Dominican Republic - Cocoa and Coffee Development Project

Document of The World Bank Co COpy FOR OFFICIAL USE ONLY Report No. 3379-DO STAFF APPRAISAL REPORT DOMINICAN REPUBLIC COCOA AND COFFEE DEVELOPMENT PROJECT June 1, 1981 Regional Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Official Rate: RD$ 1.00 = US$1.00 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS BA Agricultural Bank CB Central Bank CDF Dominican Development Corporation CEA State Sugar Council CEDOPEX Export Promotion Center CENSERI Centers for Integrated Rural Services CNA National Agricultural Council CODOCOOP Dominican Confederation of Cooperatives CORDE State Enterprise Corporation DGCP Office of Price Control ECRA Community Enterprises of Agrarian Reform EEC European Economic Community FDD Dominican Development Foundation FICOOP Financial Cooperative Company FIDE Economic Development Investment Fund FINAGRO Agro-Industrial Financial Company IAD Agrarian Reform Institute IDECOOP Cooperative Development Institute IICA Inter-American Institute of Agricultural Sciences INDRHI National Water Resources Institute INESPRE National Price Stabilization Institute ODC Community Development Office ONAPLAN National Planning Office PIDAGRO Integrated Agricultural Development Program SEA Secretariat of State for Agriculture GOVERNMENT OF DOMINICAN REPUBLIC FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY DOMINICAN REPUBLIC COCOA AND COFFEE DEVELOPMENT PROJECT Table of Contents Page No. I. BACKGROUND ............................................ 1 A. The Agricultural Sector ..........................1 Agriculture in the Economy .... ...................1 Main Sector Characteristics ...................... 2 Main Policy Issues of the Sector .... ............. 3 Rural Employment ................................. 4 Rural Incomes .................................... 5 B. The Banking System and Agricultural Credit ....... 5 The Banking System ............................... 5 Agricultural Credit .............................. 6 C. Bank Role in Agriculture ......................... 8 II. THE SUBSECTOR, THE PROJECT AREAS AND INSTITUTIONS PARTICIPATING IN THE PROJECT ........................ 9 A. The Subsector .................................... 9 Cocoa ............................................ 9 Coffee ........................................... 10 B. The Project Areas and Crop Growing Characteristics 10 Cocoa .10 Coffee .12 C. Institutions Participating in the Project 13 Secretariat of State for Agriculture (SEA) 13 Coffee and Cocoa Commissions .14 Agricultural Bank (BA) .15 III. THE PROJECT .15 A. Introduction .15 B. Brief Description .15 C. Detailed Features .16 On-farm Development .16 Processing Facilities .18 Nursery Development .18 Technical Assistance .20 Monitoring and Evaluation .20 This report is based on the findings of an appraisal mission which visited the Dominican Republic in November 1980. The mission consisted of Messrs. M. Ballesteros, F. Miyanaga, and J. Pelissier. of their oMcial duties. Its contents may not otherwise be disclosed witnout World Bank authorization.  - 1L~ - Table of Contents (Continued) Page No. D. Project Cost ..................................... 20 E. Financing ........................................ 22 F. Procurement ...................................... 23 G. Disbursement ..................................... 24 IV. PROJECT IMPLEMENTATION ................................ 25 A. Organization and Management ...................... 25 B. Lending Policies and Procedures .... .............. 26 C. Accounts and Audits .............................. 27 D. Monitoring and Evaluation and Progress Reporting.. 27 V. PROJECT PRODUCTION, MARKETS AND PRICES AND FINANCIAL ANALYSIS .................................... 28 A. Production ....................................... 28 B. Markets and Prices ............................... 28 Cocoa ............................................ 28 Coffee ........................................... 29 C. Producers' Benefits and Financial Rates of Return 29 D. Project Cash Flow ................................ 31 VI. ECONOMIC BENEFITS AND JUSTIFICATION .... .............. 31 A. Economic Benefits ................................ 31 B. Economic Rate of Return .......................... 32 C. Project Risks .................................... 33 D. Environmental Impact ............................. 33 VII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION ...... 33 ANNEX 1 - Supporting Tables Tables No. 1 - Distribution of Land Suitable for Agriculture ... 35 2 - Credit Trends and Main Economic and Financial Indicators .................................... 36 3 - Loan Portfolio of Commercial Banks .... .......... 37 4 - Production and Export Statistics of Cocoa and Coffee, 1970-79 ........................... 38 5 - Cash Flow of Coffee Commission (Coffee Year Ended September 30, 1979) ........................... 39 6 - Cash Flow of Cocoa Commission (Coffee Year Ended September 30, 1979) ......................... 40 7 - Investment Costs of On-farm Development (Cost per Farm) ............................... 41 8 - Investment Costs of Nursery Development and Cocoa Processing Facilities ................... 42  - :iii - Table of Contents (Continued) Page No. 9 - Costs of Technical and Credit Services .... ...... 43 10 - Phasing of Investment ........................... 44 11 - Cost Benefit Analysis - Cocoa Rehabilitation (2.3 ha) ...................................... 45 12 - Cash Flow Cocoa Rehabilitation (2.3 ha) .... ..... 46 13 - Cost/Benefit Analysis - Cocoa Replanting (2.3 ha) 47 14 - Cash Flow - Cocoa Replanting (2.3 ha) .... ....... 48 15 - Cost/Benefit Analysis - Coffee Replanting (1.0 ha) 49 16 - Cash Flow - Coffee Replanting (1.0 ha) .... ...... 50 17 - Farmgate Prices (Financial and Economic Prices).. 51 18 - Project Cash Flow of BA ......................... 52 19 - Economic Analysis ............................... 53 20 - Present Values of Net Streams at a Discount Rate of 12.0% ................................. 54 ANNEX 2 - The Agricultural Bank (BA) ............................ 55 Tables No. 1 - Classification of Loans of the Agricultural Bank by Loan Amount ................................ 59 2 - Classification of Loans of the Agricultural Bank by Size of Holding, 1978 ...................... 60 3 - Agricultural Bank Lending by Status of Loans, Category of Lending and Farm Size .... ......... 61 4 - Agricultural Bank Lending by Products ... ........ 62 5 - Balance Sheet of Agricultural Bank .... .......... 63 6 - Income and Expenditure Statement of Agricultural Bank ............................. 64 ANNEX 3: Documents Available in the Project File .... ........... 65 MAP: IBRD 15282 - Cocoa and Coffee Development Project   DOMINICAN REPUBLIC COCOA AND COFFEE DEVELOPMENT PROJECT I. BACKGROUND A. The Agricultural Sector Agriculture in the Economy 1.01 Although the share of agriculture in GDP decreased from 30% in 1960-62 to about 18% in 1977-79, the sector's performance since 1968 has been an important factor, in terms of increased output, exports and employment, for the country's overall economic achievements. In export value, agricultural products amounted to about 69% of total exports from all sectors for an annual average for 1977/78, with sugar and derivatives, coffee, cacao, and tobacco as the major commodities. According to the 1970 census, agriculture remains the main employer in the country, accounting for about 40% of the total economic- ally active population as against 11% by the industrial sector (mining, manufacturing, construction and power generation). Rural-to-urban migration is, however, explosive, as evidenced during the last 20 years by the fact that urban population has been growing at an annual rate of 5.6%, as compared with a rate of only 1% for rural population. The expectation is that, by 1982, less than half the population will live in rural areas. 1.02 In terms of production, the growth of the agricultural sector can be measured roughly in three basic periods: 1961-67, 1968-73, and 1974-79, when estimated growths were 1.0%, 7.0%, and 1.1%, respectively. Most likely, deterioration in the last period was principally due to the increase in petroleum import costs, decrease in sugar and other commodity prices, and an obvious lag of investments in the agricultural sector as compared to a more lucrative industrial sector. Two more factors may have added to this recent deterioration in growth: uncertainty associated with the series of agrarian reform legislation promulgated in 1972, especially for the rice subsector, and a severe drought in 1975 that lingered through 1976. 1.03 The most important of these adverse factors was the trend in the country's international terms of trade, influenced by the decreasing sugar export price (31.7% of total merchandise export value tor 1977/78), which dampened prospects for earnings from agricultural exports. Though the 1976 collapse of the sugar market sent a severe shock through the economy, currrent and future market prices of USJ30/kg to USg40/kg in end-1980 suggest some recent improvement. Overall, the outlook on the world market is not good for Dominican traditional exports when compared to the country's import needs over the next three years. Even the internal terms of trade, which were relatively favorable to agriculture in the 1969-73 period, shifted drastically in favor of industry during the 1974-79 period. While prices of agricultural products rose by about 30%, the prices of commercial production inputs increased by about 90%, showing a marked deterioration in the economic input/output relationship for farming.  -2- Main Sector Characteristics 1.04 Most of the estimated 4.8 million ha of land suitable for agriculture can be considered as being in farms, out of which 45% is in crops, 44% in pasture, and 11% in tree crops and forest (Annex 1, Table 1). Though these figures indicate only a limited potential for agricultural expansion, there is considerable scope for increasing productivity of lands already under cultiva- tion. Water resources are reasonably adequate in volume, with good average rainfall but it is unevenly distributed so that supplementary irrigation is required in many areas of the country. Forests cover an estimated 1.1 million ha, 30% of which are suitable for commercial logging. As a measure to protect the forests, intensive logging was prohibited in 1966. However, little has been done to develop the consequent forestry potential, mainly because of lack of adequate forestry development institutions and failure to enforce soil and water resources conservation. A recent survey, carried out by SEA with USAID assistance, has shown that erosion problems have reached critical proportions, and that conservation measures must be implemented with utmost urgency. 1.05 Government outlays on the agricultural sector have increased 3.2 times since 1969 when calculated in 1970 prices. Investment expenditures that accounted for only 40% of the total outlays to the sector in 1969-73 have increased up to 70% of total since 1976. Estimates indicate that invest- ment in irrigation infrastructure accounted for about 36% in the latter period as against 30% in the previous one, but agricultural output from irrigated areas has not yet picked up momentum. 1.06 Irrigation has always been the most active subsector in agriculture. About 160,000 ha, or about 3% of the agricultural land, are irrigated, and there is a potential for development of some 100,000 ha in the long term for the year 2,000 and beyond. Nearly 90% of the country's rice production is irrigated. Irrigation, however, is plagued with a series of constraints that are technical, legal, institutional and managerial, and that are well recog- nized by the Government. Above all, the lack of management of water resources continues to be the most serious handicap to overcome. Improvements may prove difficult in the present political situation in the country, particularly given the land tenure implication of irrigation development. 1.07 Among production factors, lack of agricultural credit is a major problem. The main obstacles to an adequate flow of funds to the sector are: (a) the subsistence nature of the largest segment of the agricultural economy involving high credit risks; (b) a complex land tenure situation; (c) an inadequate pricing policy that discourages investment; and (d) low interest rates on lending and savings deposits. Regarding lending institutions, a substantial number of public and private entities, especially commercial banks, are playing a growing role in extending agricultural credit (paras 1.27 and 1.28).  - 3 - 1.08 Nearly 80% of all farmers (i.e., some 250,000 out of 320,000) have low levels of output and productivity, which, in turn, result in low incomes. A characteristic of this group is their lack of bargaining power at the market place. On the production inputs, such as fertilizers, insecticides and seeds, small farmers on occasion are reported to pay abouc 20% more than larger producers. The Government, through SEA, is making determined efforts to improve the situation, going ahead with a program that comprises three basic elements--formation of farmers' groups, construction of storage buildings for production inputs and products, and provision of SEA supporting services in order to form cooperative associations in rural conmunities over the entire country. 1.09 Support services from both the public ane the private agricultural sector constitute a basic requisite for the improvement and transfer of tech- nology necessary to achieve the country's agricultural potential. Private sector services in research and extension are directed mainly at specific crops (i.e., sugarcane, tobacco) and are generally efficient, being small, well organized and profit-oriented. In the public sector, these services cover a much larger area, both spatially and technically, and are largely concentrated on food crops and on a number of export crops, particularly rice, coffee and cocoa. 1.10 Agroindustry is, outside sugarcane processing, the most recent and impressive aspect of the country's agricultural development. About 140 firms are operative in processing: (a) livestock products, including meat, dairy and leather; (b) fruits and vegetables; (c) grains and oilseeds; (d) cocoa; and (e) tobacco. Yet the constraints are still serious as the industry is confronted with a limited and scattered agricultural production base, and a definite, limited internal market. On the other hand, prospects are good for external market outlets because, on the basis of its resource potential, its climate, and geographical location, the Dominican Republic enjoys a comparative advantage for production, processing and export of fresh and processed fruit and vegetables and of tree and root crops. Main Policy Issues of the Sector 1.11 The issues of agricultural price policy and of agrarian reform have a direct bearing on the efficiency of implementation of existing projects in the Dominican Republic, as well as on clearing policy problem areas which would inhibit smooth preparation, appraisal and implementation of future projects. The depressive effect of faulty price policy on agricultural produc- tion and development is deep and widespread. Much of the public investment in agriculture in the Dominican Republic has been in irrigation projects, and action in respect of agrarian reform is crucial for ensuring the efficient and equitable use of the lands brought under irrigation, as has been demonstrated in the case of the Yaque del Norte project financed by the IDB and the Bank.  -4- 1.12 Price Policy. Agricultural price policy is set by the President's office, which decides on farmgate prices to encourage agricultural production and on retail prices to restrain inflation. The Office of Price Control has been partially successful in policing and controlling retail prices. The National Price Stabilization Institute (INESPRE) is responsible for a farm price support system and the direct importation (or licensing for importation) of all food and animal feed products, with the overall purpose of stabilizing food prices. However, it is difficult for the agency to launch an effective price support program because of the lack of grain storage and cold storage facilities in some areas and of the poor location or insufficient capacity of such facilities in other areas. In the present situation, however, there is apparently no firm commitment by Government to follow a single course of price policy; rather it attempts to satisfy all interests at the same time. Such a lack of policy continues to cause ad hoc decision-making, which, in turn, is often contrary to the long-term development of the agricultural sector, as well as the whole economy. 1.13 Agrarian Reform. Agrarian reform, which was initiated in the 1920s, has made impressive headway as not less than about 360,000 ha have been assigned to some 58,000 rural families. Yet, the prevailing land distribution remains uneven. Although precise information is unavailable, current estimates are that'while 88% of the total number of farms are small in size (up to 10 ha), they cover only 20% of the total agricultural land, with the remaining 12% of medium and large farms occupying 80% of the total arable land. All branches of Government---Legislative, Executive, Judiciary--discussed recently a set of new land tenure laws. Yet, those discussions, which have now been deferred, were directed at areas under irrigation projects financed by public investments, while land under rainfed agriculture was not considered. There are other alternatives to a legal process of expropriation, for which the distribution of some 200,000 ha still in the hands of Government might be the first step. Rural Employment 1.14 Information is scarce on employment in the Dominican Republic; however, some rough estimates of unemployment in the rural areas were made in 1976 on the basis of a limited survey of farmers carried out by SEA. Results from that study indicate that the rural labor force consists of about 800,000 persons. Working from labor requirements per crop, the total effective demand for labor was estimated at about 400,000 man-years in the agricultural sector. If these gross figures are representative, they indicate a substantial unemployment and under-employment problem in the rural areas, at least in the aggregate. Though there is virtually no information on regional unemployment, traditional areas of agricultural production such as the Cibao valley in the north appear to have a greater number of willing workers unemployed than the areas more recently introduced to intensive agricultural activity such as the Nizao area in the south, where the boom in exports of fruits and vegetables and the increased domestic demand for these items due to increasing incomes have resulted in practically full employment of the farm labor force.  - 5 - 1.15 The seasonality of agricultural labor demand is particularly pronounced in the country due to basic rainfed agriculture characteristics and to the high amounts of seasonal labor required for the major export crops of sugarcane, coffee, cacao and tobacco. For example, sugarcane harvesting begins about December and continues until about June; the sugar industry alone employs about 140,000 people, with about 40,000 to 60,000 being temporary workers. The coffee and cacao harvesting seasons overlap and complement work in the cane fields to provide a virtual stream of work for those who are willing to move about the country and follow the harvest cycles; however, few agricultural workers can afford to do this as they must also attend to their small farms and garden plots. The peak rural employment months are November through February. Rural Incomes 1.16 According to the first national survey of household income and expenditure carried out in 1976/77, monthly income per rural family is only US$200, about 55% of urban incomes. The distribution of income in the rural sector shows that the poorest group, i.e., under US$30 per capita per month, comprises nearly 70% of the rural population and accounts for only about 40% of total rural income. Meanwhile, the highest income group, i.e., over US$100 per capita per month, comprises only 3% of the rural population and accounts for 18% of rural income. On the regional level, income is distri- buted unevenly; the poorest areas tend to be concentrated in the western part of the country, i.e., in the areas close to the border with Haiti. B. The Banking System and Agricultural Credit The Banking System 1.17 The monetary and credit policies governing the Dominican banking system are established by the Monetary Board (MB), which is composed of top- level Government officials, including the Governor of the Central Bank (CB). MB is authorized to determine the level of interest rates for both loans and deposits, as well as legal reserve requirements. The maximum interest rate on loans has been 12% per annum since 1919, a figure that is below historical and current inflation rates of 17% in 1979 and 15% in 1980. Deposit rates fixed by MB are: (a) 4% on savings deposits of commercial banks; (b) 5% on fixed-term deposits; and (c) 8.5% on certificates issued by finance companies and mortgage banks. 1.18 MB imposes a legal reserve requirement of 50% on demand deposits and 30% on fixed-term savings deposits. However, in order to stimulate development, incentives are provided for loans to selected sectors. For example, legal reserves can be reduced to 25% and 15% in the case of loans to productive sectors (agriculture, mining, industry and exports). In addition, any increases in the agricultural (crop) and livestock portfolio after 1974 are deductible for the calculation of base to determine the level of legal reserves required.  1.19 CB implements monetary and credit policies of MB and controls foreign exchange transactions. In addition to performing the normal regulatory tasks, CB provides rediscounting facilities to stimulate productive operations for a period of less than one year at 3.5% to 4.5%. Furthermore, CB created the Economic Development Investment Fund (FIDE) in 1966 to spur capital investment in key productive sectors, such as agriculture, livestock, mining, and industry. The bulk (about 95%) of FIDE's financing is medium and long term and is channeled through commercial banks, financial companies and development institutions. FIDE increased its lending rate on loans to the industrial sector in 1980, from 5.5% to 10% to intermediary institutions and from 9% to 14% to the final borrowers, and is reviewing its lending rate for the agricul- tural sector. FIDE's low lending rate is possible because it receives long- term resources from CB (49% in 1979), the Government, IDB, USAID, and other development institutions at the very low rate of around 2% to 3%. 1.20 The Dominican banking system consists of 12 commercial banks, including: (a) the Dominican Republic Reserve Bank, an autonomous state enter- prise operating as a fiscal agency of the Government, as well as a commercial bank; (b) the Workers' Bank, an official institution, with mixed capital from official and private sources; and (c) 10 private banks, including five foreign- owned banks. Collectively, these institutions have 106 branch offices and extend loans to relatively larger borrowers. Although the ceiling on interest rates is fixed at 12%, the effective cost to the borrowers is in the range of 16% to 18%, due to loan fees, commissions, and other charges which are added to the interest rate along with compensating balance requirements. Agricultural Credit 1.21 Despite a considerable increase (91%) in institutional agricultural credit in real terms over the period 1969-79, only a limited proportion of the 320,000 Dominican farmers had access to it. According to a sample survey conducted by SEA in 1975, about 27% of Dominican farmers were estimated to have had access to agricultural credit, including non-institutional credit, but small-scale farmers had fewer opportunities than large ones (22% of farmers owning less than 5 ha and 40% of farmers with more than 32 ha). Institutional credit to agriculture as a percentage of total credit fell from 14.7% in 1968 to 10.7% in 1979 (Annex 1, Table 2) and the growth of lending in the agricultural sector has been slower than that in other sectors. 1.22 The SEA survey also shows that about 45% of credit came from non- institutional sources, such as moneylenders, merchants, intermediaries, pro- cessing factories and exporters. These sources extend credit mainly in kind in the form of seeds, fertilizers, pesticides, and transport and equipment services and also act as middlemen in marketing crops. No details are avail- able on the lending terms and conditions or the volume of these loans but interest rates are thought to be in the range of 2% to 5% per month. 1.23 The sources of the US$208 million institutional agricultural credit extended during 1979 were both private and public organizations: (a) the Agricultural Bank (BA), 61% of the amount available in 1979; (b) the commercial banks, 34%; and (c) finance companies and development institutions, 5%. The trend of institutional agricultural credit during the period 1968-79 indicates  -7 - a close correlation to agricultural output and it is likewise characterized by two distinct growth periods. In the period 1968-75, the average rate of increase of agricultural credit in real terms was 7.7% in contrast with an average growth rate in 1975-79 of 3.2%. An important structural change in the investment pattern is revealed in the increase of long-term credit from 5% to 36% of total agricultural credit during the period. 1.24 Agricultural Bank (BA). BA operates through a network of 70 branch and sub-branch offices throughout the country. BA's lending volume totaled US$127 million in 1979, about 25% of which was medium and long term, the bulk going to small- and medium-size farms: 81% of the loans and 40% of the loan amount went to farms below 6 ha in size. Interest rates are 9% for loans up to US$2,000 and 11% for those above that amount, in addition to a commission (details in Annex 2). BA does not accept deposit services and relies heavily on official agencies, including foreign donors, for its loanable funds. BA is described in detail in Annex 2. 1.25 Commercial Banks. In 1979, commercial banks extended US$71 million in loans to the agriculture sector, representing 34% of the amount borrowed by that sector from institutional sources. Their contribution to the sector is important as they operate through a vast network of 106 branch offices and have been steadily increasing the amount lent. However, agriculture's share of total portfolio has been low, around 8% (Annex 1, Table 3). Loans extended by commercial banks are generally short term, except for those refinanced by FIDE, and range in size between US$50,000 and US$400,000. These loans are usually guaranteed by mortgages, which limits the number of small- scale farmers who can meet the requirement. 1.26 Commercial banks' major sources of funds for agricultural credit are (a) deposits (around 80%); (b) CB's rediscounting facilities; and (c) FIDE's long-term investment funds. Although the liquidity position of commercial banks has been constrained recently by the slowdown in private sector deposits and by a stricter enforcement of legal reserve requirements, lending to the sector has not suffered because the Government designated agriculture as a priority productive sector for investment and provided several incentives to encourage lending to it. Incentives related to legal reserve requirements were mentioned above (para 1.18). In addition, a guarantee reserve fund was established in September 1979 within FIDE to encourage financial intermedia- ries to lend to small-scale agricultural and iivestock producers and to agroindustry and it is expected to have a positive impact. Most commercial bank credit goes to larger farms for livestock (37% in 1979) and for export crops, including marketing (50% in 1979). 1.27 Finance Companies. The nine finance companies established under the same law that established FIDE to promote private investment are active lenders to the sector. The most important companies are the Agro-industrial Financial Company (FINAGRO) S.A., Financiera Dominicana S.A., and Financial Cooperative Company. FINAGRO, for example, had a loan portfolio of US$26 million as of December 31, 1979, 28% of which was for livestock, 24% for crops, and 10% for agroindustry. The bulk of the finance companies' lending is medium term and long term at 12% interest rate, plus commissions and other charges that may  raise the effective rate to 14% to 15%. Like commercial banks, they usually require mortgages for collateral, which also limits the funds available to small-scale farmers. Their lending in the agricultural sector has more than doubled during the last three years, going from US$3.1 million to US$7.1 million, or about 3.5% of total institutional agricultural lending. 1.28 Development Institutions. There are also a few development insti- tutions in the Dominican agricultural credit system that are active in the promotion of rural and agricultural development. Their funds are supplied by foreign and international agencies, the Government and private sources, and their share of the total institutional agricultural lending was about 2.4% in 1979. Development institutions include the following: (a) the Dominican Development Foundation (FDD), established by the private sector to promote the enterpreneurial initiative and technical skills of the rural poor and to encourage the transformation of small-scale low-income farmers into viable commercial units; (b) the Community Development Office (ODC), established by the Government and USAID to develop rural community organizations that have no access to credit; and (c) the Cooperative Development Institute (IDECOOP), established and financed by the Government and USAID to promote the formation of cooperatives. These three institutions assist poor farmers in developing their creditworthiness and in forming groups for institutional credit. They charge 6% to 8% interest rate, plus 2% commission. 1.29 The Secretariat of State for Agriculture (SEA) and the Agrarian Reform Institute (IAD). SEA and IAD promote technical assistance and credit extension to marginal farmers and agrarian reform beneficiaries not qualified for institutional credits. Their resources are provided by USAID and admin- istered by BA, which holds them in a separate account although it applies the same lending terms and conditions to them as on its own portfolio. The cumula- tive outstanding balance on these accounts as of December 31, 1979 was US$24 million. C. Bank Role in Agriculture 1.30 Bank involvement in the agricultural sector has been aimed at improvement of agricultural output and better land distribution. The Bank group has to date financed a livestock development project, two irrigation projects and a sugar rehabilitation project in this sector. The livestock development project, as indicated in the Project Performance Audit Report (May 1978), contributed considerably to increases in dairy and beef produc- tion and in livestock productivity, though the latter fell short of expecta- tions. The first of the two irrigation projects, Yaque del Norte, cofinanced with the Inter-American Development Bank (IDB), was approved by IDA in 1973 and aims at increasing food crops and, in part, at settling farm workers on land by providing irrigation and drainage to approximately 23,000 ha. The project has suffered considerable delays in recruiting consultants, in acquir- ing rights of way and in carrying out civil works and land redistribution and farm consolidation in the project area. The Bank loan is expected to be fully disbursed by June 30, 1981, by which time the main drainage canal would  be completed to benefit some 3,000 ha of irrigated land, and the main and secondary irrigation canals would be completed for an area serving 1,700 ha. The remaining works are expected to be carried out by INDRHI with IDB and local funds. The second irrigation project, Nizao, which became effective in January 1980 aims at increasing agricultural productivity; increasing agri- cultural output in food crops, mainly fruit and vegetables, for export; and improving the standard of living of some 3,200 families. The project is being implemented at a slower pace than expected, due mainly to the serious finan- cial stringency of the Government that has affected the availability of the required counterpart funding. The sugar rehabilitation loan, approved by the Bank in September 1979, is not yet effective. The project aims at improving the State Sugar Council's (CEA) operational efficiency and financial situa- tion, mainly through (a) rehabilitation of six of CEA's 12 sugar factories and of their transport systems, and (b) a management and organization improvement program. II. THE SUBSECTOR, THE PROJECT AREAS AND INSTITUTIONS PARTICIPATING IN THE PROJECT A. The Subsector Cocoa 2.01 The Dominican Republic ranks among the major producers of cocoa. Production in recent years has averaged 34,000 tons and exports, 25,000 tons per year; the value of cocoa exports in 1979 was US$72 million (Annex 1, Table 4). Cocoa is grown throughout most of the country, predominantly in small holdings. A sample survey carried out by SEA in April 1980 indicated that cocoa is currently grown on about 115,000 ha by some 35,000 farmers, that 84% of the cocoa farms have less than 5 ha in cocoa, and that only 6% have more than 10 ha. 2.02 Cocoa grown in the Dominican Republic is the ordinary Forestero (Amelonado) type, with the beans known in the export market under the name of Sanchez. Most plantations are old and poorly maintained. Yields average about 290 kg/ha and indicate low levels of technology. Production was seriously affected by the two hurricanes of September 1979. 2.03 Cocoa beans are dried without fermentation after removal from the pod, which gives a product of inferior quality that can be used only for the manufacture of cocoa butter. Dried beans command lower prices than fermented beans. Exportation of fermented beans started on a small pilot scale in 1977, but there is currently no quality standard and no premium for quality. The major exporting firms deal with cocoa, as well as coffee, and five of them account for almost 95% of cocoa bean exports. Exporters buy the beans directly from larger farmers, from intermediaries, and, increasingly, from small grower associations (para 5.04). No unusual deficiencies are apparent in the internal marketing system, and improvements in processing, which are addressed in the project (paras 3.11 and 3.12) rather than just marketing, hold the key to increased farmers' incomes.  - 10 - Coffee 2.04 Coffee exports valued at US$158 million represented 18% of the value of commodity exports in 1979. The crop occupies some 150,000 ha and is grown on 100,000 farms, or 30% of the country's farm units. Most producers are smallholders: about 95% of the coffee farms are of 6 ha or less and occupy 70% of the total coffee area. Average 1977-79 output was about 50,000 tons. 2.05 Much of the coffee is grown in hilly locations, with over three- quarters of the area located above 300 m in elevation. Nearly two-thirds of the production comes from the Cibao area, especially from the northern coastal range; the next most important region is the southern slope of the central range and the third is the Baoruco range in the southwest. The traditional Arabica type dominates production, but recently new types of Arabica have been introduced, especially Caturra, a medium dwarf, that is earlier and more productive. 2.06 Coffee cherries are processed by the wet method except in the Barahona area where the dry method is used, giving lower quality beans. There is no inventory of available processing facilities, but a large number are in poor condition or have been abandoned. The larger plants, which process coffee for both export and for local consumption, are operated by the main exporting firms. Out of a total of 34 such plants, 20 operate in the Cibao region and 12-in the South Central region. 2.07 During the last decade, the Government has been promoting the rehabilitation and renovation of coffee plantings, a program benefiting about 16% of the total coffee area and one that has had a positive impact on pro- ductivity. The coffee industry was also severely affected by the two hurri- canes mentioned earlier. The SEA has estimated that some 10,800 ha were severely damaged, and 48,600 ha were partially damaged. The areas affected were primarily in the South Central Zone (San Cristobal, Peravia, Azua). Short-term assistance was received from the US Agency for International Development (USAID) for an emergency coffee rehabilitation project. The loan of US$14 million, which provided credit and technical assistance to farmers for such activities as removing fallen trees and fertilization, has been entirely disbursed. B. The Project Areas and Crop Growing Characteristics Cocoa 2.08 Location, Climate and Soils. The project area covers all the main growing regions of the country, with special focus on the zone affected by hurricane and tornadoes. Cocoa is grown in different parts of the country, between latitudes 180 and 20