Brazil - Bahia Rural Development Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2297-BR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE BAHIA RURAL DEVELOPMENT PROJECT May 24, 1978 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.  CURRENCY EQUIVALENTS Calendar 1977 May 5, 1978 Currency Unit = Cruzeiro (Cr$) = Cr$ US$1 = Cr$14.10 = 17.27 Cr$l = US$0.07 = 0.06 ABBREVIATIONS AND ACRONYMS BB Bank of Brazil BNB Bank of the Northeast of Brazil CEPA-BA Bahia State Agricultural Planning Commission CERB Rural Engineering Company of Bahia EMATER-BA Bahia Technical Assistance and Rural Extension Company EMBRAPA Brazilian Agricultural Research Company EPABA Bahian Agricultural Research Company INTERBA Bahian Land Institute POLONORDESTE Development Program for Integrated Areas in the Northeast SUDENE Northeast Development Superintendency FINANCIAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY BRAZIL BAHIA RURAL DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Federative Republic of Brazil Amount: US$37 million equivalent Terms: Payable in 15 years, including 3 years of grace at 7.5% interest per annum Prolect Description: The project is designed to raise agricultural production and farm income in the greater part of the state of Bahia's Paraguacu River basin. It provides for credit to small farmers, strengthening of support services, and infrastructural improvements. Most of the beneficiaries would be farmers whose present incomes are below the poverty level. It would consist of: Credit (35%) for investments to improve and expand agricultural production by about 17,000 small farmers and small livestock operations; for incremental working capital; and for land purchase. Agricultural Services (25%), including extension and demonstration, research and seed production, input supply and mechanization services, marketing and storage, assis- tance to cooperative societies, and irrigation technical assistance. Infrastructure (35%) including upgrading and construction of access roads, water supply systems, multi-purpose dams, and health and education facilities. Project Administration (5%), including project management, monitoring, and evaluation. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost: 1/ ---(US$ Millions)---- Local Foreign Total Agricultural Services 17.72 2.29 20.01 Credit 24.79 3.00 27.79 Investment 14.94 1.97 16.91 Incremental Working Capital 8.00 1.03 9.03 Land Purchase 1.85 - 1.85 Infrastructure 20.54 7.42 27.96 Roads, Dams, Storage 12.91 5.88 18.79 Health, Education and Water Supply 7.81 1.56 9.37 Project Administration 3.33 0.37 3.70 TOTAL BASELINE COSTS 66.56 13.10 79.66 Physical Contingencies 4.09 0.80 4.89 Price Contingencies 18.45 3.62 22.07 TOTAL PROJECT COSTS 89.10 17.52 106.62 Financing Plan: US$ Million Government 69.6 IBRD 37.0 TOTAL 106.6 Estimated Disbursements: ------US$ Million by Fiscal Year------- 1979 1980 1981 1982 1983 1984 Annual 2.2 5.1 8.7 11.3 8.1 1.6 Cumulative 2.2 7.3 16.0 27.3 35.4 37.0 Rate of Return: The economic rate of return is estimated at 15% for the parts of the project with directly quantifiable benefits, which represent 76% of the total costs of the project. Appraisal Report: Report No. 2009A-BR, dated May 19, 1978. 1/ Project costs have been calculated on the basis of the exchange rate at the end of 1977 (US$1=Cr$15).  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE BAHIA RURAL DEVELOPMENT PROJECT 1. I submit the folLowing report and recommendation on a proposed loan to the Federative Republic of Brazil for the equivalent of US$37.0 million to help finance the Bahia Rural Development Project. The loan would have a term of 15 years, including 3 years of grace, with interest at 7.5% per annum. PART I - THE ECONOMY 1/ 2. A report, entitled "Economic Memorandum on Brazil" (1665a-BR), dated October 13, 1977, was distributed to the Executive Directors on October 21, 1977. Country data sheets are attached as Annex I to this report. 3. The late 1960s and early 1970s were years of remarkable economic growth and development for Brazil. The 10% average annual rate of growth in GDP during this period was accompanied by a strong balance-of-payments performance. The dollar value of exports rose by 300% from 1967 to 1973 and a process of export diversif:ication significantly reduced Brazil's dependence upon coffee as the single primary source of foreign exchange earnings. At the same time, inflation was brought progressively under control. During the early 1970s prices rose at less than 20% per annum on average -- a considerable improvement upon the inflation of a decade earlier. The crawling peg exchange rate combined with widespread monetary correction and indexation of financial instruments helped to minimize the distortions which often accompany inflation (although indexing makes it more difficult to reduce the level of inflation). 4. The world economic crisis of 1974 marked a turning point in the recent economic performance of Brazil. Although growth continued at 9.5% in that year, it proved impossible to maintain the good balance-of-payments performance that had accompanied growth in previous years. The continuation of expansionary policies during 1974 in the context of a sharp deterioration in the terms of trade resuLted in a trade deficit amounting to US$4.7 billion. The elimination of that deficit has been a major objective of economic policy since that time. To this end the Government fortified simultaneously its policies of export promotion and of import substitution. As a result of these policies, the trade gap closed progressively year by year. In 1977 excep- tionally high coffee prices contributed towards a strong increase of export revenues and the trade gap was eliminated entirely in that year. It is pro- jected that the trade gap will remain closed even though coffee prices have already rolled back significantly from the high levels prevailing in early 1977. This expectation is predicated on a major effort to expand other exports, particularly of manufactured goods. 1/ This section is substantially unchanged from the section on the economy in the President's Reports for the urban transport and COPESUL petro- chemical projects (P-2254-BR and P-2246-BR) dated April 25 and 27, 1978 respectively.  - 2 - 5. Inflation is another problem that has become a focus of attention in recent years. Sharp rises in the prices of petroleum and other imported goods in 1974 gave an added impetus to inflationary pressures which were already building up in the Brazilian economy even prior to the world economic crisis. Inflation increased in 1974 and continued to accelerate in the subsequent two years reaching a peak of 46% in 1976. The Government has employed a wide range of monetary and fiscal instruments to combat inflation. Interest rate policy has in general been realistic, except in the agricultural sector where systematic subsidization of interest rates has complicated monetary management. Particularly significant is the much greater control now exercised by the Federal Government over the investment programs of public sector decentralized agencies. There is evidence that these policies are having effect. Inflation for 1977 was some 39%, and in the second half of 1977 inflation slowed to a rate of some 30% on an annual basis. If the Government continues to exercise careful control over monetary and fiscal policy, further headway against inflation is likely. 6. Brazil's economic performance since 1974 has been deeply affected by balance-of-payments constraints. Growth fluctuated sharply from 4.2% in 1975 to 8.7% in 1976 and down again to 6% in 1977 as the Government searched for an appropriate balance between expansion on the one hand and, on the other hand, the need to resolve difficulties in the balance of payments and in the domestic inflationary situation. The Government recognizes the need for con- tinued moderation in growth during the next two or three years if inflation is to be kept under control, the balance of payments is to be further improved and a sound basis for longer term development is to be preserved. It is projected that growth may average little more than 6% during the remaining years of the decade. Beyond that, however, there is every indication that Brazil has the potential to sustain higher levels of growth provided (a) that reasonable expansion of output and trade takes place in the industrial coun- tries, and (b) that sound economic policies are consistently pursued in Brazil. In this respect the Government's development strategy provides a sound frame- work for future development. 7. The second National Development Plan (1975-79) was published in the wake of the world petroleum crisis and incorporates a sectoral development strategy which focuses sharply upon relieving Brazil's balance-of-payments constraints in the longer term. The export potential of agriculture received explicit recognition in the development plan and the results achieved over the past several years (particularly in soya production) justify the priority given to this sector. Agriculture constitutes a vehicle for raising the living standards of the rural poor and for developing the vast frontier lands of Brazil's interior. In the case of industry, sophisticated incentive schemes have been introduced to encourage exports. However, Brazil's industrial development strategy now concentrates upon import-substitution programs in steel, non-ferrous metals, petrochemicals, fertilizers and capital goods. Brazil aims at self-sufficiency in many of these products by the early 1980s. Beyond that point these same industries may develop a good export potential.  8. Public sector investment accounts for more than half of total fixed investment in the Brazilian economy. Federal investment is heavily concentrated in infrastructure and basic industry. These two areas together account for about 70% of total investment by federal Government agencies and enterprises. Regional development and social programs absorb most of the remaining 30%. Until 1975, the rapid expansion of public investment reflected a heavy emphasis on road construction and regional development. The 2nd National Development Plan (1975-79) added a massive program of import substi- tution in basic industrial inputs, and an acceleration in the pace of social programs. Since 1977, however, severe restraints have been placed on public investment, in order to reduce a growing public sector savings gap and the accompanying balance-of-payments deficit. The sectors most affected are road and rail transport, whose ambitious expansion plans have been cut back sharply. Investments in electric power, on the other hand, are maintained at a high level, and in basic industries such as steel, non-ferrous metals and petro- leum, are being stepped up considerably. The share of regional development programs in total federal iinvestment has now stabilized at about 7%. The percentage allocated to social investment is increasing gradually, reflect- ing continued expansion of federal investment in housing, water supply and sewerage, and other urban development programs. State and municipal govern- ments also devote a substantial proportion of their resources to health, education, welfare and other public services. 9. Despite its impressive growth performance and vast future potential, Brazil is still a country with extensive poverty. The present Government acknowledges the country's poverty problem and accepts responsibility for its alleviation. While, l:Lke the previous Government, it believes that a high rate of growth is necessary to increase the incomes of the poor, it does not believe that the "trickle down" effects of rapid growth are enough and has formulated a new policy which could be labeled as "redistribution with growth." To implement this policy, in addition to pursuing some of the social programs initiated by its predecessor, the Government is taking new measures in three broad areas: (a) regional development; (b) provision of social services; and (c) wage policy. In addition, recent tax changes have tended to have a favorable, albeit marginal, impact on income distribution. 10. As one of its measures to help promote development in poorer regions, the Government has formulated a program known as POLONORDESTE for rural devel- opment in the Northeast. The program which covers the 1975-79 period is designed to raise the productivity and incomes of small farmers through inter alia, formulation and execution of integrated rural development projects, which in some cases include changes in land tenure. POLONORDESTE is based on the assumption that the rural Northeast cannot be regarded as a homogeneous whole. Therefore, the Government has identified 31 sub-regions covering large portions of the Northeast on which POLONORDESTE funds would be used initially. The Bank has made loans for integrated rural development in three of these sub-regions, and various others are in preparation.  - 4 - 11. In the area of social services, the Government has created a new Ministry of Social Security in order to consolidate its social benefit programs and to extend these programs to a larger share of the population. The Government is also strengthening the nutrition program which, under the previous Government, got off to a slow start. Greater emphasis is being given by the National Housing Bank to low-income housing, the beneficiaries of which will enjoy better financial terms than in the past. The Housing Bank is also developing a site and services program to encourage construction of self-help housing by families that cannot afford builder-constructed units. In agri- culture, the recently reorganized rural extension agency will expand and strengthen its activities directed specifically toward the small-scale farmer; and the new federal agriculture research institution is defining its program to include a selection of crops and farming systems which will ensure that small-scale farms benefit from research efforts. In November 1974, the Government revised the formula governing the adjustment of the union wage scale and the real minimum wage was increased in 1975 and again in 1976. While in 1977 the Government restricted wage increases as part of a policy package designed to control overall demand and to combat inflation, this does not signify any basic change in its longer term goal of improving income distribution. 12. In order to achieve the twin goals of high growth and an improved distribution of income, Brazil will continue to require large inflows of capital in the medium-term future. These inflows should be less than in the recent past, however. Compared with a US$6 billion annual average for 1974-76, it is estimated that the annual net inflow of medium- and long-term capital (that is, direct foreign investment and net disbursements from official and private sources) may be in the order of US$4.5 billion for 1977-80. This projection assumes that it will be possible to sustain and subsequently improve upon the trade balance achieved in 1977, with export volume rising at an average rate of 11.5% annually in 1977-80, and import growth held down to only 2.8% a year in real terms during this period. The outlook for Brazil's principal export commodities is quite favorable for the next several years, and it is expected that the good overall export performance projected here can be achieved, provided that the country continues to follow present exchange rate policies to ensure the competitiveness of manufactured exports. On the import side, several major import-substitution programs are already having a notable impact. The further development of these programs should enable Brazil to continue to restrain imports without jeopardizing growth. 13. On December 31, 1977, Brazil's estimated public external debt amounted to about US$16.6 billion and the public debt service ratio for 1977 is estimated at some 19%. This is somewhat higher than the 15% average public debt service ratio estimated for the first half of the 1970s and reflects a higher proportion of medium-term financial credits within the overall debt structure. Total external debt (both public and private) registered by the Central Bank at end-1977 is estimated at US$29.5 billion and somewhat over two-thirds of this debt (some US$20 billion) is in the form of financial credits. The net debt service ratio on total external debt during 1977 was about 41% compared with an average of 38% during the early 1970s. However, net foreign exchange reserves at the end of 1977 were about US$7.0 billion,  - 5 - equivalent to some six months' imports of goods and non-factor services and sufficient to cover nearly one quarter of the total outstanding external debt. Despite Brazil's heavy debt service burden the substantial level of foreign exchange reserves ensures that the country will have the liquidity to meet its debt service obligations in the short term. The breakdown between public and private debt in the longer run can be projected only tentatively. Much will depend upon the extent to which the Government will extend its guarantee to loans contracted externally by non-government entities. Even assuming that a government guarantee will be granted in an increasing number of cases, it is projected tentatively ithat the public debt service ratio will peak in the late 1970s at about 20%. Subsequently, a fall to about 16% by 1985 is projected, assuming that Brazil can increase the values of its exports by an average of 17% per annum and that the average maturities of new financial credits gradually improve from six to eight years. The country's record of financial and economic management provides grounds for confidence in the main- tenance of creditworthiness over the longer run. Nevertheless, there can be no doubt that very careful management of the external accounts will continue to be necessary. PART II - BANK OPERATIONS IN BRAZIL 14. By March 31, 1978 the Bank had made 77 loans to Brazil, amounting to US$3,617.4 million, of which 39 were not yet fully disbursed. During FY65-69, disbursements averaged only US$10 million per year, increasing to an average of US$150 million per year during FY70-75, reaching US$248 million in FY75, US$202 million in FY76, and US$267 in FY77. During the first half of FY78 US$129 million was disbursed. The decline in disbursements in FY76 was due primarily to the reduced level of lending in FY73-74. Disburse- ments are expected to increase during the next few years. Annex II contains a summary statement of Bank loans as of March 31, 1978 and notes on the execution of ongoing projects. 15. Since FY75, Bank lending to Brazil has amounted to between US$400 and US$500 million per year. In FY75, five loans were made totalling US$426.5 million; in FY76 ten loans totalling US$498 million; and in FY77, seven loans totalling US$425 million were approved. So far in FY78, eight loans totalling US$668 million have been approved. Work is relatively advanced on the prepara- tion of an aluminum project, an industrial pollution control project, a water supply and sewerage project in the northeastern states of Bahia, Ceara and Pernambuco, and a site and services project for Recife, Salvador (Bahia) and Sao Paulo. 16. Of Brazil's external public debt outstanding and disbursed at the end of 1977, amounting to nearly US$16.6 billion, the Bank held about 8.5%. The Bank's share of the service on this debt was about 4.5%. If present trends continue, as expected, the Bank's share in total external public debt outstand- ing would increase to 12% by 1980. The Bank's share of public debt service would rise in 1980 to about 6% while its share of Brazil's total (public and private) external debt service would remain at the present level of 2.8%.  - 6 - 17. IFC has committed more financial resources to Brazil than to any other country. As of March 31, 1978, IFC had made commitments to Brazil, totalling US$332 million, of which US$204 million had been cancelled, repaid or sold. Of the balance of US$128 million, US$101 million represent loans and US$27 million equity. A summary of IFC's investments up to March 31, 1978 is given in Annex II. Lending Strategy 18. In its lending to Brazil, the Bank has sought to help the Govern- ment achieve a number of important development obiectives which are inter- dependent and complementary. One important lending objective in Brazil is to help to intensify the efforts of the Government to identify and develop projects that will increase productivity and incomes of the lowest income segment of the population, to broaden the economic opportunities open to those groups, and to improve their living conditions. The proposed project and other loans in preparation for integrated rural development projects in the Northeast are addressed to this objective. They are designed to provide credit, productive services, and social and physical infrastructure to low- income farmers and small-scale enterprises. The loans for nutrition research and development, vocational training, agricultural research, agricultural extension and polder construction in the Lower Sao Francisco as well as for integrated rural development in the States of Rio Grande do Norte, Minas Gerais, Ceara and Paraiba were all designed to assist low-income groups in rural areas. Additional projects designed to assist low-income groups are in preparation, including a rural education project in the Northeast, additional integrated rural development projects in the Northeast, and several additional projects which will reach low-income groups in urban areas: a medium-sized cities development project, and a second urban transport project. 19. Another of the Bank's lending objectives in Brazil is to support institutional development and policy reform designed to develop rational policies and procedures, establish adequate coordination and control, and help maximize public savings and ensure that they are used economically through rational selection of investment projects. The institution-building objective has been important in Bank assistance, for example, in the transportation sector where there has been emphasis on the rational selection of investments, the strengthening of railway operations, and the improvement of railways' financial performance. 20. Another lending objective is to ease the foreign exchange constraint on development, a constraint that has become more critical since the increase in petroleum prices, by supporting projects designed to increase Brazil's export capacity and, where economical, to substitute domestic production for imports. As a result of the deterioration in Brazil's terms of trade and balance of payments which took place at the time of the 1974 energy crisis, this objective was placed in the forefront of the Government's economic policy. Lending for the electric power sector very much supports this objec- tive, since it is based primarily on hydroelectric energy, and its development lessens the need for petroleum imports. Bank support of fertilizer projects  is assisting Brazil to substitute imports with large-scale efficient domestic production and aid its balance-of-payments position. Bank lending for agro- industries in the Center and South of Brazil is also supporting this objective and much of the Bank-assisted investment in the transport sector -- railways, ports and highways -- is designed to facilitate the smooth and economical flow of exports. Support of the steel expansion program is helping Brazil to expand domestic output of a traditional import commodity which can be produced efficiently in Brazil due to the country's ample supply of high-grade iron ore and the scale of its internal markets. A similar objective would be achieved through the aluminum project now being prepared. 21. A final objective which applies to all Bank lending to Brazil is to provide part of the very large volume of medium- and long-term capital inflows that Brazil has needed and will continue for some years to need in order to sustain rapid growth and achieve its employment creation and regional develop- ment objectives. Continued active lending by the Bank in Brazil is regarded by the international financial community as an important sign of confidence in Brazil and encourages others to continue their own programs there. In some sectors, especially in electric power and industry, Bank participation is helping Brazil obtain additional resources in greater amounts and on more favorable terms from bilateral credit agencies and private financial institu- tions than may have otherwise been provided. Five co-financing operations for Brazil, totaling US$204 million, have been concluded since 1976 with private financial institutions and several others are in preparation. PART III - THE AGRICULTURAL SECTOR 1/ Agricultural Products 22. The most important agricultural products for Brazil's domestic market include manioc, maize, rice, wheat, beans, potatoes, vegetables, bananas, citrus fruit, dairy products, poultry, beef and swine; and important for both the export and domestic market are coffee, sugar, soybeans, cotton, and cocoa. Coffee, soybeans and sugar generated 42% of the country's total export earnings in 1976. Brazil is still the largest exporter of coffee in the world, although its share of the world market has declined from 50% in the early 1950s to about 25% at present. With the decline in Cuban production since 1970, Brazil is now the largest producer of cane sugar in the world. The production of soybeans has increased from less than one million tons in 1968 to over 11 million tons in 1976 and was close to 12 million tons in 1977, making Brazil the third largest producer in the world. This expansion has been instrumental in restructuring agriculture in southern Brazil, and production is expected to reach 18 million tons by 1980. 1/ This section is substantially the same as the section on the sector in the President's Report on the Paraiba Rural Development Project (P-2207-BR, dated March 15, 19781), with the addition of paragraph 25.  -8- Recent Sectoral Performance 23. Over the 1967-74 period, the agricultural sector performed well in supplying domestic demand for food and fiber as well as a rising volume of export commodities, with output growing at 5.7% annually despite adverse climatic conditions in three out of seven years. The agriculture sector's contribution to GDP has declined from 20% in 1967 to about 11% at present, but its contribution to exports has remained significant (about 56% of the total value in 1977). Recently, the value of agricultural output has been increasing but this has resulted more from expansion of land under cultivation than improved productivity. Government Policy 24. The agricultural development strategy of Brazil's Second National Development Plan (1975-79) aims at more efficient exploitation of Brazil's agricultural potential by increasing agricultural output by 40% in real terms. This goal reflects the government's intention to provide for an increasing share of Brazil's growing domestic demands for food and fiber, as well as to increase the volume of agricultural exports. In addition, the government has acknowleged the gravity of the country's income distribution problems. Major measures include (i) increased public resources to incorporate new areas into production; (ii) significant expansion in the supply of agricultural credit; (iii) reorganization of federal research and extension services; and (iv) special regional programs such as POLONORDESTE (see para. 27). 25. One important aspect of the Government's agricultural policy is its practice of encouraging a large volume of agricultural credit at sub- sidized interest rates. For most of Brazil these rates now vary between 13% and 21% per annum without monetary correction, which in Brazil's highly inflationary environment means that they are highly negative in real terms. In the POLONORDESTE program, the standard rate is now 10% without monetary correction. Credit for fertilizer purchase is interest free. The subsidized interest rate system was originally introduced in Brazil some years ago as a means of compensating the agricultural sector for adverse terms of trade resulting from high prices for fertilizer, machinery and other inputs. The subsidized rates were also intended to provide an incentive to expand agricultural production and, in the case of the Northeast, to give special help to a less developed part of the country. The main institutions extending agricultural credit, the Banco do Brasil and the Banco do Nordeste do Brasil, are able to extend this credit on subsidized terms by virtue of large interest-free deposits which public agencies place with them, so that the financial burden of the subsidies is borne by the public sector as a whole, rather than by individual financial institutions. However, the system has severe disadvantages, including possible leakages from the agricultural sector into other, lower priority sectors, the inequity of granting large farmers access to subsidized credit, and, in the case of larger agricultural enterprises, the encouragement of unduly capital intensive techniques. The possible adverse effects of such subsidized credit are much less in the case of credit to very small farmers, such as those being assisted under the POLONORDESTE program, because many of the beneficiaries are below the poverty  - 9 - level and those programs are being intensively supervised in a manner that will ensure that the credit is used for the intended purposes. Bank staff have for many years conducted a dialogue with the Government on this matter, and the Government is aware of the serious disadvantages of the system. In the past year a few modifications have been made. Larger farmers are now required to finance at least 25% of on-farm investments with their own resources, and a sliding scale of rates has been established charging larger farmers more than smaller farmers. The basic POLONORDESTE rate in the Northeast has been increased from 7% to 10%. The Government has felt that it was politically impossible to move further, and, therefore, most of the undesirable features of the program still remain. Northeast Agriculture 1/ 26. The nine states of Northeast Brazil have a total population of about 30 million, of which some 60% live in rural areas. Agricultural pro- ductivity is low and rural per capita incomes are roughly estimated at only one quarter the national average (which was about US$1,140 in 1976). Much of the Northeast has a semi-arid climate, with serious periodic droughts, and generally poor soils. Reducing poverty in the region is further handicapped by a highly skewed distribution of land ownership. Less than 1% of the total number of farm establishments account for 40% of the area, and in some areas up to 80% of the rural labor force owns no land at all, though this proportion varies considerably within the Northeast. Numerous government programs have been directed at speeding economic development in the Northeast, including public works activities, e.g. dams and ponds in drought-prone areas. Other government initiatives include the establishment of a principal coordinating agency for development activities in the region (SUDENE), a Northeast Develop- ment Bank (BNB) for financing investment in agriculture, industry and certain public utilities, and substantial fiscal and other incentives for developing both industry and agriculture. However, new jobs have not kept pace with population increases, and the gradual emigration from rural to urban areas has been coupled with considerable emigration from the Northeast to the more industrialized Center-South of Brazil. 27. The POLONORDESTE program, which was established in 1974, is helping to finance: (i) preparation and initial implementation expenditures for new integrated rural development projects, and (ii) the continuation or completion of projects (particularly land settlement and irrigation) begun or planned before the creation of POLONORDESTE. By end 1977, around US$584 million was allocated. POLONORDESTE has helped to channel the energies of various government bodies toward improving the agricultural productivity of the rural poor. It has had a beneficial impact in stimulating the development of motivated and dedicated local groups. Nevertheless, at both state and regional levels, the institutional capacity to plan, coordinate and execute the program requires strengthening, and as a result, some project are suffering execution 1/ Readers are directed to "Rural Development Issues and Options in Northeast Brazil" (Report No. 665a-BR dated June 23, 1975).  - 10 - delays. At the regional and federal levels, there were in the past frequent delays in funding which reflected complicated program preparation and approval procedures involving numerous agencies. Recent progress has been made here (see para. 57 1;cThow) but the SUDENE group responsible for assisting in POLONORDESTE project preparation is still weak. The Bank is discussing with the Government new means of collaboration which would strengthen that group. Bank Participation in Brazil's Agricultural Sector 28. The proposed loan for the Bahia Rural Development project would be the Bank's fourteenth loan for the development of Brazil's agricultural sector. The proposed loan would also be the fifth loan made for an integrated rural development project in Brazil, and other rural development projects are under preparation in several other Northeast states. Implementation of the Rio Grande do Norte and Minas Gerais projects is progressing satisfactorily after slow starts because, in the case of the former, of delays in the transfer of federal funds and marketing problems in the principal crop (cotton), and of delays in the release of credit funds for the Minas Gerais project. The Ceara project was approved last September, and its implementation is just commencing. The Paraiba loan is not yet effective. PART IV - THE PROJECT 29. A report entitled "Staff Appraisal Report: Northeast Brazil Bahia Rural Development Project - Paraguacu" (No. 2009a-BR dated May 19, 1978) is being circulated separately to the Executive Directors. The project was prepared by the Bahia State Agricultural Planning Commission (CEPA-BA), with the assistance of Bank staff. It was appraised by a mission that visited Brazil in October 1977. Negotiations with the Federal Government and the State of Bahia were held in Washington during May 4-8, 1978. The federal delegation was led by Ricardo Miranda, Coordinator of POLONORDESTE, and the state delegation was led by Jose Guilherme da Motta, Secretary of Agriculture. The Project Area 30. Bahia is the most populous and largest (560,000 km2, 35% of the Northeast) of the nine Northeast states. Slightly over half of Bahia is an arid and semi-arid zone located in the "Drought Polygon." Some 59% of its population lives in rural areas. Over the past decade, Bahian agricultural production has accounted for 28% of Northeast and 8% of national production. The Bahian cattle herd accounts for 40% of the Northeast herd. While the area under cultivation increased 24% during 1960-70, the importance of agricul- ture has declined to about 30% of the Bahian gross product. Bahian agriculture is largely characterized by low levels of technical skill, little development of infrastructure or service support, little local product processing and resource distribution inequalities.  - 11 - 31. The project area of 60,764 km , one of Bahia's four "priority" areas in the POLONORDESTE program, comprises the greater part of the Paraguacu River basin. About half the project area has irregular rainfall; some central regions are currently in the third consecutive year of markedly below-normal rainfall. Ground water resources are limited and difficult to tap economically. 32. The project area currently has a population of slightly more than one million, with average density ranging from 74.0 in the east to 8.5 in the west. Its rural areas have long been a source of emigrants to other parts of Brazil, and, recently, to the region's urban centers. 33. Agriculture is the chief economic activity of the region, involving over 71% of the economically active population. Distribution of agricultural land is highly skewed. Eighty percent of owner-operated farms are under 50 ha, but these together account for only 16% of the area farmed. There is some irrigation, but mostly by traditional means. The chief food crops are manioc, beans, and maize; the main industrial crops are castor beans, tobacco and sisal. Agricultural support services favor large and medium scale farmers. Over 1974-76, over 90% of agricultural credit (by value) from the Bank of Brazil and the Bank of the Northeast of Brazil went to livestock farmers (who tend to be large scale farmers) rather than to crop producers. Extension services have had a similar bias, and cooperative societies in the area were mostly organized by larger farmers. Storage, mechanization and input supply services are sparse and their influence has been slight. 34. With the exception of the larger urban areas, infrastructure and support services are weak. The road network totals 12,300 km but many of the 9,000 km of local access roads are seasonally impassable. The 800 km of high voltage transmission lines in the project area, even with an on-going expansion project, will serve only a fraction of the rural communities. Many of the 100 "urban" centers even lack locally-generated electricity. 35. Health and education services are poorly developed and are accessible chiefly to urban dwellers., Approximately 47% of children aged 7 to 14 attend school (compared to 86% for all Brazil and 57% for Bahia); 38% of those over 14 years of age is literate. In the entire project area, there are only 74 physicians and 19 dentists. There are 79 health centers in the project area. While overall there is one hospital bed for every 1,000 inhabitants, half the beds are in the project area's main town, Feira de Santana. There is a high incidence of diseases inc:Luding schistosomiasis and childhood diseases, aggravated by infant malnutrition. only 56 of the project area's 350 cities towns and villages have public or communal water supply systems, and only 17 of these have house connections. 36. In spite of its difficult environment and relative stagnation for much of this century, the Paraguacu Basin has favorable development prospects. It is only 120 km from Salvador, the state capital (population 1.4 million). Some areas have high agricultural potential, numerous small landholders, and a tradition of small-scale agriculture. The Basin also has growing markets  - 12 - and employment in its urban areas. While agriculture still uses largely rudimentary technology, there are good prospects for upgrading production, partly through small-scale irrigation, and overcoming the inefficient infra- structure and agricultural services. Project Objectives and Content 37. The proposed project is intended to increase productivity and incomes, broaden economic opportunities and generally improve the standard of living of some 17,000 small farm families. It would also help to strengthen the capacity of local institutions, particularly to encourage their small farmer orientation. 38. The project would include: (i) intensified development of approximately 16,325 small-farm and 675 small livestock operations, and provision of credit for investment and incremental working capital; (ii) expansion and strengthening of agricultural support services (including extension, research and seed production, input supply and mechanization services, irrigation technical assistance, and assistance to cooperative societies), with particular attention to small farmers; (iii) improved access to land and to land titles for small-scale farmers by providing land purchase credit for approximately 820 small-scale operators, and by strengthening state surveying and titling services; (iv) development of infrastructure through the construction and upgrading of about 1,140 km of access roads, establishment or rehabilitation of small-scale irrigation schemes, building of crop storage facilities and of 12 small multi-purpose dams, and construction of about 70 village water supply systems; (v) expansion and improvement of health and education services and facilities (including construction or improvement of 50 village health posts, 27 health centers and 100 rural primary schools); and (vi) support for project administration, monitoring and evaluation. The project would be carried out during the 5-year period beginning April 1978. 39. Agricultural extension. Through an expanded and strengthened network, EMATER-BA (the state technical assistance and rural extension company) would promote increased small-farmer use of improved agricultural technology and support services. The project would finance the costs of a four-fold increase in the extension service in the project area (at present 77), training of extensionists and farmers, and demonstration plots. There would also be changes in the structure and methods of extension activities.  - 13 - 40. Agricultural Research and Seed Production. EMBRAPA, which coordi- nates agricultural research in Brazil, and its Bahia affiliate (EPABA), have tried to consolidate research activities in the state and to establish stronger collaboration with -local producers and the extension service. However, there remains considerable scope to improve production through adaptive research and experimentation. The project would finance research on improved varieties, plant spacing and protection, and nutrient application for major crops, as well as on improving mixed farming systems. It would also include the devel- opment of improved seed production facilities. The project would finance equipment, vehicle and minor installation costs for four research and experimentation sites, and the initial costs of seed production activities. Agricultural Credit 41. The proposed credit component is intended to expand significantly small farmer use of institutionalized credit through the Banco do Brasil (BB) and Banco do Nordeste do Brasil (BNB). It would include: (i) agricultural in,vestment credit for about 16,325 small-scale farmers with less than 100 ha (including about 2,000 share- croppers and renters) for land clearing, storage facilities, small equipment and tools, and establishment of permanent crops; and to finance irrigation works for about 500 beneficiaries; (ii) incremental seasonal crop production credit; and (iii) livestock investment credit for about 675 small- and medium- scale livestock operations of up to 200 ha. The majority of the benefitting families, almost 90% operating farms of less than 50 ha, would be receiving institutional credit for the first time. Virtually all have incomes below the relative poverty line in Brazil (about US$380 per capita). 42. Credit terms and conditions would be those established by the Govern- ment for the POLONORDESTE program, including interest rates of 10%, unindexed, for both investment credit and seasonal production credit (see Schedule 5 to the draft Loan Agreement). Repayment terms for investment credit provide for a maturity of up to 12 years, including up to 6 years' grace. The Central Bank would make available the necessary funds to cover 100% of sub-loan value. The Bank would be informed of any modification in credit terms (see Section 3.03(a) of the draft Loan Agreement). The interest rates adopted by the Government for POLONORDESTE Projects are negative in real terms (see para. 25). The disadvantages of negative real interest rates are well known. However, in the case of this and similar projects they are, to a certain extent, mitigated by (a) the limited financial resources of the borrowers, which makes diversion of loan funds to other sectors unlikely; (b) the stringent limit on sub-loans to individual farmers --total debt outstanding not to exceed 100 MVR 1/ (about $5,500) which works in the same direction; 1/ The "Maximum Reference Value" or MVR is a periodically adjusted measure, equivalent to the minimum monthly wage which is currently about US$55.  - 14 - and (c) the close supervision of loan uses. It is thus unlikely that the negative real interest rates will lead to a serious misallocation of resources in rural development projects structured as the present one. Loan disburse- ments for livestock investment would be limited to 15% of total Bank disburse- ments from the credit component (see Section 4 of Schedule I to the draft Loan Agreement), and would be limited to small-scale producers with low incomes, who have had limited access to credit and technical assistance. 43. Under the POLONORDESTE program, several steps have been taken to help expand credit coverage and alleviate some of the constraints to small farm lending. In utilizing POLONORDESTE funds, participating banks have been instructed by the Government to give priority to small-scale and landless farmers. Application procedures for loans of under 50 MVR have been simpli- fied. The extension service helps small farmers in preparing credit applica- tions. BB and BNB agencies are to initiate satellite banking activities for small loans in municipalities without permanent bank branches, especially in POLONORDESTE project areas. These changes would be applied under the proposed project. 44. The Government would maintain agreements with participating banks governing the terms and conditions of the credit program. Seasonal crop production credit would be provided under an arrangement in which repayments would be reapplied for subsequent credit (see Section 3.03(d) of the draft Loan Agreement). Disbursements for seasonal crop credit would be made only against credit in excess of the amount extended during the previous year. 45. Land Purchase Credit. An interesting feature of the project is the program to extend to more farmers the land ownership or security of tenure needed to induce on-farm investment and to facilitate access to credit, extension, etc. Currently in the project area, land purchase credit from government funds is made available only when, with the lot to be purchased, the farm will be at least 35 ha. This has been regarded as the minimum necessary to generate a net income four times the annual minimum wage (around US$3,000 total). Because of this high minimum size, very few farmers in the project area have been able to take advantage of the land credit program. Exceptions to this minimum for land credit have usually been granted only in cases of irrigation or highly organized colonization programs (an exception is being negotiated for the Ceara Rural Development Project, being partly financed through Bank Loan 1488-BR). 46. The project would include land purchase credit with a more flex- ible lower limit on farm sizes, from which some 820 sharecroppers, tenants, and owners of small plots are expected to benefit. Under this component, short-term (up to 2-year) financing would be available to cooperative societies to purchase larger parcels of land for subdivision and resale to their small- farmer members. Also, the state would establish a fund to purchase potentially usable lands where cooperative participation is not possible, or to expropriate unutilized estates. By December 31, 1978, the Government would transmit to the Bank new guidelines permitting a lower limit of farm sizes eligible for land credit and with an administrative plan to expedite processing of the small land purchase loans (see Section 3.05 of the draft Loan Agreement). The new minimum size would be that which enabled a farmer to earn at least the minimum regional annual wage for each labor unit to be employed, taking into account the managerial and financial capacity of the farmers concerned and the socio- economic situation of the area. The Bank loan would not be disbursed against  - 15 - this component, but the loan would be reduced by US$800,000 1/ if the guidelines and administrative plan are not presented on schedule (see para. 6 of Schedule 1 to the draft Loan Agreement). 47. Land Surveying and Titling. Over 95% of the farmers in the project area have no clear title to their land. To improve this situation, the project would expand the capacity of the Bahian Land Institute (INTERBA) to survey the lands of small-scale farmers and to grant a total of 15,000 titles (roughly equivalent to the number of "owner-operators" expected to participate in the project). The project would finance the costs of office and surveying equipment, vehicles and materials required for a headquarters unit in Salvador and 6 field offices; and the staffing and maintenance of the system during the project period. INTERBA will, in particular, need to carry out cadastral reviews during the next two years. The establishment of two new review units would be a condition of disbursement for the component (see Section 3(b) of Schedule 1 to the draft Loan Agreement). 48. Cooperative Society Support. The project would expand the state's assistance to cooperative societies and farmer groups in order to provide production services to small farmers. Efforts would be made to strengthen the societies' financial and managerial capacities; and to improve their marketing services, credit channeling, etc. The project would finance expenses of expanding the Secretariat of Agriculture's Cooperatives Division staff, minor equipment and training. 49. Mechanization/Input Supply. There is little privately owned motorized farm machinery in the project area and the state mechanization service and agricultural supplies company (CAMAB) offers only limited services. Parallel to the project (without project financing), CAMAB would establish some 20 retail outlets. It would also improve its machinery pool in the poorly served western area, especially to provide mechanization services for irrigation related investment (see Section 4 of the draft Project Agreement). Project costs would cover the installation of a new equipment storage depot and workshop, and purchases of vehicles and office equipment. Agreements between the participating agencies would be a condition of disbursement for the component (see Section 3(c) of Schedule 1 to the draft Loan Agreement). 50. Irrigation. In keeping with the local tradition of farmers groups building small irrigation works, some 500 farmers would benefit from a total of 1,500 ha of new or rehabilitated irrigation schemes. The works would be identified by extension agents and prepared and designed by the state's rural engineering company (CERB). The personnel, materials and contracted services of CERB would be financed by the project while irrigation works would be financed through the credit component. A condition of disbursement for this subcomponent would be the preparation of a manual on preparation procedures and evaluation criteria satisfactory to the Bank (see Section 3(d) of Schedule 1 to the draft Loan Agreement). Any group irrigation scheme costing more than US$250,000 would be subject to prior approval by the Bank (see Section 3.04 of the draft Loan Agreement). 1/ 35% of the cost of the land purchase component.  - 16 - Infrastructure 51. Multi-purpose Dams. It has been established that, in some instances, small dams would be the least-cost village water supply solution for target communities and could also serve small irrigation fisheries projects and live- stock in droughts. The project would include feasibility studies and the design and construction of 12 small earth dams. By December 31, 1978, feasibility studies and preliminary plans, satisfactory to the Bank, would be completed for the 12 dams (see Section 3.06(a) of the draft Loan Agreement). 52. Crop Storage. The project would include the construction and equipping of six 700 ton capacity storage units whose modular design would permit future expansion. Improved on-farm crop storage facilities would also be developed (for funding under the credit component). At the same time, the state would test in selected areas two schemes to improve marketing and production, which would require local bulk storage capacity. Storage tariffs would cover expected minimal storage operating and maintenance costs and provide for capital cost recovery over about 25 years. The signing of agree- ments with the responsible agencies would be conditions of disbursements for the storage component (see Section 3(c) of Schedule 1 to the draft Loan Agreement). 53. Feeder Roads. In the Paraguacu area there are some 9,000 km of unpaved municipal roads, mostly no more than one-lane earth tracks impassable for much of the rainy season. To help provide greater access to markets and services, the project would include engineering design and construction or upgrading of about 1,140 km of low-cost feeder and access roads. Their design standards have been agreed upon. Execution of the works would be the respon- sibility of the state's road construction unit. An added 700 km of higher standard federal and state collector roads will be necessary in the Paraguacu area to support the project and other planned developments. The state would construct the 14 collector roads by the end of the fourth year of the project (see Section 6(c) of the draft Project Agreement). The state also is currently preparing a program to strengthen its highway department's road maintenance capacity. This plan would be provided to the Bank for comment by December 31, 1978 (see Section 6(b) of the draft Project Agreement). 54. Health Services. The project would develop a low-cost rural health delivery system to serve some 110,000 people. It would include: (i) the construction and equipping of 50 village health posts; (ii) the construction, upgrading or equipping of 27 health centers; (ii) the development of an improved building and equipment maintenance system; (iv) the training of health workers; and (v) the strengthening of state health agencies. The project would finance construction and equipment costs; the training program costs; and technical assistance, equipment and operating costs for health administration. To ensure that the proposed investments are carried out well, and that the improvement in health services is sustained, the Government would provide plans for endemic disease control programs for the project area to the Bank by December 31, 1978 for comment. By the same date, the Bank would be provided with the details of the rural health attendant training courses for comment (see Section 3.07(a)(i) of the draft Loan Agreement). Conditions of disbursements for the health component would be the completion of supplementary project staffing of regional health offices; and the signing of project agree- ments by participating agencies (see Section 3(e) of Schedule 1 to the draft Loan Agreement).  - 17 - 55. Village Water Sipply. The project would provide for the study, design and construction of about 70 village water supply systems providing potable water to some 35,000 people; the strengthening of state and insti- tutions to maintain such systems; and the training of village water system operators. Community societies would be responsible for (i) contributing land, funds, labor and/or local materials; (ii) operating the systems; and (iii) collecting user charges. The water systems would range from simple community stand-pipe systems in villages with up to 500 population to systems including elevated storage tanks, more extended distribution and some house connections in towns with up to 2,000 people. CERB would design and build the water systems and also be responsible for supervision and maintenance back- stopping. CERB will carry out special pre-investment, maintenance and organization studies. The project would finance these as well as the equipment and construction of the water systems, and regional maintenance equipment. The results of the studies would be provided to the Bank by December 31, 1978 for comment (see Section 3.07(a)(ii) of the draft Loan Agreement). Before starting construction of a system, the benefitting community would establish a health society; agree on the community's financial contribution; and agree also on user charges (see Section 3.08 of the draft Loan Agreement). 56. Education and Vocational Training. The education component would include: (i) the construction and equipping of 100 rural primary schools where inadequate facilities exist or students need to walk more than 3 km to reach schools; (ii) the preparation and introduction of a new curriculum and teaching materials for grades 1-4; (iii) the training and/or upgrading of 1,200 teachers and 259 supervisors; (iv) the provision of vocational training for about 3,000 persons; (v) studies on training needs and employment projec- tions; and (vi) the strengthening of the state Secretariat of Education. The project would finance design, civil works, equipment and furnishings for the primary schools; development of new teaching materials; training programs; and the costs of administering this component. Detailed site plans for schools to be built under the project would be provided to the Bank, for approval (see Section 3.09(c) of the draft Loan Agreement). As conditions of disbursement, the Government would provide to the Bank satisfactory evidence of site acqui- sition and with agreements between the participating agencies (see Section 3(f) of Schedule 1 to the draft Loan Agreement). The state would present a revised rural primary education curriculum satisfactory to the Bank before December 31, 1978 (see Section 3.09(a) of the draft Loan Agreement). 57. Administration, Monitoring and Evaluation. A special project unit has been established within CEPA-BA to coordinate project planning, implementation, monitoring and control. The state would also establish a separate evaluation group directly responsible to the president of the state's POLONORDESTE management council. The proposed project would finance the costs of equipping and staffing these units, and consultant services. The Government would provide a project evaluation program to the Bank by December 31, 1978 for comment (see Section 3.10 of the draft Loan Agreement), and the annual project work plan (see Section 3.12 of the draft Loan Agreement). The latter would be provided annuaLly for Bank comment four months prior to POLONORDESTE's fiscal year, and approved by the Government two months before then. In addi- tion, beginning this year, the Federal Government would indicate a preliminary  - 18 - allocation of its planned funds for POLONORDESTE projects about six months prior to each fiscal year. This should facilitate the individual states' budget preparation. Moreover, the regional POLONORDESTE group now plans to participate more intensively at state and area levels in the formulation of annual work plans for each project. These and related measures to strengthen the administration of all 31 rural development projects in the Northeast (see the draft supplemental letter) should help ensure that, in the future, major funding delays in the POLONORDESTE program will be avoided. Cost Estimates 58. The total project cost is estimated at US$106.6 million including a foreign exchange component of US$17.5 million. A summary of project costs is set out in the Project Summary above (see p. ii). Physical contingencies have been estimated at 6% of the baseline cost, and price contingencies equivalent to 26% of baseline cost plus physical contingencies. The provision for future price increases has been calculated separately for different items. 1/ 59. The proposed Bank loan of US$37 million to the Federative Republic of Brazil would finance 35% of total project costs, the balance to be provided by the Federal Government under its POLONORDESTE program. The loan would cover the project's full foreign exchange costs of US$17.5 million equivalent, as well as US$19.5 million or 22% of local costs. Since Brazil is making a vigorous effort to mobilize domestic resources, it would be appropriate for the Bank in this instance to assist in financing some local currency expendi- tures, especially in light of the project's high priority but relatively low foreign exchange content (16%). If the Bank is to be effective in supporting a project of this kind, it seems reasonable to finance at least 35% of total costs even though this entails financing some local currency expenditures. The government would ensure that adequate funds would be made available for the timely execution of the project, and for the operation and maintenance of the facilities and services developed. Retroactive financing of up to US$1 million equivalent is proposed to help cover eligible expenditures after March 31, 1978, but before the loan is signed. Procurement 60. All equipment and vehicles needed (totalling US$2.0 million equiv- alent) are locally produced at reasonable cost and would be procured in accordance with local procurement and bidding procedures, which are acceptable. 1/ The annual percentage price increases used were: 1978 1979 1980-84 Civil Works 8.0 7.5 7.0 Equipment 7.0 6.5 6.0 Other Materials, Supplies, Credit, Salaries 7.0 7.0 7.0  - 19 - Construction works (totalling US$15.5 million) for the feeder roads would be divided into 19 construction lots. Contracts for these and the other major civil works required (US$5.1 million) would be awarded to prequalified bidders on the basis of competitive! bidding advertised locally and in accordance with satisfactory procedures. Brazil has a competitive construction industry capable of carrying out the project works. Since the individual construction works are relatively small and quite dispersed, foreign contractors are not expected to be interested, though they would not be excluded from bidding. Construction works (US$2.6 million) for health posts, water supply, extension and mechnization service installations would be carried out through a combi- nation of self-help, force account and local bidding. About 540 man-months of consulting services are estimated to be contracted from Brazilian sources, costing an average of about US$4,000 equivalent, primarily for feeder road design, project administration and evaluation unit studies. These would be employed on terms and condiLtions satisfactory to the Bank. Disbursements 61. The proposed loan would be disbursed against 36% of all project expenditures except land purchase credit. Disbursements would be made to the Central Bank of Brazil against withdrawal applications covering statements of expenditures issued by the various implementing agencies under the project and certified by the project unlit. Standard documentation would be submitted to the Bank for civil works, vehicles, equipment and technical assistance. Cost Recovery 62. The project's agricultural investments and services over the five- year period (including conitingencies) would average roughly US$3,800 per direct beneficiary family. Physical infrastructure and social service investments would amount to an additional US$2,200 per direct beneficiary family. These investments would also greatly benefit the community at large. Of the estimated US$69 million total (including contingencies) in "off-farm" project costs, around US$29 million would be recovered through direct financial contributions, user charges and taxes. This is appropriate in view of the beneficiaries' low income levels. The extent to which on-farm project costs would be recovered in real terms is, however, very difficult to estimate because of inflation and the Government's policy of providing unindexed agricultural credit. Assuming a gradually declining though continuing moderate inflation, real recovery of on-farm project costs could well be less than half. Project investments would generate recurrent costs of some US$6.4 million p.a. after the implementation period, principally for agri- cultural extension and research plus health and education facilities. These are expected to be partly offset by additional revenues of some US$4.4 million annually from taxes on incremental agricultural production. Benefits and Risks 63. The main benefits of the project are expected to be increased agri- cultural production and higher incomes for small farmer beneficiaries. Of the 17,000 direct participants, only a fraction are estimated to have incomes above the relative poverty level in Brazil (US$380 per capita). Over a period  - 20 - of eight years, with a moderate increase in the area cropped, the introduction of improved management, technology and inputs; and off-farm investments in roads, storage facilities and various agricultural services, annual crop production of direct project beneficiaries is expected to increase by US$32.7 million equivalent. The incremental production is expected to consist mainly of beans (45%), maize (11%), manioc (11%) and tobacco (10%), along with citrus (8%) and passion fruit and other fruits (9%). Further benefits will derive from expanded milk and meat production, estimated at US$1.0 million annually. The estimated family income from agricultural or livestock activities would increase from a weighted average of about US$655 equivalent to some US$1,685. Based upon the expected yield increases, the economic rate of return is estimated at 15% for the components for which benefits can be quantified (accounting for 76% of total project costs). The financial rates of return for participating farmers, based on representative models, range from 12% to over 50%. In addition, the project is expected to generate additional agricul- tural employment, around 9,200 man-years annually, largely to be met by family labor. Moreover, the social infrastructure investments should benefit more than 100,000 people living in the target regions. The project's emphasis on community participation and low-cost design of the health and training compo- nents could be replicated in other areas. 64. The project's success will depend on the timely implementation of a wide variety of activities by many agencies, some of which have limited experience in carrying out large programs directed at small-scale farmers. On these accounts, the state would involve directly key officials of the principal participating agencies in its POLONORDESTE management council. Other safeguards built into the project include the annual review mechanism for approving the implementation program of each participating agency, a strong project unit, along with monitoring and evaluation systems. Moreover, the endemic disease control program would deal with any possible increase in the incidence of schistosomiasis in the project area resulting from the small irrigation and dam construction schemes. PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The draft Loan Agreement between the Federative Republic of Brazil and the Bank, the draft Project Agreement between the State of Bahia and the Bank, a draft supplemental letter from the Federative Republic of Brazil, and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 66. Special conditions of the project are listed in Section III of Annex III. As noted previously, conditions of disbursements would be: (a) for the land titling component, the establishment of two more cadastral review units (para 47); (b) for the minor irrigation schemes, the preparation of a satisfactory project manual (para 50); (c) for the health component, the completion of supplementary staffing of the project area regional health departments (para 54); (d) for rural primary schools, the provision to the  - 21 - Bank of satisfactory evidence of the acquisition of the respective sites (para 56); (e) for the heaLlth, education, mechanization and storage/marketing components, the prov4.sior to' the Bank of the agreements between the state and participating agencies (paras 49, 52, 54 and 56). 67. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 68. I recommend thalt the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 24, 1978 Washington, D.C.  - 22 - ANNEX I Paso I SAZ7L * SOCIAL INDICATOIS DA?A SMElT LAND AREA (TNDU 6R5) ................... ............... B................ ^RAZIL REFERENCE COUNTRIES (19701 T7TOL A512.0 RnST RECENT ASRTC 2029, tb 19,0 ESM?OATE OEEICO URUGUAY JAPAN** C9@ PDE C1DT9n CUSS) 300.0* 550,.* 114n0./a * 690.0 940* 2030.0* .................... POPJLATION ANt VITAL STATTSTTC3 R3PU^0TpnW (zUO.09. rNlLLIDNI h9. 92,58 110. /a 50,3 2.7 104.3 I 1vAYF'Km 8,n 11. 3 I.0 15.0 28 0.0 PER 93 00, AGRIIJLT[IRAL LANO 44.0 oR.0 54.0 7. 52. D I.0 1700.0 VITAL ST&ATTS?CS CRI0 9TRtD ROTE 1/?SU. Aol 00. lS,rJ 37.1 83.9 22.l 17.5 0R,:E IlFA7' RATE C/T-w7tJl IAV7 e.s a,0 10 2.2 7.1 T.FowT .nrPoL!TY 0AIF t/TW(u1 Ig0.o II.0 *. 8.5. 13.1 LIFE E,PECTo4Co AT BIRTO ( I05) S6h0 5s,4 b1./. h9,3 71.1 00,ms9 IRR uCTT30 04TF 2.6 2,h ?.5 3,1 t.4 1,0 '01`ULlAT1o` GRnwT0 httL CE) ItnTAL 30 7.9 2.e 3,ta 0.7 1.0 JPRA- 5.5 5s0 4.0 a * 0 1.2 0.0 JPRAN D)P ILoTn0 (I 310 7T1ALI 46,0 S6,0 59 1 S,t 781. 8I*tJ AGF RTOICTUDE (PFRCENIt 0 TM Ia YEARS 403, 0,0 o2 ,7 Ll.h2 28 3 21 .0 1S 11 00 YFARS Su,n 55.0 5s.1 50.? h3.S 58.9 oS YYADt AN3 3VEQ S,O 3.0 3.02 5, I2.? 7.1 'GE `EpEoItFNCY A T3I n,9 0. 65 0 I, .A 0. 0.5 ! 4I r-T, nFPFNSENCO CQTI I . t 5 1.4 /b 2.0 1.0 0. 'i'll y 8LAkNNING OCCEIT'RS tLI'4LiJ?LIvF TOJU) .. ?50,0 .S5.5. * 13rQ9 f0 nF 000RiE 7W01N) , 1. . . T300L 100,0 9tIPcE tTP4yU8h. P7TO,0 29400 0 34100 oot 'Co,o. 10?0,0 53300.0 LAF 94470rF TM AGQICJLTtl#E tst 52.n 40,4 37,8 oS6 17.0 19.0 J0E LYv,' tS OF LAS30R 9mRCE1 ., 7.5 5.0 .. 0.0 /a .2 0N:3.E rlTOIoT8rjTo4 S '0 00T0009 TNC!nwE 9tC'f 9'R- l.*FST StS 0 OJIUEWOLO$ 39,9 / 35 oa * 37,0 19.0 /b lJ.2 w14AFST 20t oF H%J5EOLDS :1.1 a oh2o7 0 h3.2 a"7 7 37.6 L:JEIT 2nx OF .dJSEoOL.O 3,57 3,0 a ,, u7 0.4 /b 8.8 LIwEST ao0 7OF HIJscfOLMS 10.3L a- I .. 10.2 10.2 7l 22.3 0I1TQIR,iTT1N (IF LAN3 3wNF9Q4TP X 1^> 00 T1P 10 39 JC OW4F4 .,