After cleaning, different kinds of seeds require special- ized machinery for grading such as length separators for cereals, corn grader for corn, and spiral separator for soybeans. The seed plants would be equipped with all the cleaning and grading machin- ery necessary for their respective crops. (d) Treating, Bagging and Labeling. Seed treaters would be provided for treatment of cleaned and graded seed stocks against diseases and insects. Final seed would be bagged and labeled, the latter under the supervision of DCS, through semi-automatic bagger- weighers. (e) Seed Storage. Storage of seed would involve several stages: storage prior to processing (uncleaned) would usually be in storage bins. Storage bins would be of steel construction, each with 100 tons capacity and equipped with aeration devices as well as a feed- ing and discharge system, operating with vertical steel elevators (bucket type) and horizontal belt conveyors. Clean seed would be stored mainly in bags in properly constructed and ventilated ware- houses. There would be two 500-ton warehouses, one at the Sierra plant and one at the Costa plant, and storage for 250 tons at the Austral plant. Clean seed may also be stored in storage bins and bagged when needed. (f) Quality Control. All seed centers would have testing laboratories to check the quality of seed at all stages of processing. Seed laboratories would be equipped with devices for purity analysis and germination and moisture tests. Details of the processing and stor- age flow as well as the machinery used for each operation are given in Chart 6. 29. Criteria for International Tender. All major requirements for the establishment of the project seed processing and storage centers wwould be fulfilled by one or more well experienced firm, which would be selected through international tender. The major items are as follows:  ANNEX 2 Page 13 (a) Detailed design for seed processing flow at the three seed centers; (b) Detailed list of machinery and equipment according to the agreed flow design - a suggested list is given in Annex 4, Table 5. (c) Detailed design for the buildings needed to house the installation of machinery and equipment. (d) Detailed design for the warehouses to be attached to the process- ing plants, as well as the layout design for the storage bins; (e) Direct supervision of assembly and installation of all the machin- ery and equipment; and (f) Conduct of the required test runs to ensure satisfactory operation of all machinery and the plants at completion. The construction of the needed buildings would be undertaken by one or more local engineering firm, which would be selected through tenders. All tech- nical and operational aspects of international and local tenders for the establishment of the seed centers would be under the supervision of the proj- ect management. 30. Administration and Staffing. The seed centers would be under the management and administration of EMS. Existing technical staff of EMS in seed processing would be further trained and assigned to the new facilities. Additional staff would be provided for the operation and maintenance of the centers by EMS. All the technical staff would be provided with specialized training by the project. The following list of personnel would be assigned to each center: Number of Staff Position Sierra Austral Region Costa Plant manager 1 1 1 Processing technicians 2 1 2 Processing assistants 3 2 3 Seed analysts 2 -/1 2 Clerks/accountants 2 1 2 Laborers (seasonal) -----as needed------------ /1 Seed testing for Austral Region would be conducted at the Sierra Center. Workshop facilities as well as standby generators would be provided to the plants to ensure uninterrupted operation and maintenance of the plants. De- tails of procedures, operational manuals, stock keeping records and other  ANNEX 2 Page 14 required operations features would be prepared and adopted under the supervi- sion of a seed processing and storage consultant who would be assigned to EMS for an initial period of two years. Schedules of construction and other relevant activities are given in Annex 5. 31. Operating Costs and Revenues. The entire administration and opera- tion of EMS is in direct relation to the scale of processing, storage and sales of certified seed. Ther-efore, operating costs of the seed processing center would include all other costs of EMS. Detailed analysis of EMS oper- ating costs, revenues and cash flow are given in Annex 7. Seed Distribution and Promotion 32. General. Ten new warehouses would be constructed under the project. Nine would replace old buildings and an additional one would be constructed in Naranjal (in the Costa). Each warehouse would have a capacity of 100 tons and estimated investment costs would be $10,000 (SI 250,000), with a foreign exchange component of 40% (Annex 4, Table 4). Warehouses would be located to provide an adequate network. for certified seed distribution throughout the Sierra and Costa. Sites are listed below: For Sierra For Costa Cayambe Babahoyo Riobamba Daule Loja Machala Portoviejo Naranjal (additional) Esmeraldas Vinces Farmers would purchase their seed requirements from the nearest warehouses at EMS wholesale prices, and EMS would pay commission of 1% to the agencies which own the warehouses (mainly BNF and MAC). Seed distribution warehouses also distribute fertilizer under the auspices of BNF. Projected quantities of seed to be distributed by the project over the five-year period are given in Table 8c. Three trucks would also be financed for EMS to be used for trans- porting seed stocks. 33. Seed Promotion. A promotion and publicity program would be under- taken by all agencies associated with the project, especially EMS and DCS, to popularize the use of certified seed. BNF would also play a major role by making the purchase of certified seed a condition of production loans to farmers. DCS would establish four promotion centers in cooperation with EMS in four major production regions (two in the Sierra and two in the Costa). Seed promotion equipment would be provided by the project and would mainly consist of mobile audio visual equipment for use in farming communities. Field days would be organized by EMS on contract seed growers' farms to  ANNEX 2 Page 15 demonstrate the performance of certified seed to neighboring farmers. Various media such as radio, TV, and agricultural publications would also be utilized for advertisement and publicity purposes. All distribution centers would be provided with posters, illustrated pamphlets and other material for distri- bution to farmers in their respective areas. Quality Control, Seed Certification and Legislation (DCS) 34. General. The overall seed quality control at the national level would be administered by the DCS through a seed certification scheme. The legal support for the regulatory work and institutional framework is provided by existing seed legislation which would be amended to be administered by the NSC. The DCS would have full autonomy in exercising its regulatory func- tions over all agencies which would produce, process and distribute or sell seed, including all seed stocks for import and export. 35. Organization and Staffing. The present organizational and staffing situation of the DCS is given in Chart 3. The status of DCS in relation to the overall organization of MAG is illustrated in the Chart is Annex 1. Total technical staff is 24, including 14 field insnectors and four seed analysts. Ten additional permanent technical staff would be recruited for the expanded activities under the project. The project would finance the cost of the addi- tional staff for the project period, and the Government would continue the needed financing thereafter. Additional staff would account for six new field inspectors and four new seed analysts (Annex 4, Table 3). The geographical distribution of DCS is quite satisfactory since most of the major seed produc- ing provinces are covered by a representative officer (field inspectors). The greatest need for the improvement of the DCS would be specialized training of staff at all levels, which would be provided by the project (Annex 3). Criteria for Seed Quality Control 36. Field Inspection. All crops which are intended for production of basic, registered and certified seed would be subject to field inspection by the official field inspectors of the DCS. All crops must pass the prescribed field and crop standards in order to be considered as certified seed classes. Major factors which are considered during field inspection are the field and crop history; the origin of the seed used at planting; the isolation of the field; varietal purity; freedom from pests, diseases and mixtures with seeds of other crops and weeds. The agencies involved under the project would be INIAP for the production of basic and registered seed and contract seed grow- ers for production of certified seed. Total.areas to be field inspected in different years of the project are given in Tables 10c and llb. For the pro- duction of registered and certified seed, 20 field inspectors would be working under the DCS for field inspection of all seed growing areas, including those under INIAP (about 6,500 ha for Year 5). The project would provide the vehicles needed for use by the field inspectors since availability of transport is of prime importance to the conduct of field inspection (Annex 4, Table 3).  ANNEX 2 Page 16 Field and crop standards for certification purposes have been prescribed already in General Regulation No. 673 issued by the MAG as authorized by Decree No. 1628. All standards, as well as field inspection techniques and procedures for the issuance of necessary reports and certificates by DCS, would be reviewed and revised,, as necessary, by the seed production and certi- fication consultant of the project, who would advise the NSC accordingly. 37. Seed Testing. All seed stocks which are intended for distribution and/or sale as certified seed (in this case includes basic and registered seed) would be subject to seed testing at the official laboratories of the DCS. No seed stock could be labeled as basic, registered or certified unless it conformed to prescribed seed standards after the completion of seed test- ing. Seed testing activities would be conducted by the DCS through two official seed testing laboratcries: one in Quito for the Sierra and one in Guayaquil for the Costa. The seed laboratories are well equipped for present requirements but would need additional equipment in order to meet the increased testing capacities under the project. The project would finance the supple- mentary equipment required in Years 2 and 3 of the project. Four additional seed analysts would be recruited for the completion of staff needs at the two laboratories in Years 2 and 3. All seed analysts (eight) would be provided with specialized training through the project. Details of investment costs for these requirements as well as others for the DCS are given in Annex 4, Table 3. Major activities under seed testing would include: (a) Sampling, which woul,i be conducted by field inspectors, of all quantities of seeds of different classes throughout the country according to prescribed methods and procedures. Seed samples would be sent to the seed laboratories in Quito and Guayaquil for the tests; (b) Moisture testing, which would determine the moisture content of dif- ferent seed lots; (c) Purity analysis, for determination of seed purity in relation to different contaminations; (d) Germination tests, which would determine the percentage of seed viability; and (e) Others such as pathological test and greenhouse tests (for variety verification) as may be needed. Seed testing methods and procedures would be based on those established by the International Seed Testing Association (ISTA). Seed standards for dif- ferent crops would be, however, reviewed, and amendments would be recommended, as necessary, by the seed production and certification consultant of the project.  ANNEX 2 Page 17 38. Seed Labeling. Labeling of seed is one of the most critical measures for quality control. A well defined and organized system would be necessary to control the labeling of seed stocks of different classes of in- spected seed. No seed lot could be labeled as registered or certified unless it had met all inspection requirements (mainly field inspection and seed testing). Furthermore, labeling of different classes of certified seed could be authorized and administrated only by the DCS; therefore, no other agency would be permitted to issue official seed labels. 39. There would be three types of labels which would be distinguished by different colors, e.g., red for basic seed, green for registered seed, and blue for certified seed. All labels would be printed by the DCS and made available to INIAP and EMS in quantities required for different classes of seed. A breakable seal, after being applied to the container, should accompany every label on every container. An accurate recording of the number of labels issued, used, and discarded would be kept by DCS and agencies which utilize them in order to prevent disputes and misuse. All the labels would have the following information clearly printed on them: (a) Name of crop species and variety; (b) Name of producer (INIAP or EMS); (c) Year or season of production; (d) Percentage of moisture and date of the test; (e) Percentage of pure seed, other varieties, other crops and weeds; and (f) Percentage of germination and date of the test. All labeling operations by different agencies (INIAP and EMS) would be con- trolled by the DCS, which would also maintain the relevant records. Details of procedures to be followed would be worked out by the seed production and certification consultant. 40. Seed Legislation. In 1972, Presidential Decree No. 1628 was issued, -officially authorizing (under Article 15) the formation of DCS and providing general guidelines for the improvement of seed legislation, with major emphasis on the responsibilities of INIAP for basic and registered seed production and of MAG for certified seed production and distribution. No further review and elaborations have been made; however, the rapid development of the seed industry has necessitated more detailed and better defined legislation. One of the re- sponsibilities of the project through NSC would be the preparation of new de- tailed and suitable seed legislation and for Government consideration and enactment. The technical director of the project would be responsible for the preparation of the needed draft. A general guideline for some of the major categories is given below:  ANNEX 2 Page 18 (a) Official designation of the NSC as the highest authority in the Government for the administration and coordination of seed programs (production, processing and storage, distribution, import and ex- port, etc.) at the national level; (b) Official designation of DCS for the regulatory work concerning seed quality control over all concerned agencies at the national level; (c) Official designation of different agencies for research, basic and registered seed production, certified seed production, and distri- bution; (d) Provision of legislative backing for different field crop and seed standards and their application, which would be prescribed by the DCS; (e) Prohibition of production, import and distribution of seed varieties and planting material which was not be included in the National List of Varieties; (f) Official designation of a price fixing agency for different seed classes; (g) Provision of penalty charges for the violation of any prescribed provision; and (h) Provision of any other relevant statements which would be considered necessary to regulate seed production, distribution and trade. December 23, 1975  ANNEX 2 Table 1 ECUADOR SMEDS PROJECT Varieties Eligible for Seed Certification in 1975 Species Varieties Wheat 1/ Atacazo, Crespo, Ruminahui, Bonza,Amazonas, Romero 73, Cayambe 73. Barley ./ Dorada, Filberck Union Soft corn a INIAP 176 Hard corn INIAP 515, INIAP 504, INIAP 513, VS 2 Rice INIAP2, INIAP 6, IR 8 Rye grass Pichincha Peanuts Tarapoto 47-67 D, 48-115 D Sesame Portoviejo 1, Aceitera Oats Santa Catalina, INIAP 67 Potatoes Santa Catalina Cotton Coker 41-04, Empire WR 61, Deltapine 16, Del Cerro Castor beans Portoviejo 67 1/ Amazonas, Ruminahui and Crespo are to be phased out and replaced by Romero 73. A new variety of wheat is expected to be released in 1976. 2/ A new barley variety is expected to be introduced in 1976. 3/ Intensive work is underway to develop new varieties. INIAP 176 has not been very successful. Source: INIAP and DCS. October 3, 1975  ECUADOR SEEDS n RJECT National Institute of Agricultural Research (INIAP) Experiment Stations for Basic Seed Production Area for Average Total Area for Seed Eleva- ADInual Relative Crops under Area Research Production tion Rainfall Humidity Station Cultivation (HH) (Ha) a) (m) (mm? (%) Santa Catalina Wheat, barley oats, rye grass, potatoes, soft corn 950 840 U1 2650-3250 1706 79 Boliche Rice, soybeans, cotton, peanuts 151 91 60 17 741 82 Pichilingue Hard corn, pas- ture crops, coffee cocoa 1200 1138 62 75 2327 84 Portoviejo Cotton, soybeans, peanuts, sesame, hard corn, castor 1/ beans 8 55 30 652 82 Santo Domingo African palm, pasture crops, hard corn 247 147 100 300 4242 88 1/ Does not include about 150 ha out of 400 ha recently allocated to the Ministry of Agriculture and Livestock (MAG). September 9, 1575  ANNEX 2 Table 3 ECUADOR SEEDS PROJECT Production Goals for Registered,Seed of Selected Crops (1 975-1977 i/ Quantity of Crop Registered Seed 1975 1976 1977 -___-- tons -------- Wheat 364 454 545 Barley 45 68 91 Soft corn - 16 227-/ Rice 100 114 118 Soybeans 41 46 50 Hard corn 109 123 140 Sesame 1.40 1.80 2.30 Peanuts 27 37 45 Beans 1.32 1.34 1.36 1/ Production targets are considerably in excess of national requirements for the production of certified seed but INIAP will adjust its production targets to the requirements for certified seed production. 2/ A major increase in introduction of new varieties is planned. Source: INIAP September 9, 1975  ANNEX 2 Table 4 ECUADOR SEEDS PROJECT Certified Seed Distributed by the Seeds Corporation (EMS) in 1974 Crop Quantity 7ton) Wheat 1,350 Barley 380 Rice 1,200 Hard corn 450 Total 3,380 Source: EMS. September 9, 1975  ANNEX 2 Table 5 ECUADOR SEED PROJECT Existing Seeds Distribution Center i/ Sierra Costa Tulcan - MAG Esmeraldas - BNF San Gabriel- BNF Sto. Domingo - BNF El Angel - EMS Quevedo - INIAP Cayambe -EMS Balzar - BNF Quito - EMS Vinces - BNF Latacunga - EMS Babahoyo - BNF Riobamba - EMS Guayaquil - EMS Guaranda - EMS Daule - BNF Canar - MAG Machala - BNF Cuenca - MAG Portoviejo - BNF Loja - EMS Yaguachi - EMS Gozanama - MAG Puyo - BNF 1/ BN? centers also distribute fertilizers.- Source: EMS September 9, 1975  CCUADOR Seeds Project Selected Technical Coefficients Used in Economic Analysis Contract Seed Growers Average Commercial Farmer 1 2 3 4 5 6 7 a 9 lo Assumed Average Yield on Yield of all Assumed Increased Farms Yield of National Farmers using Assumed Average Yield due to using Partition of Yield Increase Producing Cleaned Average Certified Seed Yield of Farmers Certified Seed and Fertilizer and SeedinI Certified Certified Yield and Recoesended not Using Recosmended Cultu- Certified Seed other Cultural Ratel' Seed aockagei/ Seed 1971-74 Cultural Practices Certified Seed ral Practices Alone3/ Practices kg/ha kg/ha % kg/ha kg/ha kg/ha kg/ha kg kg kg Wheat 110 2,000 20 1,600 936 1,300 940 360 18C 180 Barley 90 2,500 25 1,875 707 1.100 710 390 140 250 Soft corn 35 4,00D 60 1 CCC c/ 1,000 670 330 130 200 hard corn Its 4,000 60 1,600 1,088 1,500 1,090 410 210 200 RLea 50 4,000 15 3,400 2,429 3,200 2,400 800 600 200 Soybeans 70 1,600 30 1.120 1,318 1,400 1,200 200 140 60 Peanuts 70 1,400 30 980 830 1,100 830 270 200 70 Sesame 4.5 1,200 30 840 886 1,000 890 110 100 10 Beans 50 1,200 30 840 444 500 400 100 60 40 It Same for both seed growers and copsrrciai producers. 2/ Percentage of field prod-ction that is nout useable as certified seed. This is removed during seed processing. From I to 5% is lost during processing. The balance is sold as comeaercial grain. 3/ This is the incremental yield increase attributable to the use of only certified seed. The farmer is assumed to use exactly the same cultural practices as reflected in the yields of column 7 of this table. These estimates are based oil INIAP reports, discussion with INIAP and EMS personnel and prior experience and judgement of the appraisal team, September 18, 1975  ANNJEX 2 Table 7 EMADOR SEEDS PROJECT Projections of National Total Areas Under Project Cropsi! ('000 ha) - -- Project Year -------------- Drop 0 1 2 3 4 5 Wheat 55 55 55 55 55 55 Bsrley 60 60 60 60 60 60 Soft Corn 75 75 75 75 75 75 Hard Corn) 85 85 85 85 85 85 Rice 32/ 95 99 103 1 07 111 115 Soybeans ) 8 11 l1 17 19 20 Peanuts 15 15 15 15 15 15 Sesame 2 2 2 2 2 2 Beans 60 60 60 60 60 60 Total 455 462 469 376 482 487 1/ 'xcluding pastures. 7/ Based on two season planting each year. September 18, 1975  ANNEX 2 Table 8 ECUADOR SEEDS PROJgCT Project Targets for Certified Seed _-----------------------Project Year-------------------------- Crop 0 1 2 3 4 a. Percentage of National Total Seed Requirements (%) Wheat 26 26 30 33 36 40 Barley 8 10 13 16 18 20 Soft corn - - 2 4 9 15 Hard corn 33 35 37 39 40 40 Rice 29 34 39 43 47 50 Soybeans - 19 31 314 41 50 Peanuts - 5 7 13 16 20 Sesame - 5 10 15 18 20 Beans - - - 7 10 15 b. Area to be Sown With Certified Seed (ha) Wheat 14,500 14,500 16,400 18,200 20,000 22,000 Earley 5,000 6,100 7,800 9,400 10,600 12,000 Soft corn - - 1,400 2,900 7,100 11,250 Hard corn 28,100 29,700 31,300 32,800 34,000 34,000 Rice 28,000 34,000 40,000 46,000 52,000 57,500 Soybeans - 2,100 4,300 5,700 7,900 10,000 Peanuts - 700 1,000 2,000 2,1400 3,000 Sesame - 100 200 300 350 400 Beans - - - 4,000 6,000 9,000 Total 9 75,600 87,200 102,400 121,300 140,350 159,150 c. Certified Seed Requirements -/ (ton) Wheat 1,600 1,600 1,800 2,000 2,200 2,400 Barley 450 550 700 850 950 1,050 Soft corn - - 50 100 250 400 Hard corn 450 475 500 525 550 550 Rice 1,400 1,700 2,000 2,300 2,600 2,900 Soybeans - 150 300 400 550 700 Peanuts - 50 70 140 170 200 Sesame - 0.5 1.0 1.4 1.6 1.8 Beans - - - 200 300 450 Pasture seeds - - 20 50 80 120 Total 3,900 4,545.5 5,441 62466.4 7,651.6 8,771.8 I/ Excluding area for pasture seed production. 2/ Final clean and bagged seed (field production less dockage for seed processing). W/ Rye grass, alfalfa, guinea grass anl perennial soybeans. .ept.ember 30, 1975  ANNEX 2 Table 9 ECUADOR SEEDS PROJECT Projections for Registered Seed Requirements 1/ (Kg) ------------------Project Year----------------------- Crop 0 1 2 I-onward Wheat 8,500 9,500 10,500 11,4O0 Barley 1,700 2,000 2,300 2,400 Soft corn 25 50 125 200 Hard corn 50 55 55 55 Rice 570 665 7h5 830 Soybeans 1,200 1,600 2,200 2,800 Peanuts 360 720 880 1,030 Sesame 30 40 50 60 Beans - 710 1,070 1,600 Pasture seeds 390 628 947 1,328 Total 12,825 15,968 18,872 21,703 1/ Clean and bagged (field production less processing dockage) September 18, 1975.  ANNEX 2 Table 10 ECUADOR SEEDS PROJECT Projections of Registered Seed Requirements --Project Year--- Crop 0 1 2 3 4-onward a. Requirements for Clean and Bagged Seed (Ton) Wheat 110 :23.0 138.0 152.0 165.0 Barley 27 34.0 41.0 46.0 50.0 Soft corn - 1.1 2.2 5.5 8.8 Hard corn 4.7 5.0 5.3 5.5 5.5 Rice 25 34.0 39.0 44.0 49.0 Soybeans 9.4 19.0 25.0 35.0 44.0 Peanuts 3.6 5.0 10.0 12.2 14.3 Sesame 2.7 kg 5.4 kg 7.7 kg 8.1 kg 10.0 kg Beans - - 12.0 18.0 27.0 Pasture seeds 1/ - 4.4 7.1 10.7 15.0 Total 179.7 225.5 279.6 328.9 378.6 b. Requirements for Field Production (Ton) Wheat 137.0 154.0 172.0 190.0 206.0 Barley 36.0 47.0 55.0 63.0 66.7 Soft corn - 2.8 5.7 14.0 22.0 Hard corn 11.8 L2.5 13.8 13.8 13.8 Rice 29.4 40.0 46.0 52.0 58.0 Soybeans 13.4 27.4 36.5 50.2 64.0 Peanuts 5.2 7.2 14.3 17.5 20.5 Sesame Trace 8.0 kg 10.6 kg 13.3 kg 16.0 kg Beans - - 17.0 25.6 38.5 Pasture seeds - 6.8 10.9 16.5 23.1 Total 232.8 297.7 371.2 442.6 512.6 c. Requirements for Area of Production (ha) Wheat 68.0 77.0 86.0 95.0 103.0 Barley 14.4 19.0 22.0 25.0 27.0 Soft corn - 0.7 1.4 3.5 5.5 Hard corn 3.0 3.1 3.4 3.4 3.4 Rice 7.5 11.4 13.3 14.9 16.6 Soybeans 8.1 17.0 22.0 31.0 40.0 Peanuts 3.6 ;.1 10.2 12.5 14.7 Sesame ---------------------Negligible---------------------- Beans - 14.2 21.4 32.0 Pasture seeds - 2-7.2 43.6 66.0 92.4 Total 104.6 160.5 216.1 272.7 334.6 1/ G;uinea grass, rye grass, alfalfa and perennial soybeans. September 18, 1975.  ANNEX 2 Table 11 ECUADOR SEEDS PROJECT Projections of Field Recuirements for the nro&e-tion of Certified Seed-/ ----Project Year--------------------------- Crop 0 1 2 3 4 5 a. Requirements for Field Production (Ton) Wheat 2,000 2,000 2,236 2,510 2,764 3,000 Barley 600 750 945 1,140 1,278 1,418 Soft corn - - 126 251 628 1,006 Hard corn 750 1,200 1,250 1,325 1,375 1,375 Rice 1,647 2,030 2,380 2,730 3,080 3,430 Soybeans - 227 433 571 800 1 ,