Ecuador - Third Livestock Development Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 2799 PROJECT PERFORMANCE AUDIT REPORT ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (Credit 222-EC) December 28, 1979 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authoriation. CURRENCY EQUIVALENTS US$ = S/ 25.00 Sucres 1 = US$0.04 Sucres 1,000 = US$40.00 Sucres 1,000,000 = US$40,000.00 WEIGHTS AND MEASURES (Metric System) 1 kilogram (kg) = 2,205 pounds 1 ton = 2,205 pounds 1 hectare (ha) = 2.47 acres 1 liter = 0.264 gallons ABBREVIATIONS AU Animal Unit BNF National Development Bank (Banco Nacional de Fomento) CB Central Bank COFIEC Development Finance Company ERR Economic Rate of Return IDA International Development Association IDB Inter-American Development Bank INIAP National Institute of Agriculture Research MAG Ministry of Agriculture and Livestock PB Participating Bank PCM Project Completion Mission FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY Project Performance Audit Report ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (Credit 222-EC) TABLE OF CONTENTS Page Preface i Basic Data Sheet ii Disbursement Table iii Highlights iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. Summary 1 II. Main Issues 3 Need for Project 3 Rate of Return 7 IDA Performance 7 Lesson to be learned 8 PROJECT COMPLETION REPORT I. Background 9 II. The Project 11 III. Operating Performance 14 IV. Institutional Development 24 V. Project Impact and Economic Re-evaluation 25 VI. IDA Performance 31 VII. Conclusions 32 Table 1 - Appraisal Estimate and Actual Project Financing 34 Table 2 - Allocation of Proceeds of Credit 35 Table 3 - Central Bank Rediscounts from Project Account 1972-1978 35 Table 4 - Project Cost and Subloans by Category and Participating Banks 36 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) Page Table 5 - Distribution of Subloans by Interest Rates 37 Table 6 - Distribution of Subloans by Size, Participating Banks and Category 38 Table 7 - Distribution of Subloans and Number of Beneficiaries 39 Table 8 - Distribution of Subloan Approvals by Years and Category 40 Table 9 - INIAP: Utilization of Funds 41 Annex 1 - Table 1 - Production and Prices 42 Table 2 - Beef Ranch Investment Costs 43 Table 3 - Beef Ranches (Estimated and Actual Parameters) 44 Table 4 - Dairy Farm Investment Costs 45 Table 5 - Dairy Farms: Estimated and Actual Parameters 46 Table 6 - Percentage Herd Composition and Sales 47 Table 7 - Percentage Price Increases of Selected Inputs - 1972-1975 48 Table 8 - Costs of Labor and Selected Inputs - 1970-1976 49 Table 9 - Economic Parameters 50 Annex 2 - Procedures Used for the Recalculation of Project Rates of Return 51 Annex 2 - Table 1 - Estimate of Costs and Returns for Beef and Dairy Subloans 53 Table 2 - Project Benefits 54 Annex 3 - Project Unit Organization Chart 55 Map  Project Performance Audit Report ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (Credit 222-EC) PREFACE This is a performance audit of the Third Livestock Development Project in Ecuador for which Credit 222-EC in the sum of US$10.0 million was approved in November 1970. The final disbursement was made on June 7, 1978 and the credit was closed on June 6, 1978, 18 months after the original closing,date. The previous two livestock development projects (Loan 501-EC and Credit 173-EC) were approved on May 18, 1967 and November 24, 1970, respectively. A follow-on project, Agricultural Credit Project I (Loan 1459-EC) was approved on June 14, 1977. This audit consists of a memorandum prepared by the Operations Evaluation Department and a Project Completion Report (PCR) dated June 7, 1979. The PCR was prepared by the Latin America and the Caribbean Regional Office on the basis of a visit to the country in January 1979. The audit memorandum is based on a review of the Appraisal Report (No. PA-35a), dated November 10, 1970, the President's Report (P-875) of November 12, 1970, the Credit Agreement dated December 10, 1970 and the PCR. Correspondence with the Borrower and internal Bank memoranda on project issues as contained in rele- vant Bank files have also been reviewed and Bank staff associated with the project have been interviewed. An Operations Evaluation Department mission visited Ecuador in May 1979. Discussions were held with officials of the Ministry of Agricul- ture and Livestock, Participating Banks and the Project Unit, and project workers and farmers. The information obtained and observations made during that mission, in addition to that obtained from Bank records and staff, were used to evaluate the conclusions of the PCR and are also reflected in the audit memorandum. A copy of the draft report was sent to the Borrower on November 1, 1979 for comment. No comments have, however, been received. The audit concludes that the PCR provides a lucid, accurate account of project history and a candid evaluation of most of the project's achieve- ments and shortcomings. The PCR falls short in its evaluation of the need for and benefits of the project and its income impact. The memorandum elaborates on these as well as a few other minor issues. The Operations Evaluation Department acknowledges the valuable assistance provided by the Government, staff of participating Banks, and the Project Unit and farmers, which contributed significantly to this report.  - ti - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (Credit 222-EC) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 19.7 21 3 Overrun (%) 8 Credit Amount (US$ million) 10 0 10 1 1/ Disbursed 10 0 10.1 Cancelled Repaid Outstanding to 3/31/79 10 0 10 1 Date Physical Components Completed June 1976 March 1978 Proportion Completed by Above Date () N A 100 Proportion of Time Overrun (%) N A 35 Economic Rate of Return (Z) 22 18 OTHER PROJECT DATA Original Actual or Item Plan Revisions Est. Actual First Mention in Files or Timetable - - 02/69 Government's Application - - 07/69 Negotiations 02/70 - 08/14/70 Board Approval 04/70 - 11/24/70 Credit Agreement Date - - 12/10/70 Effectiveness Date 04/30/71 05/30/71 06/15/71 07/15/71 08/15/71 09/30/71 09/30/71 Amendments to Credit Agreement 02/15/73 05/09/74 Effectiveness - Amendments to credit - 10/08/74 Closing Date 12/31/76 06/30/77 12/31/77 03/31/78 06/07/78 Borrower Republic of Ecuador Executing Agency Ministry of Agriculture and Central Bank Fiscal Year of Borrower Jan I - Dec 31 Follow-on Project Name AgrLcultural Credit Project I Loan Number 1459-EC Amount (US$ million) 15 5 Loan Agreement Date 11/03/77 MISSION DATA Sent Month No of No of Date of Item By Year Weeks Persons Manweeks Report Identification IDA Preparation IDA Appraisal IDA 9/69 3.5 4 14.0 11/70 Total 3.5 14.0 Supervision I IDA 5/71 1 6 1 1.6 6/18/71 II IDA 11/71 0.1 1 0 1 12/10/71 III IDA 1/72 1 4 1 1 4 2/17/72 IV IDA 6/72 0.2 1 0.2 7/10/72 V IDA 5/73 2.4 1 2.4 5/31/73 VI IDA 7/73 1 0 3 3.0 7/25/73 VII IDA 9/73 0.7 2 1.4 9/13/73 VIII IDA 11/73 2 4 2 4 8 12/05/73 " X IDA 12/74 2 4 1 2.4 12/27/74 X IDA 6/75 '2.0 1 2.0 7/18/75 XI IDA 10/76 0.4 4 1.4 10/27/76 XIII IDA 4/77 1.2 1 1 2 4/18/77 XIII IDA 8/77 2 0 2 4.0 9/06/77 XIV IDA 3/78 0 8 2 1.2 3/20/78 XV IDA 6/78 1.0 1 1 0 6/30/78 Completion I IDA 1/79 1.9 3 5 8 Total 21.5 33.9 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Sucres (S/) Year. Appraisal Year Average Exchange Rate US$1 - S/ 21 Intervening Years Average US$1 = S/ 25 Completion Year Average US$1 = S/ 25 1/ Exceeded amount originally approved owing to exchange rate adjustment  - iii - Project Performance Audit Report ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (Cr. 222-EC) Disbursement Table (US$ '000 Cumulative) Period Appraisal Actual as of % Ending Estimate Actual of Estimated 12/31/71 800 - 0 06/30/72 1,800 100 5 12/31/72 3,100 600 19 06/30/73 4,800 1,400 29 12/31/73 6,500 2,300 35 06/30/74 7,800 2,600 33 12/31/74 8,700 3,800 44 06/30/75 9,400 5,300 56 12/31/75 9,800 5,800 59 06/30/76 10,000 6,200 62 12/31/76 - 6,700 - 06/30/77 - 6,700 - 12/31/77 - 9,700 - 06/30/78 - 10,100 1/ - 1/ Additional 100,000 due to exchange rate adjustment.  - iv - Project Performance Audit Report ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (Credit 222-EC) HIGHLIGHTS The primary objective of the Third Livestock Development Project was to further develop approximately 350 beef ranches in the coastal zone and 225 dairy farms in the Sierra region of Ecuador. Livestock projects I and II aimed only at increasing beef production in the coastal zone. Under the Third Livestock Project funds were on-lent by both private and govern- ment banks to beef ranches and dairy farms for development investments in pasture improvement, fencing, water facilities, machinery, improved breeding stock and other related inputs. The credit also supported ranch and farm development programs through funds for research, ranch management training, facilities for improved forage seed production, and improving the financial and lending operations of the Banco Nacional de Fomento -- the major on- lending bank. Mainly because of an extended controversy between IDA and the Borrower over lending terms to ranches and farmers, the project was complet- ed almost two years later than expected at appraisal. At completion 206 beef ranches and 173 dairy farms had received development loans. On the average, sub-loans to ranches and farms all were larger than envisaged at appraisal, this partly accounts for the reduction, vis-a-vis appraisal, in the number of sub-loans made. All supporting project components were successfully implemented except those for improving operations of BNF and the forage seed improvement program. The re-estimated financial rates of returns are 25% and 37% for beef ranches and dairy farms, respectively. These rates compare with the respective appraisal estimates of 16% and 41%. The re-estimated economic rate of return according to the PCR is 27% compared with 22% estimated at appraisal. However, neither estimate took into account development that might have taken place on project beef ranches and dairy farms without the project. In the judgement of audit, therefore, an ERR of 18% would be a more reasonable re-estimate. Other points of interest are: - improvements in production efficiency or technical coefficients on beef ranches and dairy ranches have not met appraisal expec- tations (PPAM para. 16 and PCR paras. 5.07 - 5.12); - project directorship effectively transferred from expatriate to Ecuadorian (PPAM para. 11 and PCR para. 3.10); - efforts to develop high quality forage seed program were not successful as was the case for the First Livestock Project (PPAM para. 25 and PCR paras. 3.21 - 3.23); and - need for project and estimation of its benefits are questionable (PPAM paras. 13 - 19).  Project Performance Audit Memorandum ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (Credit 222-EC) I. SUMMARY 1. The Bank began financing beef cattle development in Ecuador with a loan of US$4 million (Loan 501-EC) in June 1967 for development of beef production in the coastal zone of the country. In July 1969, eighteen months after the loan became effective (December 1967) all funds had been committed for the development of about 130 ranches. The Government then requested supplementary funds from the Bank to continue beef ranch develop- ment without the delay that would have been required in preparation for a full scale second livestock project. Accordingly, an interim second livestock project was appraised and approved (Credit 173-EC). This credit was designed to cover future sub-loans made over a period of about 12 months until the full scale third livestock loan could be appraised and approved. The third live- stock project was appraised in September/October 1969 and a credit for US$10 million was signed on December 10, 1970. Total project cost was estimated at US$19.7 million. Of this total, participating banks were expected.to finance US$5 million, farmers about US$3.9 million and the Central Bank the remaining US$0.8 million. 2. The primary objective of the Third Livestock Development Project was to further develop approximately 350 beef cattle ranches in the coastal zone and 225 dairy farms in the Sierra region. Other supporting components of the project were pasture and beef cattle research, construction of a ranch management training center, development of a seed multiplication and certification service in the Ministry of Agriculture and Livestock, tech- nical assistance to improve the operation of the Banco Nacional de Fomento (a Government development bank), training of ranch managers, and financial support for the operation of the Project Unit. Execution of the project was to be under the direction and control of the Project Unit which had been established under the First Livestock Project. In addition, a National Project Commission was to be established to carry out coordination and supervision of the project. 3. As a result of the slowness in signing the requisite subsidiary loan agreements between the on-lending banks and the Government and the Central Bank, the effectiveness date of the IDA credit was delayed by about six months. 4. Several lending policy issues arose after the credit became effec- tive. These involved the percentage of the capital contribution of dairy farms for on-farm development, the percentage of a subloan that could be used to purchase breeding cattle, reduction in the interest rate on subloans from 12% to 9%, the percentage margin earned by participating banks on subloans, and the organizational location of the project unit. The first two issues were resolved quite readily as IDA agreed to reduce dairy farmers' contri- butions to development costs from 35 to 20%, the same as for beef ranches; - 2 - further, IDA agreed that ranchers be allowed to use 60% of a subloan to purchase breeding stock instead of 50% as stipulated in the Credit Agreement. The latter three issues, especially the interest rate, caused considerable delays in disbursements as well as requiring an amendment to the credit agreement. After prolonged discussions between IDA and the Borrower in 1973, IDA ultimately agreed to the organizational shifting of the Project Unit from the Central Bank to the Ministry of Agriculture and Livestock (MAG). (Con- trary to IDA's earlier anticipation transfer of the Project Unit from the Central Bank to MAG did impair the Unit's efficiency.) After extensive discussions of the interest rate issue, IDA agreed to a compromise; only subloans for US$25,000 equivalent or less and subloans, regardless of size, to certain cooperatives would be made at 9%, all others would be made at 12%. The amendment to the Credit Agreement was signed on May 9, 1974 and became effective on October 8, 1974. At that time, only one fifth of the credit had been disbursed. (See PCR paras. 3.03 - 3.06.) 5. Seventy percent of the on-lending was done by the Banco Nacional de Fomento (BNF). One private bank, COFIEC, made 12% of the total sub- loans under the project. Six other private banks participated in the lending program; most made just a few subloans (PCR para. 3.13). 6. The project was completed almost two years later than expected and by completion had financed further development of 206 beef ranches and 173 dairy farms compared with the appraisal estimates of 350 and 225, respec- tively. Farms and subloans were generally larger than envisaged at appraisal, in the case of dairy farms much larger. 7. Although not anticipated at appraisal the beef ranches involved in the project contributed significantly to total milk supplies. On 29 beef ranches that were surveyed to estimate project benefits, milk pro- duction had increased by 356% by 1976. If this rate of increase holds true for all 206 beef ranches, the total increase in milk production on beef farms would be two million litres. This unexpected development basically resulted from Government pricing policy that sets milk prices high relative to beef prices. At appraisal it was expected that milk production would increase by 40 million litres annually on participating dairy farms at full development of the project (10 years). After the first four years, about 50% of that ten year target had already been attained. 8. According to the sample survey estimate, total incremental beef production (from dairy and beef herds) reached about 2,800 metric tons (mt) at the fourth year of development. This amounted to 38% of the annual incremental production of 7,500 mt expected in the 10th year of the project and about in line with the appraisal estimate for that year. 9. Technical efficiency on dairy farms and beef ranches has not progressed as anticipated. In both types of enterprises, carrying capacity has been about 70% of that expected for the present stage of development. Calf mortality rates run 40 to 100% higher than expected. Weaning rates at about 65% for both enterprises compare with an expected 84% for dairy and 75% for beef. - 3 - 10. The seed program never was developed as expected; first because of difficulty in hiring an expatriate expert and then because the Bank financed a separate seed project (Loan 1229-EC) for US$3 million in 1976. At the completion of the project only a little more than 10% of the apprais- al estimate had been expended. The special study of BNF's business opera- tions was carried out by a well-known consultant; however, BNF chose not to implement the consultant's recommendations. Owing to deficiencies in its accounting practices, BNF found it is difficult to submit proper documenta- tion to the Central Bank for rediscounting subloans under the project. Subsequently, in 1977, an Interventor from the Superintendencia de Bancos was appointed to the BNF to strengthen internal procedures and perform the functions of an auditor. BNF also hired another consultant for management studies which were financed out of an IDB loan. The research and training program of INIAP was carried out with considerable success. This research made an important contribution to pasture fertilization recommendations. The training center conducted over two hundred management and other live- stock related courses in which 5,510 trainees participated. 11. The Project Unit, responsible for executing the project including technical, financial and economic aspects of on-farm livestock development programs, has performed well despite the fact that there was a controversy between IDA and the Borrower over where it was to be administratively located, i.e., in the Central Bank or MAG. The expatriate Project Unit Director successfully trained highly skilled but inexperienced counterpart personnel; one of whom became Director of the project in mid-1973. He and his staff maintained the high level of efficiency of project unit operations. 12. The re-estimated rate of return for the project as calculated by the PCR is 27% compared with 22% estimated at appraisal. In the audit's opinion, both of these estimates were not calculated correctly and, consequently, are too high (See PPAM paras. 20-22). II. MAIN ISSUES Need for Project 13. National data indicate that the beef cattle and dairy herds in Ecuador have been increasing at a significant rate over the last two decades; the beef herd has expanded over 50% and dairy herd has more than doubled. The beef off-take rate and milk production per cow have improved over this period too. These trends are corroborated by the PCR (paras. 3.04 and 3.06). Generally favorable government policies and the relative profitability of livestock operations have fostered this growth. Visits to several participat- ing farms and impressions of neighboring non-participating farms suggest that these two groups are presently near the same level of development. Therefore, the question arises as to the need for and actual benefits to the financing provided under the project. 14. The dairy industry in Ecuador has developed over many decades and is presently based on high cross Holstein-criollo stock. Dairymen import pure-bred Holstein bulls to improve their herds. Beef stocks are predominant- ly criollo-Brahman crosses. A pure bred Brahman herd has been established in the coastal region, independent of the project. With the higher relative price now received by producers for milk compared with that for beef, many ranchers are developing herds of Brahman-Brown Swiss crosses which produce a significant marketable surplus of milk as well as higher incomes from beef ranching. Although, the technical coefficients - calving rates, survival rates and carrying capacity - are not high in Ecuador, they are higher than in many Latin American countries at a similar stage of development. 15. The audit of the two previous livestock projects (OED Report No. 892) looked at the need-for-project issue from the viewpoint of substitution of IDA funds for other funds available to ranchers. That report concludes that it is not clear how much investment (on beef ranches in that case) would have taken place in the absence of the Bank supported project, nor how effective such investment could have been. It states also that, according to a Project staff estimate, approximately 70 percent of project borrowers could have self-financed their entire farm development plan had they been willing to liquidate other assets which they owned. Because most of the borrowers were large and well established beef ranchers it is not likely that they would have needed to convert financial and other assets to finance ranch development because they could have used these assets as well as farm or ranch assets for collateral to obtain development loans. It is likely that this financial status also characterizes a large number of sub-borrowers under Credit 222-EC. For example, many of the ranch and farm operators who have participated in Credit 222-EC have other professional and business interests besides livestock. The average size of beef and dairy enterprises receiving development loans under Credit 222-EC are above the national average in size. As already noted the beef ranches averaged 339 ha and the dairy farms 125 ha, larger than expected at appraisal, especially the dairy farms. Thus, they likely had opportunities to obtain long-term loans outside the project. In fact, one borrower for dairy farm development, cancelled part of the loan granted through the project and financed development from another source. Another newly established beef rancher had obtained only a small part of required development funds through the IDA credit. 16. Through the technical assistance (farm and ranch planning and technical advice) provided by the Project Unit and other experts in the participating banks, the project undoubtedly has had some impact on beef and milk production on participating ranches and farms above what it would have been without the project but not of the magnitude expected. According to available information, most of the increases in beef and milk production on the project farms came through increases in herd size (stock purchases), not through dramatic increases in technical coefficients as expected at appraisal. For a sample of the dairy farms participating in the project total milk production increased by 48%. However, the herd size increased 51%, Table 1. The production per cow/day is estimated to have increased by 9% and the percentage of cows in milk was about the same as before the project. Thus, the explanation for the slower growth in production than in herd size must be due to less milking days per year per cow. Stocking rates and weaning rates were all less than estimated at appraisal for the stage of development when these data were obtained. For a sample of beef farms, the Project Performance Audit Report Table 1: Development on Project Dairy Farms and Beef Ranches Before Development Year 4 of Development Appraisal Completion Appraisal Completion % Change Completion List estimate report estimate estimate report estimate Report estimates ---------------------------------------Dairy Farms-------- ----------------------------- Total herd No. 157 137 205 207 51 Stocking rate Au/ha 1.8 1.2 2.3 1.5 25 Cows in milk % 33.0 41.3 35.0 41.6 1 Weaning rate % 66.0 61.3 81.0 63.6 4 Survival, adult % 96.0 95.3 97.5 95.1 - I Total milk product 1,000 liter 85.6 210.3 183.3 310.5 48 Production per cow/day Liter 6.0 8.8 9.0 9.6 9 1 --------------------------Beef Ranches-------------------------------------- Total herd No. 375 303 626 531 75 Stocking rate Au/ha 1.0 1.1 1.8 1.3 18 Weaning rate % 55 63 75 65 3 Survival, adult % 95.0 97.8 97.0 98.5 1 Extraction rate % 14.4 13.4 13.4 13.0 -3 Sales of beef cattle S/'000 124.1 135.5 178.1 246.31/ 82 and milk Source: PCR Annex 1 tables 3, 5 and 6. 1/ Deflated to 1970 price level. -6- herd size increased 75% but the value of beef and milk production increased by just 82% (constant prices). The average weaning rate on these beef farms improved only slightly, much less than anticipated at appraisal; three percent compared with the 36% expected. The average extraction rate was down 3% and 3% less than expected. 17. The ranch management training and research carried out at the Pichilingue Station should have made, and should continue to make, develop- ment impacts that go much beyond the project farms, especially the informa- tion on new pasture fertilization procedures that were developed there. But as noted in the recent report-l, there is a great need for an effective agricultural extention service in Ecuador. Without an effective extension service the full benefits of such research will not be realized. 18. Improvement of income distribution was not an objective of the project. It is worth noting, nonetheless, that all the income benefits accrued to middle and upper income producers. Development loans averaged about US$44,000 for dairy farms and US$27,000 for beef ranches. Based on PCR data and calculations of the audit net income would reach US$56,000 on the project beef farms and US$28,000 on dairy farms (1976 prices) at full develop- mentL. In contrast, per capita GNP in Ecuador in 1976 was estimated at US$700. 19. The structure of the follow-on Agricultural Credit I Project is an implicit recognition of the issues raised above as well as new Bank policy with respect to low income groups. The project is expected to support about 2,000 sub-loans and focus on developing medium sized beef ranches and dairy farms (50 ha), small dairy farms (6 ha), sheep farms (40 ha) and small crop farms (5 ha). The loan also provides funds for small industries. Rate of Return 20. The rates of return to the project as calculated at the time of appraisal and at project completion were based on the incremental benefits derived from the situation on project farms before development and that achieved as the farms were developed through project implementation. This is only an acceptable procedure if it can be demonstrated that development on the farms had stagnated and would continue to be static without the project. 21. The audit first calculated a rate of return assuming that pro- ductivities on the participating farms would increase about in line with the increases observed in the national herd. Under this alternative the ERR drops to 18% compared with the 27% estimated by the PCR. A more realistic 1/ Development Problems and Prospects of Ecuador: Special Report V61. II, para. 427, IBRD Report No. 2373-EC, June 18, 1979. 2/ See PCR Annex 2, Table 1. - 7 - assumption for the farms involved in the project may be that some invest- ment would have taken place, say at 50% of that acchieved under the project, and that this investment would be augmented by some improvement in manage- ment practices, which would have increased production efficiency. This assumption is based on the observations referred to in PPAM para. 13 and would yield an ERR of 9%. 22. However, all these re-estimated rates of return are based on certain broad assumptions; all attempts by the audit mission to obtain more soundly based micro information related to developments on non-project farms and ranches over the project period were not successful. In the circumstances, it is the view of audit that 18% represents a reasonable re-estimate of the economic rate of return on this project. IDA Performance 23. The audit agrees with the points made in the PCR concerning IDA performance (paras. 6.01 and 6.02). Several other points warrant further discussion. 24. The Bank had good reason not to reimburse sub-loans made at 9% interest rate rather than the agreed 12%, when the borrower unilaterally made the decision to reduce the on-lending interest rate. At that time, the inflation rate in Ecuador was running at about 13%, more than double the rate existing when the project was approved. The compromise agreed to by the Bank, to reimburse only subloans of US$25,000 or less made at the 9% rate (with one exception), probably provided an incentive to the smaller farmers and helped them obtain development funds without at the same time granting an unneeded incentive to the wealthier farmers. (It should be noted, however, that producer beef prices did not keep up with inflation over the project period although milk prices have more than done so.) 25. Why the seed component was included in the project after little progress was made with similar component in the first livestock project and then failed to be developed is somewhat of a mystery. Under the First Livestock Project (Loan 501-EC) funds were provided to establish a seed multiplication and certification program through INIAP at its Pichilingue research station. The Third Livestock Development Project provided funds to establish a Department of Seed Certification in MAG for seed testing lab- oratories and processing plants at Quito and Quevedo. Both sub-projects failed partly because of the same reason, a satisfactory seed expert could not be hired. As already noted (PPAM para. 10), development of this com- ponent was eventually suspended when a loan for the Seeds Project (Loan 1229-EC) was approved by the Bank in 1976. Because IDA obviously thought the supply of new and higher quality forage seed was essential to develop- ment of the livestock sector's potential, the seeds component should have been designed to ensure its success, and more supervision input should have been provided to this component, such as assisting the borrower in obtaining a qualified expert. Better still, qualified and available seed experts could have been identified at appraisal. - 8 - 26. With respect to supervision, IDA could have assisted in improving the quality of the technical assistance provided by the project if it had suggested that the Project Unit keep records of year by year development on participating ranches and farms. The farm development plan that was used for qualifying beef ranches and dairy farms for subloans was very detailed and well designed, covering all physical and financial aspects of a ranch or farm over the development period. It would have been easy and prudent to have used this form to monitor actual development. Such a record would have provided an excellent background for management decisions. Further it would have eliminated the problem the Project Completion mission encountered in obtaining requisite data for the completion report. The non-use of the full potential of the subloan evaluation and development form appears to have been an oversight of project management as well as the appraisal and subsequent supervision missions. Lessons to be learned 27. The project and its predecessors have demonstrated that expatriate consultants can serve a very essential function in establishing a project with new concepts and procedures. Further, responsibility for managing a project can be transferred from expatriates to nationals without any loss of efficiency if a commitment to such a transfer is made at appraisal; planned for and then carried out. 28. The seed component's failure seems to reflect a non-commitment or "desirable but not essential component" attitude that can easily creep into project design. Such components lead to waste of time and other scarce resources. A strong effort should be made to screen them out of projects. In retrospect, forage seed improvement does not appear to have been an essential or critical component of the project. However, if improved forage seeds are needed in Ecuador, successful implementation of the seeds component could have had a significant impact on livestock production throughout the country as well as on project farms and ranches. - 9 - PROJECT COMPLETION REPORT ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (Credit 222-EC) I. BACKGROUND 1.01 After the short flush of rapid growth largely fueled by petroleum exports in the early 1970s, the Ecuadorian economy has returned to more modest economic growth rates, although above those experienced in the 1960s. During this decade, the agricultural sector has notably improved its performance; between 1970/71 and 1976/77, overall agricultural output rose at an average of 5.3 percent per annum--well above the average of the previous five years. Output increased most rapidly in fishing (13.2% p.a.), forestry (9.6% p.a.)-- both relatively minor components of the sector--and livestock (6.1% p.a.), while crop production trailed behind (3.5% p.a.). While with the advent of petroleum exports the share of agricultural exports has dropped to about 30% of the total, the agricultural sector's importance has not waned as it con- tinues to employ about 55% of the labor force and accounts for some 20% of GDP. Rural per capita incomes--estimated at about US$300 equivalent in 1977--are about 40% of the national average. 1.02 About 230,000 farmers--some 40% of the total--own cattle, although 60% of these owners have less than 5 animals (accounting for about 13% of the national herd). Nearly 80% of the livestock owners are located in the Sierra and are predominantly dairy farmers. Dairy cattle are primarily Holstein or Holstein Criollo crosses. Beef ranching is located predominantly in the tropical zones, with nearly 90% of the ranches located in the Costa region. The cattle are largely Criollo Brahman crosses. 1.03 Owing to the low productivity of the present dairy herds--milk pr-duction per cow in the Sierra averages about six liters per day--domestic supply has not been able to meet the rapidly growing demand in recent years. Moreover, the attempts by the Government to maintain low consumer fluid milk prices have at times encouraged producers to use milk in the production of cheese, yoghurt, etc. The result has been rising powdered milk imports in recent years. The Government's attempts at intervention in beef prices have had less impact on the beef market situaiton, in large part owing to apparently substantial unrecorded flows across the borders with Colombia and Peru. While the present productivity of dairy farms and beef ranches is low, considerable potential for their improvement exists. In addition to upgrading current operations, there may be an appreciable scope for expanding beef ranching on the eastern Andean piedmont (Oriente) as the communication infrastructure within that region improves. 1.04 The project under review represents a continuation of Bank lending for livestock credit programs initiated in earlier projects. 1/ The first livestock development project (Loan 501-EC for US$3.7 million, effective to December 1967) financed 132 subloans, totaling about US$4.9 million equivalent for on-farm investments for beef production in the Coastal region. In view of the rapid commitment of loan funds, interim financing was provided under 1/ See OED Project Performance Audit Report No. 892 of October 21, 1975 for a review of these earlier projects. - 10 - the second livestock project (Credit 173-EC for US$1.5 million, effective June 1970), which financed 90 subloans for Coastal beef production, totalling USS2.2 million equivalent. The Third Livestock Credit Project (Credit 222-EC for US$10 million, signed December 10, 1970 and effective September 30, 1971) continued to finance beef cattle development on the Coast and was expanded to include dairy farm development in the Sierra highlands and a smaller volume of lending for beef cattle in the Oriente. It also provided US$2 million for research, technical assistance, and a seed improvement program. Under the project, 401 subloans have been approved, totalling US$14.2 million equivalent. 1.05 In this project, as in previous projects, the Borrower was the Government of Ecuador. IDA funds were channelled through the Central Bank, which rediscounted subloans granted by participating financial institutions (PBs). By projedt completion, there were seven banks and two financieras participating in the project. An executive Technical Committee oversaw the execution of the Project. A Project Unit, headed by a Project Director and two Regional Directors for the Coastal and Sierra areas, supported by a small staff were in charge of reviewing and approving subloan proposals from PBs on the basis of the technical and financial aspects of farm development and investment plans. During the Project, the PBs employed 26 qualified livestock technicians who, in consultation with producers, prepared investment plan proposals and supervised the implementation of these plans and disbursement of subloan funds. 1.06 Other Bank-group projects in the sector are Fisheries (Loan 555-EC for j554.3 milliun, approved FY1969), Kilagio Irrigation (Credit 425-EC for US$5.5 million, approved FY1974), Seeds Production (Loan 1229-EC for US$3 million, approved FY1976), Rural Development Project Preparation (Loan 1230-EC for US$4 million, approved FY1976), Agricultural Credit (Loan 1459-EC for US$15.5 million, approved FY1977) and Tungurahua Rural Development (Loan 1644-EC for US$18 million, approved FY1979). - 11 - II. THE PROJECT A. Identification and PreDaration 2.01 In 1965 the Bank began to plan with the Government of Ecuador a livestock development program in the Coastal region. Much of the design of the project was carried out by a special commission in the National Planning Office, assisted by two Bank missions. The first livestock loan (501-EC) was signed in June 1967, providing US$4.0 million. It was designed to operate on a pilot basis, providing loans for on-farm investments such as land clearing, pasture development, fencing, water supply and improved breeding stock, both domestic and imported, in the western lowlands. Implementation of the project went smoothly. It was administered by a specially created Project Commission, composed of representatives from both the public and private sectors and operated under the technical authority of an expatriate Program Director, who selected and supervised the loan technicians. Funds available were fully committed by July 30, 1969, and upon the request of the Government, IDA sent an appraisal mission for a second project. This mission concluded that the first project had achieved its major goals and recommended a second interim loan to maintain the momentum of the project, until a third, more comprehen- sive project could be designed and approved. This interim loan (IDA credit 173-EC) of US$1.5 million was signed in January 1970. These two projects provided a total of 232 subloans to 199 borrowers over a four-year period. 1/ 2.02 The Project under review here represents that third more comprehen- sive project. It was prepared by a commission whose members came from the National Planning Board, Ministry of Agriculture and Banco Nacional de Fomento (BNF) and assisted by the Project Director and IDA. Project preparation was completed in mid-1969. B. Appraisal 2.03 At the invitation of the Government, a four-man mission (two IDA staff and two consultants) visited Ecuador for three weeks in September/ October 1969, to appraise the proposed third project. The mission findings were in general agreement with those proposed in the preparation report with respect to the scope and components of investments for beee cattle development, primarily in the tropical Coastal Zone, and for dairy cattle, primarily in the temperate Sierra Zone, but put special emphasis on pasture improvement through the introduction of legumes and better grasses, and the use of phosphate fertilizer--particularly in the Sierra. This was to be supported by a project-oriented technical assistance and tratning component, and financial support to establish a seed production scheme. Whilst in the two previous projects only BNF and COFIEC (a private finance company) participated, the mission recommended participation of additional private banks, which required a change in the Banking Law (Article 172), permitting these private banks to make long-term loans under the program. 1/ For a detailed review of performance under these first tio Projects, see OED Project Performance Audit Report No. 892 of October 21, 1975. - 12 - 2.04 The Yellow Cover Report was distributed on January 23, 1970 and on March 20, 1970 the Loan Committee Memorandum was circulated, proposing a credit of US$9.1 million. On March 24, 1970 a Special Loan Meeting was convened to consider outstanding issues, namely (a) whether or not short-term financing for feeder steers should be provided from proceeds of the credit, and (b) whether the credit should cover the full cost of US$0.9 million or only the foreign exchange expenditures for the research and training programs. It was decided that the short-term loans of US$1.0 miillion for feeder steers should be included in the proposed project cost but be wholly financed by the participating banks without IDA participation and that US$0.9 million be allocated to the research and training programs, as additional local operating costs of US$0.7 million during the implementation period would be covered by the Government. The total amount of the proposed credit was thus increased to US$9.5 million. C. Negotiations 2.05 Negotiations for the project were held in Washington between August 14 to 21, 1970. The primary issues during negotiations on which agreement was reached were (a) the expansion of the technical assistance program of INIAP including additional investments, thereby increasing the credit by US$0.5 million to US$10.0 million, (b) an increase in the commis- sion for the Central Bank to 1.5% p.a., which was to cover project administra- tion costs (salaries and office expenses of the Project Director, regional directors and staff), (c) the Government's or Central Bank's advance to the Technical Services Account, (d) the short-term financing for feeder steers to be provided by the participating banks, and (e) the establishment of a single national Project Commission rather than two regional commissions as originally proposed by the Ecuadorian Authorities. The Credit was approved by the Board on November 24, 1970. D. Description 2.06 Project Components. The project was to provide credit for the development of some 350 beef cattle ranches in the Coastal Region and to about 225 dairy farms in the Sierra region, for pasture improvement, fencing, watering facilities, machinery, improved breeding stock and other related inputs. Funds were also included for (a) the expansion of the tropical pasture/beef research unit, administered by INIAP at Pichilingue Experiment Station, (b) the establishment of a ranch management training center to provide short courses in all aspects of ranch management for Project Tech- nicians, administrators and ranch owners, and (c) technical assistance to the dairy training center at Santa Catalina Experiment Station. Furthermore, the Project included funds for the Department of Seed Certification in the Ministry of Agriculture, to establish facilities for seed production, processing, storage, testing and certification, including the establishment of two seed testing laboratories. To improve the financial and lending operatings of BNF, financing was provided for (a) foreign management consulting services to assist BNF in modernizing its operations and (b) the purchase of mechanized accounting equipment and vehicles for the project technicians. For the Project Administration Unit, financing was included for (a) payment of salary and other expenses of the expatriate Project Director and (b) the purchase of vehicles and office equi;ment for a Project office in Quito and one in Guayaquil. - 13 - 2.07 Project Costs. Total Project costs, including local financing of working capital for feeder steers (US$1.7 million), were estimated to amount to US$19.7 million with a foreign exchange component of US$5.8 million, resulting in the allocation of US$4.2 million of the credit to finance 30% of local currency expenditures. 2.08 Financing. IDA funds were expected to cover about 51% of total Project cost, with the balance provided by participating banks (25%), the sub-borrowers (20%) and the Central Bank for Project Administration (about 4%). At appraisal, dairy farmers were expected to contribute 35% of on-farm investment costs, while beef ranchers' participation was 20% only. 2.09 Sublending Terms and Conditions. The participating banks would rediscount 70% or 75% of subloan amounts for dairy subloans or beef subloans, respectively, with the Central Bank and were supposed to contribute the balance of the subloan from their own resources. In addition, the banks were to provide short-term credit required for production expenses and financing for the purchase of feeder steers. Participating banks were to earn a spread of 4% between IDA funds borrowed from the Central Bank at 8% and on-lent at 12%. Subloans for beef ranch development were to be for periods up to 12 years with up to 5 years' grace, and subloans for the development of dairy farms were to be for 10 years with up to 3 years' grace. 2.10 The IDA credit of US$10.0 million was made to the Government of Ecuador, which carried the exchange risk, and proceeds of the credit for expenditures in sucres were made available to the participating banks and the othe& agencies through the Central Bank, acting as the Government's fiscal agent. The participating banks make repayments to the Central Bank in sucres, and the Central Bank will service, on behalf of the Government, the debt to IDA in foreign currency. The credit was repayable in 50 years including 10 years of grace, allowing for a considerable rollover of funds which would permit the Central Bank to finance other development projects in which the Government is interested. 2.11 Procurement. Goods required for the project would be procured through existing local commercial channels as there would be enough active competition to ensure adequate supplies and satisfactory service. No need for special arrangements for procurement of cattle was foreseen. Local competitive bidding would be employed for the purchase of vehicles required for Project Administration. 2.12 Rate of Return. The overall rate of return of the project to the economy was estimated at 22%. The financial rate of return to the typical beef rancher would be 21% while return to the dairy farmer was estimated at 41%. Substantial non-quantifiable benefits were expected, particularly, the research and training activities of INIAP, the improved seed scheme and the modernization of BNF. It was also expected that the Project would enlist the participation of commercial banks more fully in extending long-term credit to agriculture. - 14 - 2.13 Targets and Goals. The primary objective of the Project was to increase the supply of beef and milk to feed a rapidly growing population in Ecuador. It was estimated tha tafter about 10 years, Project ranches and farms would supply about 80,000 head for slaughter annually, an increase of about 25% over the national figure existing at appraisal. Incremental milk production was estimated to be about 40 million liters annually, representing a 20% increase to production at time of appraisal, and an additional consump- tion of more than 5 liters of milk per person per year. In addition to increases in milk and beef consumption, it was estimated that approximately 0,000 surplus breeding animals would be available from Project ranches to the livestock industry. 2.14 Sector Significance. Government realizing the necessity of increas- ing the food supply, accorded high priority to the livestock sector. The 1969-1973 National Development Plan established production targets for the beef and dairy cattle sub-sectors: value of livestock production was planned to increase 8.7% per annum compared with 5.4% for agriculture overall. Per capita consumption was to increase by 1973 according to the Plan, from 7 kg to 7.8 kg of beef, and from 73 liters to 86 liters of milk. The Project was to finance the entire investment program for beef and dairy development envisaged in the Plan, although additional resources became available from loans of the Interamerican Development Bank to finance term lending in both agricultural and similar livestock expansion programs. III. OPERATING PERFORMANCE A. Effectiveness and Start-up 3.01 The Credit Agreement was signed on December 10, 1970. A supplemen- tary letter was also submitted by the Government confirming its intention to (i) assure an adequate spread between costs of production and prices of beef cattle (ii) maintain free movement of cattle within Ecuador, and (iii) encour- age export of cattle and beef. 1/ Credit effectiveness, which had initially been set for April 30, 1971, was formally postponed five times--to May 30, June 15, July 15, August 15 and September 30, 1971. All conditions were finally met and the credit was declared effective on September 30, 1971. 3.02 Delays in effectiveness were initially caused by the slow pre- paration of the legal documents (agreement between Government and Central Bank and Subsidiary Loan Agreement). The first financial institution which signed a subsidiary loan agreement in May 1971, was, at that time, not accept- able to IDA in view of its deteriorated financial situation and another participating bank signed a subsidiary loan agreement only at the end of September 1971, where upon the credit was declared effective. 1/ While the Government did not enact legislation permitting or promoting beef exports, unrecorded cattle movements continued in both directions over the borders. - 15 - B. Changes in Credit Agreement 3.03 Sub-borrower Contribution. In June 1972, nine months after credit became effective, Government requested IDA to reduce the 35% contribution to new investments by dairy farmers to 20%, as was established in the credit agreement for beef ranches at appraisal. The reason for requiring a larger contribution from dairy farmers than from beef ranchers was that the dairy farmers were expected to realize a comparatively higher profitability than beef ranches (about 41% compared with about 21%). This rationale, however, did not fully recognize the fact that an improved cash flow would not be achieved until years 4 to 5. Another problem was that resources for contribu- tion in kind were scarce in the Sierra Region (e.g., fence posts, lumber, sand and gravel). It was also considered that lowering the percentage contribution would broaden the base for participation, particularly from the small and medium size producers. 1/ 3.04 An additional alteration to the Credit Agreement (Part A of Schedule 4) involved the stipulation that no more than 50% of each subloan should be used for the purchase of breeding cattle. This policy was particularly important for the first two Projects to ensure balanced investments for pasture development and acquisition of cattle. The application of this principle was still valid for the Project, but reflecting the growth of ranch development the major new investment required to maximize development could be cattle. Accordingly it was agreed with Government to increase the limit so that up to 60% of a subloan could be used for purchase of breeding cattle, and furthermore, that no limitation would be imposed for purebred breeding enter- prises. 3.05 An amendment to the Credit Agreement, incorporating the changes detailed in above two paragraphs, was signed on February 15, 1973. 3.06 Interest Rates. In October 1972 Government requested that interest on subloans be reduced. IDA, at that time, considered the rate of 12%, as established in Credit Agreement, reasonable, given the rate of inflation and the cost of capital within Ecuador, the liberal terms for subloans and the provision of technical services to participants in the Project at no additional cost. Nevertheless, the Junta Monetaria regulation 655 of May 3, 1973, unilaterally reduced the legal z=iling on interest rates from 12 to 9 percent per annum on all credit operations in the agricultural and small-scale industries sector. On project grounds and given the rate of inflation in Ecuador at that time, IDA could see no justification for such a subsidized interest rate to medium and large scale livestock producers and sugoested various alternatives such as indexing of subloans or re-orienting the Project to provide subloans to smaller ranchers. 2/ Government's position was that 1/ The appraisal mission did not originally propose the higher beneficiary contribution for dairy sub-borrowers; the decision was made during Credit processing. 2/ Consumer price increases were: 1971, 9.5:; 1972, 7.7%; 1973, 12%; 1974, 22.7t; 1975, 14.4Z; 1976, 10.2% and 1977, 12.9Z. - 16 - because of the serious stagnation in agricultural production for the domestic market, Government had opted for an easier credit policy as the best alterna- tive to stimulate production. I/ The aforementioned Junta Monetaria decree caused complete suspension in the lending operations and Bank disbursements: intensive negotiations on this subject were undertaken betwen the Government and IDA. Agreement in principle was reached in October 1973 on a two tier system of 9% and 12% for small and large subloans. At the end of 1973 Govern- ment accepted IDA's proposal that subloans up to US$25,000 and subloans, regardless of size, to cooperatives established under the auspices of the Agrarian Reform Institute, would be made at 9%, while for all other subloans the 12% rate would continue to apply. IDA reluctantly accepted the Govern- meat's request that the margin for participating banks be increased from 4% to 5%. The proposed changes in the Credit Agreement were approved by the Board on March 4, 1974 and on May 9, 1974 an amendment to the Credit Agreement was signed, which became effective on October 8, 1974. 3.07 Project Organization. At the end of 1970 Government had authorized the Central Bank to act as its fiduciary and fiscal agent in the administration of development programs receiving international assistance. To perform this task, the Monetary Board created the Trust Funds office in the Central Bank. The Credit Agreement provided for the establishment of a Project Commission, whose composition, organization, powers and functions were to be satisfactory to IDA, and this was done via Decree N0431 issued in March 1971, which provided for establishment of an Advisory Commission constituted by the Credit Advisory Office of the Ministry of Production (which later became Ministry of Agricul- tur!), to ensure top-level coordination and promotion of special programs. In addition, an Executive Technical Committee (successor in name to the Project Commission) under the virtual control of the Trust Fund Office was created, which would be directly responsible for the execution of specific projects, appoint the project directors and employ technical staff for Project management, approve annual program plans, prepare the annual operating budget and approve the operations of the trust fund in accordance with the fiduciary agreement between the Central Bank and Government. This institutional setup conformed with the provisions of the Credit Agreement. 3.08 In April 1972 Government issued Decree N0260 reducing the role of the Trust Fund Office to that of fiscal and disbursing agent and eliminating its voting participation in the Executive Technical Committee. By Decree N0374 issued in April 1973, a new mechanism called Fondos Financieros was created in the Central Bank in lieu of the former Trust Fund Office and all responsi- bility for the livestock program under the Project was transferred from the said Trust Fund Office to the Ministry of Agriculture and Livestock. The Pro- ject Unit, which until then operated as an autonomous entity under the Central Bank, cam under the control of the Ministry of Agriculture. These changes in Project Administration were subject of lengthy negotiations between Government 1/ In reality, the growth rate of crop production was the laggard; livestock production was expanding more rapidly. - 17 - and IDA during 1973 and in January 1974 the Minister of Agriculture formed the. Executive Technical Committee whose membership consisted mainly of key officials of the Ministry of Agriculture, the Project Director being respon- sible to this committee. Retrospectively, the loss of organizational autonomy did not undermine the smooth functioning of the Project Unit, which, during the years of Project execution, maintained a kind of special status in the Ministry of Agriculture. Nevertheless, occasional problems or overly time- consuming procedures arose, e.g. the finalizing of Project Unit budgets, job classifications and related salaries of Project Unit professional staff. Moreover, the distancing of Central Bank from the operational problems of the lending and rediscounting program may have made this institution less apprecia- tive of the negative impact of its overly complex procedures on private bank participation. On the other hand, the incorporation of the Project Unit into MAG, however, tenuous in practice, may have facilitated its conveying to the MAG its views on technical and poliicy questions relating to livestock develop- ment. C. Project Unit 3.09 Until mid-1973 the Project Unit was headed by an expatriate Project Director, seconded from the Bank, who previously managed Bank/IDA financed Projects 501-EC and 173-EC. In February, 1973, IDA agreed to the appointment of a well qualified Ecuadorian livestock expert, who had worked for several years in the Project Unit, as Project Director, and the expatriate Project Director was released on June 30, 1973. For personal reasons, the local Project Director relinquished his position in July 1974 and returned to his previous position in-the Project Unit as Director for the Coastal Region, and another. Ecuadorian Project Director was appointed, who remained in charge of the project until its completion. 3.10 The organization chart of the Project Unit is shown in Annex 3. The Project Unit had a staff of 18, including the Project Director, two Regional Directors, one for the Coastal Region and the other for the Sierra and Oriente Regions, 5 professionals and 10 administrative staff. The Project Director has satisfactorily carried out his functions as were detailed in Schedule 5 of the Credit Agreement. 3.11 The Project Unit, with the cooperation of INIAP, organized the first training course in March 1971 for 16 selected professionals, who then became available for hire by banks wanting to participate in the Project. During execution of the Project the Unit continued to train new field technicians and maintained its right of approval of banks' technicians qualified to prepare and evaluate sub-projects. In addition to the general training course, the Project Unit organized a dairy and pasture management course in Santa Catalina in 'Harch 1974, and a beef and tropical pastures course in Pichilingue during July 1975 for all technicians of the participating banks. During project execution 26 technicians in participating banks under guidance and supervision of the Project Unit, efficiently accomplished their task of development plan preparation and evaluation. The only major shortcoming was an over-optimism - not unusual in this kind of project - in the ability of the inputs provided by - 18 - the Project to increase calving percentages. I/ In this respect the techni- cians were possibly misled by earlier evaluation results of Loan 501-EC and Credit 173-EC. The success of the training and experience obtained can be indicated by the fact that the majority of banks' technicians have since been promoted to general credit and administrative positions. D. Participating Banks 3.12 BNF and COFIEC, a private finance company, were the only credit institutions participating in the First and Second Livestock Projects. Expectations at time of appraisal (para 2.20 in Appraisal Report) that a larger number of private banks would participate in the Third Project and that about 50% of the subloans would be made by them, did not materialize, although very favourable conditions were established to make such participation attractive and profitable. As agreed with Government, the General Banking Law (Article 172) was amended and the Junta Monetaria lifted limitations on banks' loan portfolio for subloans under the Project, thus removing any legal obstacles for private bank participation. The Project Unit provided intensive training and assistance to banks' technicians and during the early stages of the Project helped in preparing and evaluating farm development plans. Lending was not risky, given the type of sub-borrowers involved and the collateral they could offer. The 4 - 5 percent margin between interest rates on subloans and the rediscount races gave the banks a return of 24-27 percent on their own resources invested in Project subloans, which was about double the interest on their regular short-term lending operations and, furthermore, rep.y.mnt terms of the rediscounts to Central Bank were keyed to subloan terms plus one year for slippage. 2/ E. Central Bank 3.13 During Project execution eleven financial institutions signed sub- sidiary loan agreements with the Central Bank. Two of these did not make any subloans, and of a total of 401 subloans under the Project, 70% were made by BNF, (the Government-owned development bank), 13% by COFIEC, about 6% each by Banco del Pichincha and Banco de Cooperativas, while the other five banks shared the remaining 5%. Central Bank rediscounts with Credit funds were as follows: 1/ This problem was identified during project execution as widespread in Ecuador and is being studied by an expatriate expert contracted under the follow-on project (Loan 1459-EC). 2/ However, for short-term subloans to agriculture the rediscounting terms were even more favourable; the margin for 2arricipating banks was 6Z and 100% of the subloan was rediscountable. - 19 - CENTRAL BANK REDISCOUNTS TO PARTICIPATING BANKS No. of Bank Subloans Amount Percentage (Sucres '000) 1. BNF 1/ 281 138,002 62.2 2. COFIEC 52 42,176 19.0 3. Banco del Pichincha 23 18,896 8.5 4. Banco de Machala 7 6,083 2.7 5. Banco de Cooperativas 26 8,644 3.9 6. Caja de Credito Agricola 4 2,092 0.9 7. Banco del Pacifico 5 1,727 0.8 8. Banco de los Andes 1 475 0.2 9. Finansa 2 3,912 1.8 Total 401 222,007 100.0 1/ In the case of the BNF - Unlike the other banks - 100% of the subloan amount was rediscounted by the Central Bank. 3.14 The distribution of subloan approvals by years and category is presented in Table 9. The slowdown in subloan approvals arising from the extended negotiations on changes in the Credit Agreement (discussed in paras 3.03 - 3.08) is apparent from the reduced numbers of subloans approved in 1973. Approvals again slowed down in 1975 when it appeared that the Credit funds were approaching full commitment, but the rate then accelerated in 1976 when IDA agreed that earlier approvals and commitments of subloans made by BNF, for which adequate disbursement and rediscounting documentation were not available, would be uncommitted. This action freed Credit funds and permitted new subloan approvals. 3.15 At appraisal it was estimated that all participating banks would contribute at least USS3.0 million to Project cost for long-term subloans; actually private banks financed approximately US$1.5 million, while BNF contributed no financing as its subloans were fully rediscounted by the Central Bank. Detailed information is given in Tables 2, 5 and 8. 3.16 While private banks accounted for one-third of the sublending, it is unfortunate that the Project Unit and the Central Bank did not succeed in getting these financial institutions =ore involved in lending operations - 20 - for livestock development; the subject calls for further inquiry, particuarly for ongoing and future Bank Projects. Two major reasons for the relatively low participation of private banks in the Third Livestock Project appear to be: (a) Fondos Financieros in the Central Bank, with their cumbersome procedures and the excessive amount of documentation and time required for rediscounts had been a bottleneck in lending operations and a deterrent for banks participation, and (b) private banks could not compete with BNF on equal terms, since BNF was not required to invest from its own resources and instead obtained full rediscounting facilities from the Central Bank. F. Other Institutions 3.17 INIAP. The component for technical services in the Project included an allocation of US$900,000 for the construction of training facitilies, research and consultants' services. Actual expenditures under the Project are detailed in Table 10. Project funds were invested in the expansion of the tropical pasture/beef research and training center at Pichilingue, and in strengthening the Santa Catalina Experiment Station in the Sierras. The costs of four internationally recruited specialists for period from 2-3 years were also financed under the Project. 3.18 The Pichilingue Research and Training Center consists of 1,050 ha, with a mean temperature of 24.30C and 2,742 mm rainfall. It is typical wet tropic and representative of the coastal livestock area., The buildings and equipment financed at Pichilingue have been well employed and maintained. Research, both applied and experimerktal, continues in pastures and livestock production, ensuring a sound training and dcmonstration basis for extension workers, students and farmers. Between 1964 and 1978, 213 courses organized by INIAP were attended by 5,510 participants. During 1977 six livestock courses held at Pichilingue were attended by 124 participants, representing a total of 1,572 man-days of instruction. During 1978, seven courses in pasture and livestock production were attended by 132 for a total of 1,498 days. On all occasions the 30-bed dormitory, instruction buildings and other facilities financed under the Project and first used in 1975, were utilized. Technicians at Pichilingue are also working with cooperating ranchers, collecting basic field information in the provinces of Los Rios and Esmeraldas. 3.19 The tropical pasture and livestock experts working at Pichilingue are considered to have made the greatest contribution to the activities of INLAP. They assisted in expanding the research program in tropical pastures and livestock and organizing the rancher training program. It might have been desirable to assign more priority to applied research and demonstra- tion, establishing closer links with livestock ranches in the region, but the expatriate experts did establish sound research methods which are being continued by the local staff. 3.20 The Santa Catalina Experiment Station is located 14 km South of Quito and consists of 950 ha at altitudes ranging from 2,630 to 3,250 m, with 1,436 mm rainfall and a mean temperature of 11.40C. It is a suitable experimental site for the Sierra region. The work initiated by the Project- financed expatriate plant nutritionist is being continued in the greenhouse - 21 - constructed at Santa Catalina for that purpose. The work demonstrated that white clover responded to phosphate on all the Sierra soils tested and pro- ductivity was further improved by additional sulphur. This formed the basis for a changed fertilizer recommendation, and received wide publicity under the project. The expatriate dairy expert accomplished his mission, but his effectiveness was limited because of language difficulties, and the almost entire confinement of his activities to Santa Catalina Research Station. The Project Administration now feel that they failed to fully utilize the experi- ence of this specialist by not using him more widely in the field. However, it should be recognized that INIAP was constrained by institutional jealousies from overtly transgressing MAG's agricultural extension responsibilities. 3.21 Seeds Program. The Credit Agreement (Section 4.11) allocated US$300,000 to establish in the Department of Seed Certification in MAG a unit to administer operation of two seed processing plants and associated seed testing laboratories in Quito (for the Sierrra) and Quevedo (for the Costa). An expert was to be recruited internationally to assist in planning the program, training the field staff and setting up the seed processing equipment. 3.22 The first expert, hired under the INIAP contract with the University of Florida, did not have the language capability necessary for the assignment and left after six months. A second professional proved unqualified for the task and was discharged. 3.23 In April, 1973 the Empresa Mixta de Semillas (EMS), a joint Co-ernment-private sector firm, was-established to produce, -process and sell certified seeds. In December, 1974 the Project Commission reviewed and approved an EMS proposal for a program to be partially financed by a US$250,000 allocation from this component of the Credit. Ultimately, however, this pro- gram was not carried out and instead it was included in a subsequent Bank loan (1229-EC for US$3 million) for a certified seeds project (including the EMS) approved in January 1976. The total expenditures for this component of the Credit summed US$38,000; 1/ the remainder was reallocated to the livestock credit program. 3.24 Banco Nacional de Fomento (BNF). The technical services component of the Credit included US$200,000 for BNF. According to Section 4.12 of the Credit Agreement BNF contracted the services of a well-known expatriate consulting firm to carry out a study and prepare a program for the improvement of the bank's operating systems. The first phase of the study was completed in March 1973 and the consulting firm proposed to continue its services for two years to put the proposed program into operation. BNF management chose not to continue these activities. It is unfortunate that IDA did not vigo- rously urge the BNF management to pursue the consultants' proposals, in the light of the serious deficiencies in the bank's operating procedures and 1/ The Certified Seeds Project has experienced considerable delays in execution and Loan disbursements. - 22 - accounting practices which became more evident in 1975 when BNF was unable to submit proper documentation to the Central Bank for rediscounting subloans under the Project. Further serious difficulties in BNF operating and finan- cial procedures, unrelated to the Project, also came to light in 1975; these problems resulted in the appointment to the BNF of an Interventor from the Superintendencia de Bancos in 1977. BNF ultimately contracted another consul- ting firm in 1976 whose services were financed from an IDB loan. 3.25 The allocation of Credit resources for BNF was utilized as follows: Us$ (a) Consultants 17,500 (b) Vehicles for livestock technicians (2 Toyota jeeps and 12 Land-Rovers) 62,073 (c) NCR cash registers and bookkeeping machines 117,427 197,000 G. Delay in Project Comoletion and Bridge Financing 3.26 Bridge Financing. At the end of 1975, when Project funds were apparently fully committed by the Project Unit, 'Government agreed to allocate loral financing from the Economic Development Fund (FONADE) 1/, to be admini- stered by the Project Unit for further livestock development, with particular emphasis on dairy-farm development in the Coastal Region, on terms, conditions and procedures similar to those of the Project. This was to be an interim arrangement until a Bank financed agricultural credit project, which was then under preparation, would become effective. This permitted the Project Unit to continue approving subloans, submitted by the participating banks, but only in April 1977 Government made available the first amount of S/ 50.0 million of FONADE funds and in June 1977 agreed to an additional allocation of S/ 150.0 million. Considerable delays in disbursement of FONADE funds occurred until FONADE and Central Bank reached agreement on the terms and conditions under which these funds were to be made available to the Central Bank. 3.27 BNF Rediscounts. The credit component of the Project was fully committed by the end of 1975. Central Bank rediscounts and IDA disburse- ments progressed at a much slower pace and came to a complete standstill between July 76 to June 77, with an amount of US$3.3 million of the Credit still undisbursed. This undisbursed balance was almost all locally dis- bursed by BNF and amounted to about half of subloans made by BNF, going back over a period of years, some even to 1973. BNF was unable to submit acceptable and properly substantiated rediscounting requests to the Central Bank. 2/ 1/ A part of petroleum revenues is channelled through FONADE to finance investment projects. 2/ A problem probably related to the situation diagnosed by the consulting firm financed under the Project and the failure to comply with audit requirements. - 23 - 3.28 In view of the situation described in the foregoing and in order to complete disbursements under the Project, IDA agreed with the Central Bank in April 1977 to open the committed but undisbursed balance of the Credit to all participating banks, permitting the Central Bank to effect rediscounts of livestock development subloans irrespective of having been originally approved in the Project or for financing with FONADE funds. 3.29 The financial and statistical information on Project execution (Tables 2, 5, 6 and 7) includes those Project subloans which were financed, in part, by FONADE. Consequently, FONADE's participation in Project cost financing for beef and dairy farm development was about S/ 33.7 million - 7.3% of Project cost. Other livestock development subloans approved by the Project Unit but financed solely with FONADE funds were not included in the tables. 3.30 The Credit closing date, which had originally been set for December 31, 1976, was formally postponed three times - to June 30, 1977, December 31, 1977 and March 31, 1978; Credit was fully disbursed in May 1978. - 24 - IV. INSTITUTIONAL DEVELOPMENT A. Project Unit 4.01 Initially, the Project Director was an expatriate with considerable experience in livestock development and credit programs. When he left the Project Unit in mid-1973 to return to the Bank, a well-qualified and experienced Ecuadorian professional became National Project Director. Subsequently, for personal reasons, the latter transferred to the Guayaquil Project office as Director for the Coastal Region and a new National Director was recruited from the major private PB. He performed very well, remained with the Project Unit throughout the period of project execution, and continues in that position for the repeater project (1459-EC). 4.02 At the time of project completion, the Project Unit comprised 10 professional staff. Project management and the quality of technical advice provided at the farm level by Project and PB technical staff have been good. At the time of the transfer of the Unit from the Central Bank to MAG, the Association expressed concern over the possible negative impact of such an arrangement on the autonomy and efficiency of the Project Unit. There appears to have been no noticeable adverse impact of the transfer on Project Unit performance. 4.03 The most notable shortfall of the Project Unit was in the area of mai-taining information on the progress of project execution, including subloan disbursements and rediscounts at the Central Bank, reflected in the incomplete reporting system. The format of project progress reports was not properly designed and lacked adequate information on stages of Project execution other than subloan approval. Had this reporting system been properly designed and implemented, it would have highlighted the large differences between PB subloan disbursements, Central Bank rediscounts and IDA reimbursements and permitted more timely action to resolve problems slowing up Credit disbursements. B. Participating Banks 4.04 As reported in Table 5, the major PB was the Government's Banco Nacional de Fomento (3NT), followed at some distance by the private DFC, COFIEC. During the period of project execution, but unrelated to the Project, the BNF experienced a series of financial and managerial problems which it is reportedly in the process of resolving. However, during the final two years of project execution, there were a series of confrontations between the BNF management and the Project Unit, and lack of cooperation on the part of the BNF as its management did not recognize the role and authority of the Project Unit as foreseen in the Legal Documents. Instead BNF sought to dissolve or absorb the Unit and be chosen as the sole channel for future Bank-financed agricultural credit operations in Ecuador. 1/ Once the problem of documentation 1/ This antagonism was largely confined to the Central Management of the BNF; Project Unit relations at the technical and branch levels were good. - 25 - of BNF subloan disbursements to substantiate rediscounts was identified and IDA intensified its requests for audit of BNF subloan accounts (which were never fulfilled), relations between the BNF and IDA deteriorated. 1/ IDA support of the Project Unit contributed to this deterioration. The refusal of the BNF to provide IDA with audit reports and the report of an IDB- financed consultant--a request cleared with the IDB-compounded the problem. At one point the General Manager of BNF wrote to the Minister of Agriculture (November 23, 1976) accusing IDA of bad faith (infidencia). IDA relations with the other PBs were no problem, but supervision missions should have visited them more frequently. C. Central Bank 4.05 The Central Bank's rediscounting procedures under the Project were excessively complicated and time-consuming. Unessential doctmentation was required and internal review and processing were overly complicated. In addition, there was a failure on the part of the Central Bank to comply with the accounting and audit provisions under Section 4.03 of the Credit Agreement and to enforce the accounting and audit provisions for the Participating Banks under Section 13 of the Subsidiary Loan Agreements with the Central Bank. Subloan accounts in the Participating Banks were never audited; the Central Bank did not maintain a separate Project Account nor was it audited. In the final two years of Project execution the CB submitted to the Association - summary statements of disbursements and receipts, certified by the Interventor of the Superintendencia de Bancos in the Central-Bank, as requested by IDA, as an audit of the CB project account. The Borrower 4.06 The Government's decision to provide up to US$10 million equivalent to continue the sublending program carried out under the Credit indicates its appreciation of the beneficial impact of the sublending operations on dairy and beef development and its determination to not let the program lapse. V. PROJECT IMPACT AND ECONOMIC RE-EVALUATION A. Sublending Program 5.01 At appraisal it was estimated that the Project would finance devel- opment of about 350 beef ranches, and about 225 dairy farms. Tables 2, 5 and 7 1/ During his participation in the negotiations of Loan 1459-EC, the Technical Manager of the BNT sent letters dated May 4 and May 6, 1977 to Mr. Lerdau, confirming that BNF would have its 222-EC subloan account audited and would contract external auditors acceptable to the Bank. On the occasion of two supervision missions to Ecuador, BNF management stated that proposals had been invited from well-known auditing firms. In the end these actions were not ccplied with under the project. - 26 - provide detailed information on Project cost, amounts of subloans and distri- bution of subloans by loan size; selected statistics are shown below: On-lending Program Dairy Farms Beef Ranches Total Total Subloans - No. Actual 188 213 401 Appraisal Estimate 225 350 575 Total Project Cost- US$ million Actual 10.8 7.4 18.2 Appraisal Estimate 4.4 10.4 14.8 Averaee Subloan Size - Sucres '000 Actual 1,060.0 700.0 885.0 Appraisal Estimate 400.0 600.0 520.0 5.02 The Appraisal Report stressed the fact that dairy production offered a v-ry high rate of return, therefore it was considered justified that dairy farmers would receive subloans for up to 65% of investment cost for periods between7-9 years, while beef ranches were to receive subloans of up to 80% of development cost for periods between 8 to 12 years. As discussed above (para 3.03), upon request of the Government which was under pressure of the Sierra Livestock Ranchers' Association (essentially dairymen), the Credit Agreement was amended in February 1973 and sub-borrowers' contribution for both types of livestock producers was fixed at 20%, so as not to discriminate between the two main regions of the country. 5.03 IDA agreement in 1974 (Section 3.06) to reduce interest rates to 9% on subloans up to US$25,000, and subloans to cooperatives established under the auspices of the Agrarian Reform Institute, resulted in 115 subloans (average amount - US$17,400), which absorbed 14% of total amount of subloans, having been made at 9% and 286 subloans (average amount - US$42,100) totalling 86% of total amount of subloans at 12%. Table 6 gives detailed information on distribution of subloans by interest rates. 5.04 While in the interval between appraisal in 1969 and loan effective- ness in 1971, prices received by ranchers for beef cattle may have shown a small increase in real terms, official milk prices to producers increased by at least 20% in real terms. Combined with the i=proved sublending terms, this reinforced the demand for credit for dairy farm development more than could be anticipated at Appraisal (Annex 1 - Table 1). 1/ Excluding non-Credit components of the Project. - 27 - 5.05 Project cost estimates at time of appraisal for both beef and dairy farms also differ from the actual project results because both types of farmers, on average, contributed more than the mandatory 20% to project cost and continued development after the initial subloan investment program was completed. Information in Table 5 shows project costs at time of subloan approval while data on actual investments is given in Annex 1 - Tables 2 and 4. 5.06 For beef ranches Project funds financed (i) establishment of new pasture on 21,400 ha and improvement of 26,350 ha existing pasture, (ii) con- struction of 2,700 km of new fencing and (iii) 304 new corrals and improve- ments to 48 others. The dairy subloans included financing for 125 milking sheds and 144 calf sheds. Water supply and irrigation systems also contrib- uted to an improvement in technology and production, which will continue because of the permanent nature of the principal investments. B. Technical Performance of Sub-borrowers 5.07 Animal Health. The appraisal report considered the three major animal health problems to be foot and mouth disease (aftosa), tick infestation and internal parasites. Assurances were given during negotiations that effec- tive control measures would be obtained by a compulsory aftosa vaccination program for all cattle on Project ranches/farms, before a nationwide campaign financed by IDB and UNDP became fully operational (Section 2.12 in Appraisal Report). Brucellosis and Tuberculosis control were also included in the program. The National Animal Health Services of MAG effectively carries out the aftosa vaccination program and Project farms were receiving two to three vaccinations yearly, depending on the area. To control tick infestation, man of the Project development plans included dips and regular dipping is practiced in bad tick areas. Among ranchers there is a general awareness of the nature and causes of anaplasmosis and piroplasmosis (the tick borne fevers) and effective measures are taken to cope with these health problems. Vacccin- ation is also widely applied agrainst Brucellosis, which is more prevalent in the dairy than the beef herds; the percentage of blood samples giving positive reactions appears to be declining. Meat inspection figures indicate that tuberculosis is not widespread. 5.08 Fertility. Calving rates have shown no increase on Project farms, but effective weaning rates have increased by about 2%, indicating decreased calf mortality. Weaning rates of over 60% for tropical beef cattle in the Coastal region, and over 70% for dairy cattle in the temperate Sierras can be considered satisfactory, but also offer a potential for improvement. Some dairy farms are obtaining about 90% calvings through good management which includes adequate mineral supplementation. The incidence of 0.5% metritis in adult cows slaughtered would not indicate a fertility problem in this area. An expatriate livestock expert (financed under Loan 1459-EC) has recently initiated a 3-year research contract to study the means of improving the calving percentage in the dairy herds in the Sierra. He will work with INIAP at Santa Catalina. 5.09 Beef Ranches. At appraisal it was estimated that development of 350 beef ranches in the Coastal Region would require investments of about S/ 262.0 million, a typical ranch consisting of 300 ha carrying 375 head of cattle and requiring an investment of S/ 750,000 to reach the anticipated - 28 - level of productivity. Two hundred and thirteen subloans were made to 206 sub-borrowers, their development plans totalling S/ 186.0 million, the typical ranch consisting of 339 ha carrying 303 head of cattle and requiring an investment of S/ 780,670 for development (Annex 1, Tables 2 and 3). Total investments and inputs follow remarkably close to those proJected at appraisal with only minor increases in cow purchases and buildings and a decrease in pasture renovation (Annex 1, Table 2). The increase in the purchase of breed- ing cows probably was the result of the amendment to the Credit Agreement, signed in February 1973, permitting the Project Director to approve that up to 60% of the proceeds of subloans be used for this purpose and non-restricted lending for purebred breeding stock, in place of up to 50%, as originally agreed. 5.10 Milk production in beef herds was not considered at appraisal although it formed an important part of the "before project" income and increased at a greater rate than income from meat due to the double effect of substantial increase in producer prices and higher volumes of production (Annex 1, Tables I and 3). The marked retention of female stock is demon- strated in Annex 1, Table 6, showing percentage herd composition and sales. The projected and actual ranch parameters are summarized in Annex 1, Table 3. As we see there, increases in stocking rates (to 1.3 AU/ha) were less than forecast (1.8 AU/ha), reflecting the lower than anticipated investment in pasture development. As is common for livestock projects, stocking rates increased while mortality and weaning rates changed slightly; weaning rate remained a low 65%. At appraisal, information concerning dairy production an- markets was not complete and future relative price trends not known, thus it was not possible to predict the impact on production patterns of changes in the relative prices of milk and meat. The Coastal Region, previously considered as beef producing, has become dual purpose, and milk prices are higher than those in the Sierra. Presently, some herds of specialized dairy cattle exist, and the Research Station at Pichilingue is experimenting to solve the problems of environmental adoption of dairy animals, particularly Holsteins, moved to the Coastal Zone from the Sierra. 5.11 Dairy Farms. At appraisal it was estimated that 225 sub-projects in the Sierra Region would require about S/ 111.0 million for investments, with a typical farm consisting of 60 ha carrying 156 head of cattle, and requiring an investment of S/ 494,000 to reach the anticipated level of productivity. 188 subloans were made to 173 sub-borrowers, their investment plans totalling S/ 274.0 million, the typical dairy-farm consisting of 125 ha carrying 137 head of cattle, with an investment plan totalling S/ 1.3 million (Annex 1, Table 5). 5.12 Farm inputs, as a percentage of investments, generally follow appraisal estimates, considering some variations in the terminology and classification (Annex 1, Table 4). The 3% of funds, estimated as necessary for silo construction, were invested in irrigation equipment, as an alterna- tive means to solving the dry period feed-supply problem. Irrigation also reduced much of the need for pasture renovation because the irrigated areas underwent a rapid species change with the use of water and application of fertilizer. The higher limit of sub-lending for breeding stock from 50% to. - 29 - 60%, and the non-restricted lending for the purchase of purebred animals, coupled with increases in milk prices, led to the purchase of cows and heifers accounting for 35% of the amount of development projects financed for dairy farms, instead of the 9% estimated at appraisal (Annex 1, Table 4). The investment prospects attracted a considerable number of new dairy farmers with relatively large holdings, capable of carrying increased herd numbers, but also requiring a bigger investment--especially for herd formation--than the established dairy farms anticipated at appraisal. The estimated and actual parameters are detailed in Annex 1, Table 5. Farms turned out larger than anticipated, while stocking rates (1.5 AU/ha) were lower. Calving rates (71.3%) and weaning rates (63.6%) were lower and adult mortality higher (4.9%). Milk production per cow per day (9.6 liters) was reasonable, but owing to lower stocking, milk production per ha (2,714 liters) experienced a notable short- fall. C. Project Impact 5.13 For an assessment of Project impact, data derives from three main sources--Project Unit, BNF and information collected by the completion mission during visits to Project farms. All data available was combined, where possible, in order to present the most representative information. As BNF refused to cooperate ;with the Project Unit in the post-evaluation of sub- projects, data collected by the Project Unit covered only 17 beef ranches and 14 dairy farms financed through the private financial institutions, and con- tained results for 1976 and, in a few cases, also for 1977. BNF did, however, prenare a separate evaluation of sub-projects (29 beef ranches and 13 dairy farms) based on information and results for 1976. In spite of continued requests during 1977-1978 this BNF report was made available to IDA and the Project Director only at the time of the completion mission. When the mission sought access to the background information which served as the basis for the BNF report, BNF staff stated that this was confidential information available to BNF staff only. 1/ Nevertheless, where applicable, information from the BNF report has been used for this evaluation. To broaden the information base, the mission collected some key indicators from 19 Project-financed farms visited by the completion mission, and included these data. The varying sources of information account for the variations in the number of observations in the analysis, but some parameters are based on 14% of the total number of sub-borrowers. Benefits 5.14 Breeding Animals. At appraisal it was anticipated that after ten years Project farms and ranches would annually produce about 20,000 surplus breeding animals. The composition of sales from dairy farms four years after development indicate a decrease in percentage sales of heifers, but as extraction percentage increased from 27.9% to 35.3% on a herd 49% bigger 1/ This refusal, coupled with the failure of the BNF to carry out an audit of its subloan accounts, impedes fully assessing BNF performance under the Project. - 30 - (Annex I - Table 6), actual heifer sales per farm have increased from 2.1 to 3.1, or about 50%. The value of the additional herd is about US$18,300 compared to US$4,500 estimated at appraisal, confirming the statement in the Appraisal Report that present incentives were sufficiently strong to encourage farmers to further develop their properties even beyond the level indicated in the model projections. Future sales will greatly increase as a result of this retention. On the sample beef ranches, number of cattle has increased by 75% and income from sale of animals by 240% (Annex I - Table 3). 5.15 Incremental Milk Production. It was calculated that after about ten years the Project farms and ranches would produce some 40 million liters of additional milk annually. Milk production on the 52 farms sampled has increased 47% (Annex I - Table 5), or about 17.5 million liters from the 173 dairy farms financed. On the 29 sample beef ranches, the value of m1lk sales increased by 356% (Annex I - Table 3) which would represent an incremental production of 2 million liters for the 206 Project beef ranches. Summing these two, after about four years almost 50% of the projected 10 years incre- mental milk production has been achieved, although in part this favorable outcome reflects the larger than anticipated lending for dairy subprojects. 1/ 5.16 The 1969-73 National Development Plan set a target of 8.7% annual increase in livestock production, which would have resulted in increases in per capita consumption of milk and milk products, from 73 liters to 86 liters by 1973. The estimated incremental production generated by the Project would represent 3 liters per capita for 1977, when the-Ministry of Agriculture and Livestock estimated consumption at 79 liters and Junta Nacional de Planifica- ciou estimated a consumption of 83 liters per capita. 5.17 Incremental Beef Production. At appraisal it was calculated that after 10 years the Project farms would produce additional 7,500 metric tons of beef annually. The average value of meat sales from the 42 dairy farms sampled increased by 142%, from S/ 94,000 to S/ 228,000, representing about 4,437 kg additional meat at 1977 prices, and 776.5 metric tons for the 173 dairy sub- borrowers. On the 29 beef ranches sampled, the value of meat sales increased 242%, which at 1977 prices would represent 2,064 metric tons of additional beef sales for the 206 Project ranches. Summing these two sources, about 4 years after development additional meat production was about 2,841 metric tons or 38% of the projection at full development. 2/ 5.18 The 1969-73 National Development Plan aimed to increase average beef consumption from 7 kg to 7.8 kg per capita. In 1977 consumption was 11.2 kg (Annex I - Table 1), for which year the estimated incremental production from 1/ While it was anticipated that under the project US$4.4 million equivalent would be invested in dairy farms, the figure turned out to be US$10.82 million. 2/ Despite the fact that at appraisal beef ranch investments were anticipated to be USS10.4 million equivalent and they turned out to be US$7.35 million. 31- Projec,. inanced farms and ranches would account for 430 grams; this repre- seats about 10% of the increase in per capita consumption 1969-1977. 1/ D. Economic and Financial Rates of Return 5.19 The economic rate of return of the project is estimated to be about 27%. This is somewhat higher than the appraisal estimate of 22% but is to be expected in the light of the resulting higher proportion of more profitable dairy subloans in the total lending program than anticipated at appraisal. Regarding the respective ranch models, the appraisal report anticipated a financial rate of return for beef subloans of 16%, excluding the incremental herd value. 2/ On the basis of the data gathered for the PCR, the rate of return for such subloans is estimated at 25%. In part, this higher rate of return reflects the importance of milk production from what are essentially dual-purpose herds, an income not included in the appraisal model but now representing about 18% of ranch sales revenues. At the time of appraisal, the financial rate of return on the dairy subloan model was 41% (excluding incremental herd value). On the basis of the data compiled by the Project Unit, the estimated rate of return is 37%, excluding incremental herd value. In view of these tentative results, which are based on projections of observa- tions of subloans relatively early in their implezentation period, the project is close to or exceeding its economic targets. A more detailed review of the data utilized to arrive at these estimates is presented in Annex 2. VI. IDA PERFORMANCE 6.01 On balance, the performance of IDA in relation to the project during implementation was fair. Changes in IDA staff during supervision were not reported to cause significant problems for project management. Relationships between IDA staff and the Project Unit and country officials in the Ministry of Agriculture were good, and IDA exhibited support and flexibility to solve problems in Project implementations as they arose. Relationship between IDA staff and BNF management appears to have been strained largely because of BNF management's generally negative attitude towards the Project Unit, their reluc- tance to supply to IDA information and reports on other consultants' studies and findings with regard to improving BNF's organization and operations, their failure to prepare and submit separate Project accounts and audited financial statements and refusal to collaborate with the Project Unit in carrying out post-evaluations of Project subloans. A supervision mission in 1976 recom- mended suspending disbursements on BNF rediscounts; IDA management chose not to accept the recommendation. I/ Based on a 1977 population of 6.55 million. 2/ The original appraisal model, whose rate of return was 21%, included an initial beef fattening operation not financed with Credit resources. Information on this possible complement was not maintained during project execution and so was excluded from our analysis. - 32 - 6.02 It appears that a major weakness in Project supervision was that insufficient attention was paid to reviewing in detail and proposing changes in the procedures for subloan disbursements and rediscounts, which would have contributed -to improving the situation and bringing Credit disbursements to a close at a much earlier date. Another problem which, it appears, was not sufficiently dealt with during supervision, was in maintaining closer contact with the participating private banks, particularly to explore the reasons for the lack of interest and resulting low participation of the private financial institutions in Project sublending. For these problems there should have been a more intensive participation by Financial Analysts in project supervision. Finally, were IDA to have more vigorously insisted on compliance with the accounting and auditing provisions of the Credit Agreement early in the project execution period, some of the later problems may not have arisen. VII. CONCLUSIONS 7.01 On the basis of the evidence available at this time, it appears that the project is on the track to achieving its production goals. The introduc- tion of the dairy component in this third project, which continued the earlier beef sublending programs,,was successful. For both categories of subloans there was an active demand, returns to sub-borrowers were high, and both their technical and financial performance were satisfactory and in line with expec- tations at appraisal. That the Government appreciated these positive factors is evidenced by its providing US$10 million of bridge financing to continue the project for the period from the commitment of the Credit resources to the initiation of the repeater project (Loan 1459-EC). The success of the Credit 222-EC sublending program justifies the inclusion of similar program in the repeater project, financed under Loan 1459-EC. In this new project, sublend- ing coverage was extended to include small agroindustries and crop development subloans. 7.02 The Project Unit performed well, as did the technicians in the participating banks. Fewer private banks participated in the project and the state bank (BNF) was more active than anticipated; in part this is owing to the sublending experience that BNF gained from its participation in the preceding two projects and the more favorable rediscounting terms (100%) it obtained at the Central Bank. 7.03 The hiatus in project execution during 1973-74, as IDA sought to accommodate the changes in the sublending terms and conditions proposed by the Government, occupied considerable staff time and attention. The changes introduced in these terms and conditions probably did not materially affect the outcome of the project. Moreover, in view of the radical change in Ecuador's economic situation as petroleum exports became a significant factor in her trade balance at that time, these negotiations provided the opportunity to shift from a Development Credit to a Bank loan to finance the project. The files do not indicate that this possibility was considered during these extensive negotiations. - 33 - 7.04 A second problem arose during 1976 when it became clear that the BNF was,experiencing difficulties in documenting subloans for Central Bank redis- counts. Had adequate attention been given from the start of the Project to the Credit Agreement requirements for accounting and auditing, this problem may not have arisen. As it turned out, participating bank subloan accounts were never audited. Finally, the Central Bank did not appreciate the exces- sively bureaucratic rediscounting procedures it maintained, which may have tended to discourage private bank participation. - 34 - ECUADOR Table 1 THIRD LIVESTOCK DEVELOP%ENT PROJECT (CREDIT 222-EC) COPLETION REPORT Ameraisal sti=ate and Actual Project Financing (USS million) MA Credit Particioati! Banks Razchers/Farners Central Bank Total Aount tAo A=ot Amount I Aount APPRAISAL ESTIMATE I - evelc:ent Beef Ranches 6.2 60.0 2.1 20.0 2.1 20.0 - - 10.4 Feeder Steers - - 1.4 80.0 0.4 20.0 - - 1.7 Dairy Farms 2.0 45.0 0.9 20.0 1.5 35.0 - - 4.4 LI - Technical Services (a) INIAP Research and Training 1.0 100.0 -- - - - - 1.0 Cb) Seed I=prove=ent Schee 0.3 100.0 - - - - - - 0.3 (c) Nat'1 Dev.3ank (BNT) 0.2 100.0 - - - - - - 0.2 (d) Project Adni-istration 0.3 27.0 - - - - 0.8 73.0 1.1 Participating Banks - - 0.6 100.0 - - - - 0.6 Total 10.0 51.0 5.0 25.0 3.9 20.0 0.8 4.0 19.7 ACTUAL I - Deveiwo-ent Beef Rancbes 3.77 52.0 0.36 5.0 1.49 20.0 1.731/23.0 7.35 Feeder Steers 2/ - - - - - - - - Dairy Farns 4.89 46.0 1.18 11.0 2.71 25.0 2.04/19.0 10.82 II - Technical Services (a) LIAP Research and Training .90 100.0 - - - - - - 0.90 (b) Seed Iprovement Scheme 0.04 100.0 - - - - - - 0.04 (c) Nat'l Dev. 3ank (BNT) 0.20 100.0 - - - - - -.2 (d) Project Adminis:ration 0.20 - - - - - 1.82 - 2.02 Participating Banks 2/ - - - - - - - - - Total 10.0 47.0 1.54 7.0 4.20 20.0 5.59 26.0 21.33 1/ 7nciudes Central Bank's redisecc.:s of 3NT participation in subloar. fizancing and other subloans partly financed with FONADE funds - See Table 2/ No inforation could be obtai:ed on short-term credits for feeder steers and vorking capital loans made by participating banks. No records are available on project ac==nstration costs of particzpating banks. - 35 - ECUADOR Table 2 THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Allocation of Proceeds of Credit (US$ '000) Original Allocation Final Allocation Category Amount % Amount % I - Long-term loans for beef ranch and dairy farm development 8,000.0 80.0 8,654.0 86.5 II - Technical Services (a) INIAP - Research & Training 900.0 9.0 900.0 9.0 (b) Seed Improvement Scheme 300.0 3.0 35.0 0.4 (c) Banco Nacional de Fomento (BNF) 200.0 2.0 197.0 2.0 (d) Project Administration 200.0 2.0 214.0 2.1 III - Unallocated 400.0 4.0 - - Total 10,000.0 100.0 10,000.0 100.0 Table 3 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Central Bank Rediscounts from Project Account 1972 - 1978 1/ Year Amount Percentage (Sucres '000) 1972 14,185.8 6.4 1973 44,425.4 20.0 1974 30,750.7 13.9 1975 35,812.0 16.1 1976 25,828.0 11.6 1977 68,033.8 30.7 1978 1/ 2,971.2 1.3 Total 222,006.9 100.0 1/ Up to March 1978 (Final disbursement) CCUALM* Till9 LIVESTUC DEUELOPHEKT PROJECT (CEIT 222-EC C~MPLXTION REPVRT proatct Cost and Subloane by Catögory and Förticipating banka No. Total Total Sub-Loan financinz Total Fjnancing of rro!!ct C>!t of Project Sub- IDA PartickpatIna sub- project sub- IDA F.rticipai.ng Sub Us Sub-Loöne Cg L-. Cfödi r0AD Bank Sorrowerc Cout Loane Credit TONADE anka Borrowera --------------------------- sUer.o MO0 ---..---------------------- ----------------------- 'ore•ntasa ----------------- . 1111 114 145,6531.8 108,093.9 65,959.3 9,706.5 32,428.1 3/ 37,557.9 100.0 74.2 45.2 6.7 22.3 25.8 2. u,rt. 42 77.538.5 58,151.2 35,227.4 5,425.8 17,498.0 19,387.3 100.0 75.0 45.4 7.0 22.6 25.0 3. U.CO dal richince 22 34,375.3 27,500.3 18.562.5 667.7 8,250.1 6,875.0 100.0 80.0 54.0 2.0 24.0 20.0 4. 1,,cu de4 KaCIsk- 5. ft.,cu .1 C<operatavea 3 3,393.2 2,706.6 1,353.0 541.6 812.0 676.6 100.0 Ö0.0 40.0 16.0 24.0 20.0 6. :.)& d. Ced,ito Ag1c0l 4 6,530.0 6,264.0 2,091.9 2,292.9 1,819.2 2,266.0 100,0 13.4 24.5 26.9 22.0 26.6 7. banco det Ipacico l 960.0 624.0 436.8 - 167.2 336.0 100.0 65.0 45.5 - 19.5 35.0 o. n.,,cu de Ios Andem 1 948.0 702.4 474.9 22.5 . 245.6 100.0 74.0 50.0 * 24.0 26.0 9. finonta . 2,500.0 2,000.0 1,400.0 - 600.0 500.0 100.0 80.0 56.0 - 24.0 20.0 sub-tal - p.try For~a las 273,686.8 206,042.4 125,501.8 18,654.5 61,682.1 67,844.4 100.0 15.2 45.8 6.8 22.6 24.8 1. 5NY 161 141,528.6 113,222.9 72,042.9 12,874.2 28,301.7 11 28,305.7 100.0 80.0 50.9 9.1 20.0 20.0 2. cAWi:C 10 11,610.6 9,283.9 6,948.5 14.4 2,321.0 2,326.1 300.0 00.0 59.9 0.1 20.0 20.0 ). q.,cu del Picl,inc,a 1 556.0 444.8 333.6 - 111.2 111.2 100.0 e0.0 60.0 - 20.0 20.0 4. h.,co de fitkhla 7 10,149.9 8,216.7 6,083.5 - 2,033.2 2,033.2 100.0 00.0 60.0 - 20.0 20.0 5. 8.,cu de C.o.operativeI 23 15,320.0 12,256.0 7,291.0 1,901.1 3,064.0 3,064.0 10.0 80.0 47.6 12.4 20.0 20.0 6. Ca. de C8,1dto Agricola - 1. 5.4ncO del recIlMc 4 2,150.0 1,720.0 1.290.0 - 430.0 430.0 100.0 80.0 60.0 - 20.0 20.0 8. 9.1,0 da lat Anåg. - 9. Finanom 1 4,645.0 3,716.0 2,511.7 275.3 929.0 929.0 100.0 90.0 54.0 6.0 20.0 20.0 aul.total - Bst Saict,a 23 05,960.1 148,760.3 96,501.2 15.065.0 37,194.1 37,199.8 100.0 80.0 51.9 8.1 20.0 20.0 Total *uh.pvojacto and *oblawn 401 459,846.9 354,802.7 222,007.0 33,719.5 99,076.2 105,044.2 100.0 77.2 48.3 7.3 21.6 22.8 / pNF garticipattua vag reditcountad by Central »,k. All other banka used oun rasources. '-3 ECUADOR TItII0 LIVESTK"r PEVELOPMIf POJECf (CIEDU T 222-EC) C*1tPL,TI0N REPOmT DIstribuion of SuIi~n by Interest mate* Sucriks 000 ----------------- DAIRY tARt SUBLANS ------------------- ------------------ BEEF RANCHES SUDLOARS ---------------- 91 12 Total 9% 121 Total Ns. Amount Nu. Amount me. Afount Na. Am,mnt Na. Amount No. ApounL . uik 24 11,262.4 90 96,831.5 a14 108,093.9 61 25,038.4 10i 88,184.5 167 113,222.9 >. e.t i: 2 1.164.0 40 56,987.2 42 5s,151.2 . - 20 9,283.9 10 9,283.9 Ib ..,u det Michiechik 2 1,014.4 20 26,425.9 22 27,.SOO3 1 444.8 - - 1 444.8 Oos.o...,. de hala - - -La - - - - - 1 8,116.1 7 8,116.7 5. lams-is de f:îrrtIves 2 1,684.8 1 1,02&.8 3 2,706.6 20 8,566.9 3 3,689.1 23 12,256.0 6. C:.Jo e c.ifto Aar(c0kA - 4 6,264.0 4 6,264.0 - - - - 1. nlm,c, del Vac(ifco 9 624.0 - - 1 624.0 2 660.0 2 1,060.0 4 1,720.0 B. t, de i..e A§ides - - 1 702.4 1 702.4 - - - - - '8. is.-.n. - - 1 2,C00.0 1 2,000.0 - 1 3,16.0 1 3,716.0 rutsl 31 15,809.6 157 190,232.8 188 206,042.4 84 34,710.1 129 114,050.2 213 148,160.3 tesent a*. 66.5 7.7 83.5 92.3 500.0 500.0 39.4 23.3 60.6 76.7 100.0 100.0 _______ Ho. I,ercentmae Amoutnt Percentage lIsai e•i,-l..mii at 9% 115 28.1 50.519.; 14.2 i-3 1... as ...5,..ae et12% 286 71.3 304,283.0 85.8 0 8.,i.! 408 5<11.0 354,1502.7 500.0 TIIRU LIVUtUcX UVELnu ~ U.ItCT (CRLUtt 222-LC) lit»·ltutoofl at Sublosne ly SI. PartiltliLlng Bank and Categtry S2cre 000 -~ ----------------- pIry f.r.e - ------------ ----------------- Beei ganches -------------- iZount o% åverage No. of ÅoUnt ot er Sublo.,ne 1 SubIoena i 8,bl. Su3loine 1a Subloane 1. Sublon Upo 625.0 52 45.6 2I,I97.t 21.3 446.1 13 67.7 44,1,99.2 39.3 393.8 6l.0 to 1,000.0 24 21.1 20,195.0 18.7 8'>.5 23 15.0 20,301.3 11.9 812.0 1,0L0.0 ts 1,500.0 11 14.9 11,13.6 19.6 l,e3.4 18 10.8 24,343.2 21.5 1,352.4 L,500.0 to 2,100 30 8.8 16,723.8 15.4 1.672.4 5 4.0 8,536.6 7.5 1,101.4 2.000.0 , Il 9.6 26,839.2 24.8 2,.440.0 6 3.5 15,542.4 13.8 2.590.4 sub-total 134 300.0 108,093.5 100.0 946.2 161 100.0 13,222.9 100.0 678.0 up o 625.0 3 7.1 1,664.0 2.9 55.0 4 40,0 2,055.0 22.1 513.8 625.0 t.o I,000.o 12 29.6 9,782.4 16.8 615.2 20.0 2,44.9 26.8 825.3 1,000.0 to 1,300.0 1) 31.0 16,390.6 28.2 1,260.8 l 10,0 1,500.0 16.2 1.500.0 1,500.0 to 2.000.0 6 14.3 30,272.1 13.7 1,712.0 2 20.0 3,244.0 34.9 1,622.0 1,00.0 a 8 19.0 20,042.0 34.4 1,05.3 - - - sub-totøt 42 00.0 58,131.1 100.0 1,384.5 10 100.0 9,283.9 100.0 928.4 8onco del flica 00 tip to 625.0 2 9.1 1,074.0 3.9 437.0 I 100.0 "44.9 100.0 444.9 625.a to 1,000.0 5 22.1 4,046.0 14.1 809.0 . . . . . 1.0(0.0 to 1,500.0 9 LO.9 11,262.0 41.0 1,251.0 1,500.0 to 2,000.0 4 18i2 6,4'9.3 23.4 1,610.0 2,000.0 2 9.1 4,619.0 17.0 2,340.0 sub-lutal 22 100.0 21,500.3 100.0 1,230.0 l 100.0 444.9 100.0 444.9 up t. 625.0 2 20.0 1,110.4 9.0 555.2 25 7?.4 20,377.4 40.2 415.0 625.0 to 1,000.0 I 10.0 702.4 5.1 702.4 4 11.4 3,279.6 12.7 820.0 1,i0.0 o I,1500.0 4 40.0 4,800.2 39.0 1,200.0 3 8.6 3,952.0 35.3 1,17.0 1,500.0 to 2,000.0 1 10.0 1,68.0 13.7 1,6e0.0 2,000.0 i 2 20.0 4.004.0 32.6 2,002.0 8 8.6 ,199.4 31.5 2,133.1 -0 100.0 12,297.0 I0.0 1,229.7 35 100.0 25,808.4 00.0 73 & Total ao.,o - A banke up to 623.0 59 3),4 21,045.6 13.1 458.4 163 67.1 57,376.5 38.6 401.2 61.0 to 1,(0.0 42 22.3 34,125.8 16.9 826.6 32 15.0 76,065.8 17.5 814.5 1,000.0 to 1.50.0 43 22.9 53,591.4 26,0 1,246.3 22 10.3 29,795.2 20.0 J.3M6.3 1.00.0 to 2,t,00.0 21 11.2 35,s3.2 17.0 1,612.1 7 3.1 11,760.6 8.0 1,683.0 2.0o0.0 * 23 12.2 53,564.2 27.0 2.415,6 9 4.3 23,?41.6 15.9 2,638.0 Tutal I88 300.0 206,042.2 I00.0 1,060.0 213 100.0 148,?60.1 100.0 690.4 0I C-I D% ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Distribution of Subloans and Number of Beneficiaries - Dairy Farms ---- ---- Beef Ranches ---- All Subloans -- No. of No. of No. of No. of No. of No. of Subloans Beneficiaries Subloans Beneficiaries Subloans Beneficiaries 1. BNF 114 109 167 163 281 272 2. COFIEC 42 34 10 7 52 41 3. Banco de Pichincha 22 20, 1 1 23 21 4. Banco de Machala 7 7 7 7 5. Banco de Cooperativas 3 3 23 23 26 26 6. Caja de Cr9dito Agricola 4 4 4 4 7. Banco del Pacffico 1 1 4 4 5 5 8. Banco de los Andes 1 1 1 1 9. Finansa 1 1 1 1 2 2 H Total 188 173 213 206 401 379 j L,CUApIOU Tilku LIVLSTCK D:VELPHNT PMOJET (CAEDIT 222-c) CtMPLET101N REPMRT Utotribu.tun ut Sublumpn Appjrt>vale by Years and Catugory Sucreå 1000 1972 1973 1974 1975 1976 11177 Tutal N4... A»n..unt Ko. ~Unt No. A~unt t. A~ u. AemsmnL NU. Annunt Nfi. Ammhunt I&Alet¥ fAllIt ItfifANS 1. it# *3 32,200.2 12 7,321.2 33 39,063.8 7 6,734.6 17 19,241.5 2 3,532.6 114 108,093.9 2. 1#witc. 14 16.301.5 6 8,438.5 2 3,444.0 2 3,528.8 10 14,322.0 8 12.116.4 42 58.151.2 1. .. l PIche18 25,625.7 3 4,315.8 l 1,358.8 22 27,50X.3 4. «lr.ec, ft.,åhes 5. p. 1 ,d 1:...tg.sivne, 1 486.4 2 2,220.2 3 2,706.6 b. Clid de coöedåtts agrecet* 4 6,264.0 4 6,264.0 K, flee, d.1 reificu 5 624.0 1 624.0 8. hm.t. d. lod AMNd 1 702.4 1 702.4 1 9. fil,olh 1 2,000.0 1 2,000.0 bub-t.1a1 Mnil Fasma 57 48,503.7 19 16,383.7 55 65.522.3 9 10,263.4 33 42,099.5 35 23,274.5 k88 206,,042.4 3it.5 KANSI h,IIntl 'ANS 3. 190e 51 31,2o2.0 27 9,512.1 48 36,140.8 b 3,568.0 25 31,852.4) 2 948.0 167 113,222.9 7. #* ftj: 5 3,797.0 2 2,500.0 2 2,34.9 1 592.0 30 9,283.9 1. J-. . 4 5 Pa.I.f, tid 1 444.8 A 444.h 4. B.Iibd.H.r .,e 8 | .7 7 8,116.7 . ~."... C:.-... ,,t Iv,, 4 1,591.1 1 2,772.0 12 7,892.9 23 12,256.0 I.. E..:1.. .h. 3 g,di t . AKu I<*e3i. 5. I..,.,, I .n *i 33 tuo 4 3,1720.0 4 120.0 '4. f h , - 3,716.0 t 3,716.0 S,Ih-t,t fitul 8.Wche.4 69 41,115.7 33 53.732.5 55 40,571.6 15 6,340.0 30 43,460.9 3 1,540.0 213 148 no .3 to,..1 126 91,617.4 52 30,115.8 1I0 106,093.9 24 16,603.4 71 85,560.4 is 24,81.0 401 354,802.7 *-1 (D 00 - 41 - Table 9 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT INIAP: Utilization of Funds 1. Pichilingue Research Station US$ (a) Buildings for Ranch Training Center including student hall, dormitories, guest house, auditorium and cafeteria. 213,022 (b) 5 houses for technicians 34,800 (c) Corrals, laboratories, implement shed, offices 18,400 (d) Carage, workshop, storage facilities 25,290 (e) Furniture for livestock section 8,497 (f) Air conditioning equipment 6,850 (g) Laboratory and photographic equipment 14,172 (h) Field equipment - Tractor MF and transporter 70,574 (i) Bus and 3 field vehicles 24,995 Sub-total 416,600 2. Technical Assistance Contract with University of Florida for 3 consultants 452,000 3. Training Scholarships: University of Florida - Ing.Radl Santill6n 14,550 University of North Carolina - Ing. W. Padilla 16,850 Total allocated and disbursed 900,000 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Production and Prices BEEF Carcass Total Consumer Per Capita Year Head Weight Meat Price Consumption (N 000) (kg) (t) (S/per kg) (kg) 1969 266.4 166 44,222 24.0 7.0 1975 397.6 178 67,463 28.5 - 1976 422.9 161 68,077 30.2 - 1977 464.5 159 73,849 32.6 11.2 1978 n.a. n.a. n.a. 32.6 n.a. MILK Daily Daily Official Maxi- Actual Milk Processing Utilized mum Producer Producer Powder Per Capita Year Capacity Capacity Price Price Imports Consumption (l - 000) (1 - '000) (S/) (S/) (t) (1) 1969 542 359 2.3 n.a. - 73 1973 - 575 n.a. 1.50 1,920 - 1974 - 590 3.6 2.53 1,502 - 1975 - 564 3.6 2.86 1,040 - 1976 - 565 4.2 3.46 5,494 - 1977 - 552 4.2 3.70 4,245 83 1978 1,094 498 4.2 3.80 - - Source: Ministry of Agriculture and Livestock a/ Delivered at Plant ECUADOR . THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Beef Ranch Investment Costs Appraisal Estimate Actual Cost Actual Unit Investment Costs Costs Average Investment Investment Category Cost 1 Per Ranch 1972 1976 Cost Per Ranch P.T S/ % S/ S/ S/% Pasture Improvement New - ha 1,440 19 1,607 2,980 1,930 19 Renovation/Improved - ha 600 16 625 2,050 722 6 Fences New - km 4,800 7 6,991 16,451 9,370 10 Watering Facilities Wells 3,600 1 14,000 9,250 - - Other - 2 5,457 10,000 36,950 1 Ranch Structures Corrals 9,600 1 25,049 54,286 28,980 4 Dips 18,000 1 33,750 36,250 39,770 2 Buildings - 2 19,230 51,154 29,290 4 Machinery & Equipment Tractor 132,000 2 206,167 232,000 215,885 2 Scales/Other 24,000 1 - - - - Breeding Stock Bulls 18,000 15 19,039 23,857 21,850 10 Cows/Heifers 3,600 23 3,963 8,333 7,050 34 I 0* Contingencies - 10 10 M 4 100 100 Average Cost per Ranch 750,000 780,670 a/ After Devaluation of August 17, 1970 ECUADOR THIRD LIVESTOCK DEVELOPHENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Beef Ranches Estimated and Actual Parameters Projected in Appraisal Estimate N* of Before Subloan Before Year Category Observations DeveloRment Evaluation - Actual Development 4 1. Total Herd - N* 51 303 - 531 375 626 2. Pasture Area - ha 51 214 328 339 300 - 3. Stocking Rate - AU/ha 51 1.1 1.4 1.3 1.0 1.8 4. Weaning Rate - % 51 63 73 65 55 75 5. Mortality (Adult) - % 22 2.2 2.2 1.5 5 3 6. Extraction Rate - % 35 13.4 13.0 13.0 14.4 13.4 7. Culling Rate - % 35 12 11 12 16 15 8. Operating Expenses- S/per head 54 298 311 667 218 190 9. Development Plan - S/'000 - - - 780 - 750 10. Development Plan - S/'000 per ha - - - 2.3 - 2.5 11. Actual Investment - S/'000 per ha 22 - 5 7.9 - - 12. Total Investment - S/'000 22 - 703.5 1,680.6 - - 13. Total Sales - S/'000 48 149.5 242.9 686.8 124.1 178.1 14. Income-Meat - S/'000 29 119.7 163.5 409.7 124.1 178.1 15. Income-Milk - S/'000 29 15.8 16.9 72.1 - - 16. Percentage Income from Milk 35 2.0 - 18.0 -- 17. Additional Sales as Percentage of Investment 22 - 53 - 68 a/ Year 4 after Development ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Dairy Farm Investment Costs Appraisal Estimate Actual Cost Actual Unit Investment Costs Costs Average Investment Investment Category Cost - Per Farm 1972 1976 Cost Per Farm si % ST/ TT7~ S/ x Pasture Establishment New - ha 16,250 12 4,291 7,706 4,659 7 Renovated/Improved - ha 12,500 32 2,665 4,420 2,440 14 Fences New - km 5,000 2 7,100 13,000 8,470 3 Water Facilities Troughs 625 1 1,640 - 1,187 1 Other - 4 - - - 4 Farm Structures Yards - 2 21,658 40,000 29,050 1 Sheds/Housing 56,250 1 30,000 100,000 62,100 4 Silos 15,000 3 17,833 30,000 19,000 - Irrigation Canals - km 25,000 2 21,406 10,000 11,610 2 Machinery & Equipment Tractor 137,500 8 164,621 366,000 226,880 7 Implements 103,500 8 24,538 34,625 46,100 3 Milking Machines 62,500 3 65,040 241,500 95,650 2 Breeding Stock Bulls 18,750 4 14,466 - 19,800 2 Heifers/Cows 7,500 8 6,508 14,059 9,850 35 Irrigation Equipment - - - - - 3 Contingencies - 10 12 M 100 100 H Average Cost per Farm 494,000 1,302,240 a/ After devaluation of August 17, 1970 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Dairy Farms: Estimated and Actual Parameters Subloan Evaluation Appraisal Estimate N* of before Estimate Before Year Category Observations Development Year 4 Actual Development 4 1. Total Ierd - No 49 137.0 248.0 207.0 157.0 205.0 2. Pasture Area - ha 43 94.0 108.0 125.0 60.0 - 3. Stocking Rate - AU/ha 41 1.2 2.2 1.5 1.8 2.3 4. Weaning Rate - % 54 61.3 76.9 63.6 66.0 81.0 5. Calving Rate - % 58 72.9 80.7 71.3 80.0 90.0 6. Mortality (Adult) - % 35 4.7 2.8 4.9 4.0 2.5 7. Mortality (Calves)- % 54 15.9 4.7 10.8 17.5 9,0 0 8. Development Plan - S/'000 - - - 1,302.0 - 494.0 9. Development Plan - S/'000 per ha - - 10.4 - 8.2 10. Actual Investment - S/'000 47 - 1,675.0 2,185.0 - - 11. Actual Investment - S/'000 per ha 47 19.1 24.5 - - 12. Total Milk Production - liter '000 52 210.3 384.9 310.5 85.6 183.3 13. Milk Production - liter per ha 43 2,105.0 3,630.0 2,714.0 1,600.0 3,230.0 14. Milk Production - cow per day 44 8.8 10.6 9.6 6.0 9.0 15. Total Sales - S/'000 42 441.0 - 1,220.0 214.0 407.0 16. Total Sales-Milk - S/'000 42 347.0 - 992.0 161.0 342.0 17. Total Sales-Heat - S/'000 42 94.0 - 228.0 53.0 65.0 18. Percentage Income from Milk 16 84.0 - 88.0 - 84.0 19. Additional Sales as Percentage of Investment 32 - - 43.0 - 39.0 - 47 - ANNEX 1 Table 6 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Percentage Herd Co=Dosition and Sales 17 Dairy Farms 22 Beef Ranches Before After DeveloDment Before After DeveloDment Develov. Actuala/ Estimated b Develot. Actuala/ Estimated -/ HERD COMPOSITION Cows in milk 41.3 41.6 30.0 32.4 31.0 32.0 Dry Cows 14.0 12.2 10.0 - - 3.5 Heifers 2-3 years 10.4 11.2 12.4 12.0 15.7 8.3 Heifers 1-2 years 15.3 17.8 11.2 13.0 13.0 10.5 Heifers 6 months 16.8 15.4 17.0 9.8 10.0 11.5 Bull Calves 6 months 0.4 0.4 17.0 9.8 10.0 11.5 Bulls 1.3 0.9 2.4 1.5 2.1 1.3 Bulls - Young 0.5 0.5 - 0.5 0.8 - Steers 1-2 years - - - 10.9 12.9 10.4 Steers 2-3 years - - - 10.1 4.5 11.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 SALES Cull Cows 32.4 26.3 25.0 Heifers 2-3 years 5.5 2.2 1.9 Heifers 1-2 years - 2.0 - Calves 58.7 66.9 71.2 Bulls - Young 0.5 - - Cull Bulls 2.9 2.6 1.9 Total 100.0 100.0 100.0 Extraction Rate - % 27.9 35.3 25.4 Culling Rate - 2 15.8 14.3 13.1 a/ Year 4 . b/ Year 4 projections in Appraisal Report. - 48- ANNEX 1 Table 7 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT PercentagePrice Idcreases of.Selected Inputs - 1972 - 1975 Percentage Increase 1. Supplementary Feed 147 2. Veterinary Products 107 3. Pasture Seeds 31 4. White Clover Seed 77 5. Fertilizer - Urea 273 6. Fertilizer'- Superphosphate 126 7. Tractor (British) 100 8. Implements (USA) 29 9. Fuel, Oil and Lubricants 90 10. Wages 147 Sources: Asociaci6n Ganaderos de la Sierra. BNF ECUADOR THIRD LIVESTOCK DEVELOPHEMT PROJECT (CREDIT 222-EC) COMPLETION REPORT Costs of Labor and Selected Inputs 1970 - 1976 Minimum Monthly Effective Percentage Basic Monthly Increase Weed Fence Year Salary Salary From 1970 Concentrates Minerals Sanitation Control Maintenance S/ S/ % S/per cow S/per AU S/per AU S/per ha S/per km 1970 600 687.5 - - - - - 1971 750 875.0 27.3 - - - - - 1972 750 875.0 27.3 682 15 38 100 140 1973 1,000 1,437.5 109.1 675 15 42 120 152 1974 1,000 1,437.5 109.1 700 23 53 160. 231 1975 1,250 1,838.6 167.4 750 29 74 253 274 1976 1,500 2,156.2 213.6 840 37 77 300 329 ANNEX 1 - 50 - Table 9 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Economic Parameters A. Gross Annual Incremental Income as Percentage of Development Investment - Dairy Farms - - Beef Ranches Years N* of Observations b/ Percentage N* of Observations b/ Percentage 2 13 29 4 32 3 6 30 5 37 4 6 59 4 81 5 5 64 5 40 6 - - 4 79 Dairy Farms ------- ----- Beef Ranches- Years N* of Observations b/ Sucres N' of Observations b/ Sucres B. DeveloDment Investment Der Liter of Incremental Milk Production 2-3 14 39.8 4 6 28.0 5 8 11.2 C. DeveloDment Investment per S/ of Incremental- Meat Sales 2 12 58.6 3 5 29.9 4 6 17.0 5 6 12.6 D. Development Investment per S/ of Incremental Sales (Meat and Milk) 2 13 3.7 4 3.2 3 6 4.1 5 3.7 4 6 2.4 4 1.6 5 6 1.7 5 2.8 6 - - 4 1.8 E. Development Investment per Additional AU Stocking 2 12 107,133.C/ 3 6 33,333 C 4 6 30,616 5 7 18,814 a/ Time lag after initiation of investment progra. b/ Number of farms/ranches surveyed c/ Includes 37% for purchase of animals ANNEX 2 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) COMPLETION REPORT Procedures Used for the Recalculation of Project Rates of Return 1. In late 1976, the Project Unit initiated the collection of data for a small number of subloans in order to assess project impact. Data were compiled for 17 beef subloans and 14 daily subloans in various stages of execution. Information was collected for 1976 and 1977 and covered: total investments, sales, herd size, reproduction and weaning rates, milk production per cow, pasture area, animal mortality and (for beef) extraction rates and operating costs. The BNF did not collaborate with the Project Unit, but rather carried out its own evaluation of 13 dairy subloans and 29 beef sub- loans. Unfortunately, the PCR mission observed a number of inconsistencies or deficiencies in the data collected by the BNF and the manner in which they were analyzed. However, as the mission was denied access to the basic data sheets and subloan evaluations which formed the basis of the BNF report, these problems could not be resolved and much of the BNF material could not be incor- porated into the PCR analysis. Fortunately, during the PCR mission, a number of Larms were visited and additional data were gathered to complement and broaden the analysis carried out by the Project Unit. The basic information is presented in Annex I, Tables 3 and 5. 2. Beef Subloans. Actual investments as presented in Annex I, Table 2 were time phased in the same proportion as in the original model. Total sales of slaughter animals and milk, reported for a single year in that Table, were assumed to follow the same trajectory (in constant prices) as assumed in the appraisal. Prices used for the economic analysis are those actually received by producers. While the government has on occasion attempted to control meat prices at the retail level, prices received by producers are not regulated and a considerable although unrecorded flow of live animals across the northern and southern borders also subjects liveweight animal prices to adjust to broad market forces. Finally, during the period of project execution 1971-77 beef prices (11veweight) rose by about 90%-100%, to approximately S/ 7 per lb, while the CPI for Quito rose by 116%. As the observed herd development parameters were by and large similar to those of the appraisal beef ranch model, operating cost information compiled by the Project Unit was indexed over time according to the evolution of herd size assumed in the Appraisal Report beef model. As most of the ranches for which data were compiled were in their fourth year of subloan execution, this year was used as the base for the indices described above. The resulting income and cost flows are presented in Table 1. The financial rate of return is estimated to be 25%. - 52 - ANNEX 2 3. Dairy Subloans. Actual investments by the ranches observed were time-phased proportionately to the original model's investment program. The value of milk output (in constant prices) was projected backwards and forwards from year 4 according to an index of sales derived from the original models. The price actually received by farmers for milk was not adjusted for the purpose of the economic analysis. While the Government has throughout the project execution period sought to control the milk prices at the producer, processing plant and retail levels, it has had little success. If official milk prices fall below what producers consider remunerative, they have shifted milk output to non-controlled items, e.g., cheese, yoghurt, or sold it unpro- cessed to consumers, outside the marketing channels with price controls. (Over half of fluid milk consumed is not pasteurized.) The price controls have probably adversely affected product quality and encouraged excess milk processing capacity. During the period of the project, the official price of milk at the producer level rose some 140% to about S/ 4.2 per liter at the end of 1976. No data were compiled by the Project Unit on dairy operating costs. Thus the unit costs presented in the Appraisal Report model were adjusted to a 1976 basis according to the increases reported in Annex I, Table 7 and then projected backwards and forwards from year 4 according to an index of herd size also derived from the model. The resulting Income and Cash flows are also presented in Table 1. The financial rate of return is estimated to be 37%. Project Rate of Return 4. The flow of net benefits of.the sublending program was developed on the basis of the individual dairy and beef models described in the preceding paragraphs, and the rate of respective subloan approvals under the project as presented in Table 9. Substantial tax exemptions are provided to farming enterprises, imports for farming operations are duty-free, there are no important subsidies on input and output prices, and total operating costs are relatively insensitive to a reduction of labor costs via their shadow pricing. In this case, the financial cost and return flows are reasonable estimates of the project's economic impact and were used to calculate the project rate of return. The results appear in Table 2 of this Annex. Also incorporated therein is the mission's estimate of the costs of other project components and the technical services provided by participating bank technicians to sub-borrowers. The rate of return resulting from the final net benefit stream is 27%. *ECUADOM TIHLRD LIVESTOCK UVELOPHENT PROJECT (CREDIT 222-EC) OOMPLETION REPORT Estimate of Costs and Returns for Ueaf and Dairy Subloans Before --------------------------------------------- YEAAS Development 1 2 3 4 5 6 7 8 9 10 11-152 ('000 Sucres) Beef tHI-ul SaleK 570.04 453.29 535.70 597.52 686.80 982.12 1,098.88 1,572.77 1,730.74 1,943.64 2,232.10 2,232.10 Uptarltiig Couti 233.76 251.46 272.72 290.43 354.18 410.85 446.26 449.80 485.22 499.39 506.47 506.47 inlvutenlmlt - 672.24 689.04 319.52 icremmetl Dknefits - (606.70) (762.34) (348.72) (3.70) 234.99 316.33 786.68 909.23 1,107.97 1,389.34 1,389.34 Mute nf Return. 257 Dutly thAO si820.85 683.20 641.80 988.20 1,222.00 1,403.00 1,793.40 1,805.60 1,817.80 1,805.60 1,817.80 1,805.60 IIwterftInK Co.u 714.91 493.56 513.08 515.78 734.99 726.71 798.28 758.15 798.28 758.15 798.28 778.43 SInvekVmI ItsIL 0 - 904.50 502.50 268.00 11ciellamital Itelkfisto - (820.80) (279.72) 98.48 397.07 570.35 889.18 941.51 913.58 941.51 913.58 921.23 .tv I f -efurn: 377 A-"IS - 54 - ANNEX 2 Table 2 ECUADOR THIRD LIVESTOCK DEVELOPMENT PROJECT (CREDIT 222-EC) Project Completion Report Project Benefits Dairy Beef Other Participating Subloans Subloans Program Bank Technical Project Net Benefits Net Benefits Costs-' Assistance Net Benfits ------------------------------S/ '000s----------------------------- 1972 (46,785.60) (55,662.02) (9,200) (3,125) (114,772.62) 1973 (31,539.24) (79,222.43) (7,150) (6,250) (124,161.72) 1974 (44,845.32) (93,586.97) (6,450) (6,250) (151,132.29) 1975 706.31 (65,789.69) (6,450) (6,250) (77,783.38) 1976 11,933.80 (45,175.63) (10,075) (6,250) (49,566.83) 1977 60,515.32 (7,240.60) (8,975) (6,250) 38,049.72 1978 100,930.41 62,051.01 (1,920) (3,125) 157,936.42 1979 137,420.31 108,434.89 245,855.20 1980 153,238.36 163,385.49 316,:623.85 1981 165,636.43 206,960.76 372,597.19 1982 174,281.83 .247,132.21 421,414.04 1983 173,004.76 271,656.56 444,661.32 1984 173,676.88 283,796.87 457,473.75 1985 173,242.99 295,085.11 468,328.10 1986 173,076.49 295,929.21 469,005.70 1987 173,191.24 295,929.21 469,120.45 1988-91 173,191.24 295,929.21 469,120.45 Internal Rate of Return: 27% 1/ Cost of components carried out by INIAP, MAG, BNF and the Project Unit. - 55 - ECUADOR ANNEX 3 THIRD LIVESTOCK DEVELOFENT PROJECT (CREDIT 222-EC) COMLETION R-rORT Proiect Unit Orzanization Chart mINISTRY OF AGRICULTMS AND LIVESTOCE Zxecutive Technical CoIttee Uodersecrecary - YAG Coordinator - MA4 Director Livestock Developcent - YAQ Deputy !'anager of Credit - Catral Bank Project Director - Project Unit General Coordination ~1 Project Director----- Professional Staff AdmInIstrateSaf Participating Banks Director-Coastal Director-Sierra Participating Banks 1Revion Livestock Soecialists: Livestock Svecialists: Banco Nacional de Famento Banco Nacional de Fouento COFEC COFIEC Sanco de Machals Banco del Pichincha Banco del Pacifico Banco da Cooperativas 3ance del Pichizcha Caja de CrIdito Agr1cola Banco de Cooperativas Caja de Cridito Agrfcola  ‘《J―… J &X U \ ]& & 」 니 7 0 1 1楸 l , 즈 - 긱 $ 14