Colombia - Second Integrated Rural Development Project

Document of F X The World Bank )rJ FOR OFFICIAL USE ONLY Report No. 3661TCO STAFF APPRAISAL REPORT COLOMBIA SECOND INTEGRATED RURAL DEVELOPMENT PROJECT May 17, 1982 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 (as used in this report) Currency Unit = Colombian Peso (Col$) US$ = Col$ 61 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS (See next page) GOVERNMENT OF COLOMBIA FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY COLOMBIA SECOND INTEGRATED RURAL DEVELOPMENT PROJECT Abbreviations BOR - Banco de la Repablica (Bank of the Republic) Caja Agraria - Caja de Credito Agrario, Industrial y Minero (Agricultural, Industrial and Mining Credit Bank) CECORA - Central de Cooperativas de la Reforma Agraria Ltda. (Union of Agrarian Reform Cooperatives Ltd.) CEPs - Centros Experimentales Pilotos (Pilot Experimental Centers) CIDA - Canadian International Development Agency CONPES - Consejo Nacional de Politica Economica y Social (National Council for Economic and Social Policy) CRDs - Corporaciones Regionales de Desarrollo (Regional Development Corporations) DNP - Departamento Nacional de Planeacion (National Planning Department) DRI - Programa de Desarrollo Rural Integrado (Integrated Rural Development Program) Electrificadoras - Empresas Departamentales de Electrificaci6n (Departmental Power Companies Subsidiaries to ICEL) FERs - Fondos Educativos Regionales (Regional Education Funds) FFAP - Fondo Financiero Agropecuario (Agricultural Financial Fund) FEDECAFE - Federaci6n Nacional de Cafeteros de Colombia (National Federation of Colombian Coffee Growers) FINANCIACOOP - Instituto de Financiamiento y Desarrollo Cooperativo de Colombia (Colombian Institute for Financing and Development of Cooperatives) FNCV - Fondo Nacional de Caminos Vecinales (National Fund for Rural Roads) FNH - Fondo Nacional Hospitalario del Ministerio de Salud (National Hospital Fund of the Ministry of Health) FONDO/MEN - Fondo del Ministerio de Educacion Nacional (Fund of the Ministry of Education) HIMAT - Instituto Colombiano de Hidrologia, Meteorologia y Adecuaci6n de Tierras (Colombian Institute for Hydrology, Meteorology and Land Improvement) ICA - Instituto Colombiano Agropecuario (Colombian Agricultural Institute) ICCE - Instituto Colombiano de Construcciones Escolares (Colombian Institute for School Buildings) ICEL - Instituto Colombiano de Energia Electrica (Colombian Institute for Electrical Power) IDB - Inter-American Development Bank 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.  Abbreviations (Cont'd) IDEMA - Instituto de Mercadeo Agropecuario (Agricultural Marketing Institute) INCORA - Instituto Colombiano de la Reforma Agraria (Colombian Institute for Agrarian Reform) INDERENA - Instituto de los Recursos Naturales Renovables y del Medio Ambiente (Institute for Renewable Resources and the Environment) INS - Instituto Nacional de SalAd (National Institute of Health) MINED - Ministerio de Educaci6n (Ministry of Education) MINSALUD - Ministerio de Salid (Ministry of Health) MOPT - Ministerio de Obras Puiblicas y Transporte (Ministry of Public Works and Transportation) PAN - Plan Nacional de Alimentacion y Nutricion (National Food and Nutrition Plan) PIN - Plan de Integraci6n Nacional (National Integration Plan) PRODESARROLLO - Programa de Desarrollo y Diversificaci6n de Zonas Cafeteras (Program of Development and Diversification of Coffee Areas of FEDECAFE) SDAs - Secretarlas Departamentales de Agricultura (Departmental Secretariats of Agriculture) SDEs - Secretarlas Departamentales de Educacion (Departmental Secretariats of Education) SENA - Servicio Nacional de Aprendizaje (National Apprenticeship Service) SSSs - Servicios Seccionales de Salud (Departmental Health Services)  COLOMBIA SECOND INTEGRATED RURAL DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. BACKGROUND *********. ***********................................................ 1 A. The Rural Sector .................................... 1 - Agriculture in the Economy ............. ...... 1 - Land Distribution and Income Structure ............ 1 - Institutional Support ... ......... ........... ......... 2 B. Government Strategy in Rural Areas ................... 3 - The Agricultural Sector ........................... 3 - The Multisectoral Programs in Rural Areas - Food and Welfare Strategies ..... ................ 4 - The Integrated Rural Development Program ......... . 5 C. Bank Involvement in the Rural Sector ......... .. ....... 6 - The Integrated Rural Development Project (Loan 1352-CO to the Government) ........... ..... 6 II. THE PROJECT AREAS . ........... ............................. 8 The Selection of Phase II Areas ............ ........... 8 Location, Climate and Soils .............. ............ 8 Socio-economic Characteristics ....................... 9 Production ............................................ 10 Production Support Services ... ....................... 10 Physical Infrastructure ..................... **.*..*..* 11 Social Services ...................................... 11 III. THE EXECUTING AGENCIES ................ .. .................. 12 This report is based on the findings of an appraisal mission which visited Colombia in February/March 1981. The mission comprised Ms. D. Babelon, Messrs. G. Rioseco, F. Portilla, H. Wagner, J. Yaron, V. Ferrer, J.C. Sallier, W. Stottmann, R. Harbison (Bank), Messrs. R. Gallagher, W. Lake, R. Vaughn-Sear, G. Herrera (Consultants), and Ms. V. Praz (Research Assistant).  - ii - Table of Contents (Continued) Page No. IV. THE PROJECT ............................................... 13 A. Origin and Formulation ................................ 13 B. Objectives and Brief Description ......... .. .......... 14 - Objectives ............................................... ...0 ... *.. 14 - Brief Description ................................. 14 C. Detailed Features . . .................... . 15 - Production .. ............. ....................... 15 - Advisory Services and Training ............... .. 18 - Infrastructure .. . .......................... ....... 21 - Social Services .... ............................... 23 - Project Administration and Management, Monitoring and Evaluation ............................................... .. 25 D. Project Costs ...... ................... ............... 27 E. Financing ............................................ 27 F. Procurement .......... .................. .. ............ 29 - Works ............................................. 29 - Goods .............................................. 29 - Contract Review ................................... 30 G. Disbursements ........................................ ............ 31 V. PROJECT IMPLEMENTATION ... ........................ ......... 32 A. Organization and Management ....................... ... 32 - The Directorate General of the DRI and PAN Programs (DNP/PAN-DRI) ........... .. ............. 32 - Coordination Mechanisms and Community Participation 33 - Programing and Budgeting .......................... 34 - Subsidiary Agreements ............. .. .............. 35 B. Operation and Maintenance ................ . ........ .. 35 - Roads ..* .......................................... 35 - Water Supply Systems . .................... ... ...... 35 - Rural Electrification Networks *........ ......... .. 36 - Health Facilities ................................. 36 - Education Facilities ...... ............... ... ...... 36 C. Lending Terms and Conditions ......................... '37 D. Accounts and Auditing ...................... ............ 38 E. Progress Reporting, Monitoring and Evaluation ........ 38 - Progress Reports .................................. 38 - Monitoring and Evaluation ......................... 38  - iii- Table of Contents (Continued) Page No. VI. PRODUCTION, MARKETING AND PRICES ............... ........... 39 A. Production ........ ........................................... 39 B. Markets, Marketing and Prices ........................ 40 VII. FINANCIAL ANALYSIS ......... ....................... ........ ....... . 40 A. Producer Benefits and Financial Rates of Return ...... 40 B. Cost Recovery and Fiscal Impact .................. .... 43 - Cost Recovery and Tariffs ........................ 43 - Fiscal Impact ............................................. 43 VIII. BENEFITS AND ECONOMIC ANALYSIS ............................ 44 Economic Rate of Return .............................. 44 Sensitivity Analysis ................................. 46 Employment Effects ................................... 47 Environmental Impact ................................. 47 Project Risks ........................................ 47 IX. SUMMARY OF AGREEMENTS TO BE REACHED AND RECOMMENDATIONS ... 48 Assurances Obtained at Negotiations ............... ... 48 Conditions of Effectiveness ..... ..................... 50 Conditions of Disbursements .......................... 51 SCHEDULE A - List of Project Municipalities ......... ........ 52 SCHEDULE B - Subsidiary Agreements ........... .. ............. 55 SCHEDULE C - Lending Terms and Conditions ........ .. ......... 57 SCHEDULE D - Arrangements to be made between FFAP and Caja Agraria . ............................... . 61 ANNEXES 1. The Executing Agencies ...................... ................ 62 2. The Selection of Phase II Areas ........................... 75 3. Functions of the DNP/PAN-DRI Marketing Unit ............... 78 4. Project Evaluation ........................................ 79 5. Audit Requirements .......... . . .. . ....................................... . 83 6. Supporting Tables Table 1 - Selected Interest Rates for the Agricultural Sector ........ ........................... 87 Table 2 - Distribution of Farms of Less Than 20 ha in the 55 Municipalities (Phase II) ...... 88 Table 3 - Tentative Distribution of Project Farms (direct beneficiaries) by Department, Type of Climate and Farm Size (Phase II) . 89  - iv - Table of Contents (Continued) Page No. Table 4 - Activities Financed, Phasing of Incorporation (Phase II) ..... ............ 90 Table 5 - Activities Financed, Phasing of Incorporation (Phase I) .... .............. 91 Table 6 - Credit Requirements (Phase II) ........... 92 Table 7 - Recuperation of Subloans (Phase TI) ...... 93 Table 8 - Credit Requirements (Phase I) ............ 94 Table 9 - Recuperation of Subloans (Phase I) ....... 95 Table 10 - Phasing of Project Costs .... ............. 96 Table 11 - Total Project Costs by Categories of Expenditures ............. ................ 97 Table 12 - Crop Yields .......... .................... 99 Table 13 - Livestock Production Coefficients ........ 100 Table 14 - Project Output - Financial and Economic Prices .......... ......................... 101 Table 15 - Illustrative Farm Models - Cropping Patterns and Phasing of Investments ...... 102 Table 16 - Illustrative Farm Models - Summary of Impact on Income of Beneficiaries ........ 103 Table 17 - Illustrative Farm Model No. 1: 1.5 ha Farm, Hot Climate - Cost Benefit Analysis 104 Table 18 - Illustrative Farm Model No. 1: 1.5 ha Farm, Hot Climate - Cash Flow Projections 105 Table 19 - Illustrative Farm Model No. 2: 1.5 ha Farm, Temperate Climate - Cost Benefit Analysis ................................. 106 Table 20 - Illustrative Farm Model No. 2: 1.5 ha Farm, Temperate Climate - Cash Flow Projections ............. ................. 107 Table 21 - Illustrative Farm Model No. 3: 5.4 ha Farm, Hot Climate - Cost Benefit Analysis 108 Table 22 - Illustrative Farm Model No. 3: 5.4 ha Farm, Hot Climate - Cash Flow Projections 109 Table 23 - Illustrative Farm Model No. 4: 5.4 ha Farm, Cold Climate - Cost Benefit Analysis 110 Table 24 - Illustrative Farm Model No. 4: 5.4 ha Farm, Cold Climate - Cash Flow Projections 111 Table 25 - Illustrative Farm Model No. 5: 13.5 ha Farm, Temperate Climate - Cost Benefit Analysis ................................. 112 Table 26 - Illustrative Farm Model No. 5: 13.5 ha Farm, Temperate Climate - Cash Flow Projections ............ ................. . 113 Table 27 - Economic Rate of Return .................. 114 7. Related Documents and Data Available in Project File . 115 Chart 1 - Project and Program Organization 117 MAP IBRD 15802  I. BACKGROUND A. The Rural Sector Agriculture in the Economy 1.01 During the past decade (1970-80), agriculture grew at an average annual rate of 4.7%, and, although this rate is respectable, it was signifi- cantly less rapid than GDP growth during the same period (5.9%) and has been marked by a substantial slowdown in recent years (3.4% versus GDP growth of 4.4% between 1978 and 1980). The agricultural sector's share of GDP has decreased from about 29% in 1970 to 24% in 1980, with about 13% contributed by the crop subsector, 9% by the livestock subsector, and 2% by the fishing, hunting and forestry subsectors. Of an estimated population of about 26.7 million (mid-1980), nearly 8.5 million, or 32%, lived in rural areas, and 27% of the economically active labor force was engaged in the agricultural sector. Average GNP per capita in Colombia was about US$1,180 in 1980, disguising important differences between urban and rural areas. 1.02 In 1980, agricultural sector exports represented about 67% of total merchandise exports of Colombia. Export performance, however, is highly influenced by changes in coffee prices and volume; coffee exports increased by about 50% between 1977 and 1980, both in volume and value. In addition to coffee, representing in 1980 over three-quarters of the sector's total exports, main exports in order of importance are: cotton, bananas, livestock (beef and cattle), sugar, rice, flowers and tobacco. The agricultural sector has a highly favorable balance of trade, with total food imports averaging only about 9% of total imports in 1979. Apart from wheat, representing 37% of total food imports, and temperate fruits, the main imports which could be replaced by domestic production are vegetable oils, feed and food grains and milk. 1.03 Although the growth of aggregate domestic demand for food products in Colombia has slowed somewhat in recent years, it has generally exceeded the increase in the domestic supply. As a result, the price of food relative to other items in the consumption basket has increased. Given that, for the relatively low income bracket used in the calculation of the consumer price index, almost half of the consumer's total expenditures are for food, food price increases have been an important inflationary factor in the country. Land Distribution and Income Structure 1.04 Colombia is extremely heterogeneous in terms of altitude, climate, and soils, and this results in a wide range of production possibilities and a considerable diversity in farm types. Of the total land area of 114 million ha, some 31 million ha are in farms, of which, according to the 1970/71 census, 7.7 million ha were cropped and 17.5 million ha were in pasture. 1.05 Out of a total of about 1.2 million farms, the 1971 census showed that some 980,000, or 82%, had less than 20 ha and farmed only about 3.8 million ha, or 12% of the total farmland; of these, most were below 10 ha (73%). An esti- mated 270,000 farms had less than 1 ha and 200,000 families dependent on agriculture were landless. In 1976, the small producer subsector, defined as all farms with less than 20 ha, was estimated to account for about 60% of the total agricultural value added and about 65% of total production of basic  - 2 - foodstuffs (maize, wheat, beans, potatoes, cassava, plantain, non-centrifugal sugar (panela), fruit and vegetables). It also accounted for about 55% of rural employment. 1.06 In 1977, about 50% of the rural population had incomes below the relative poverty income level as defined by the Bank (US$267 per capita in 1977 dollars). Rural unemployment and underemployment were estimated at 15% in 1977. Institutional Support 1.07 Agrarian Reform. Since 1961, the Colombian Institute for Agrarian Reform (INCORA) has been involved in programs of distributing public land (4.9 million ha as of June 1978) and redistributing unused private land (0.7 million ha), benefiting a total of about 200,000 families. INCORA's activities are associated, to varying degrees, with investments in land recla- mation and infrastructure and the provision of supervised credit and technical assistance. However, most of the land distributed so far has been assigned to families already occupying the land. INCORA's land titling activities are limited mostly to distributing titles to small-scale farmers on public land in newly settled areas. In recent years, INCORA, and particularly its land acquisition program, has been subject to considerable criticism and political resistance and, as a result, land acquisition through both the expropriation of land and termination of private ownership has been at a standstill since 1974. 1.08 Agricultural Credit. The main sources of agricultural credit in Colombia are the Agricultural Financial Fund (FFAP) and Caja Agraria. FFAP is a rediscounting facility managed by the Bank of the Republic (BOR), which, through participating financial intermediaries, supplied 56% of total lending for agricul- ture (Col$ 40.5 billion) in 1980. FFAP funds are almost exclusively relent to medium- and large-scale farmers. On the other hand, Caja Agraria, the largest bank in Colombia, is the major source of credit to small-scale farmers, and accounted for 43% of total agricultural lending. Small-scale farmers are currently defined as those with gross assets below Col$ 1.8 million (US$35,300). Nominal interest rates were in 1981 for most crop and livestock activities 21% per annum for FFAP and, for Caja Agraria's own resources, 18% to 23% for small-scale farmers and 29% for other farmers (Annex 6, Table 1). Effective rates were somewhat higher (24% for FFAP and 20%, 27% and 35%, respectively for Caja Agraria) because, for seasonal credit, interest is usually charged quarterly in advance. Since inflation was close to 30% in 1979, 26.5% in 1980, and about 27% in 1981, real rates of interest for the most important lines of of credit for agriculture were still slightly negative. 1.09 Marketing. The Institute of Agricultural Marketing (IDEMA) is in charge of regulating prices by purchasing (at support prices), selling, import- ing, exporting and maintaining regulatory stocks of a number of basic agricul- tural commodities (wheat, rice, maize, beans, sorghum, barley, soybeans and sesame). Except when large imports are made by IDEMA, however, the Government's market stabilization policies have had only a marginal impact because of IDEMA's limited resources, in turn attributed to the general government policy of minimizing intervention in the market place (para 1.12).  -3- B. Government Strategy in Rural Areas The Agricultural Sector 1.10 General. The relatively modest growth of the agricultural sector during the past few years, which led to upward pressures on prices of staples and other foodstuffs (para 1.01), is attributed to slow productivity increases, inefficient marketing and processing of agricultural produce and inadequate exploitation of soil and water resources. On the other hand, because of the slowdown in population growth, it is expected that growth of internal demand during the 1980-90 period will somewhat slacken, so that changes toward encouraging exports will have to be made in sector policies in order to ensure a sustained rate of growth of the sector. 1.11 In attempting to deal with these issues, the National Planning Department (DNP), within the context of the National Integration Plan (1979-82) (PIN), has formulated objectives and strategies for the 1980s. Briefly, the main objectives are to: (a) increase substantially the productivity of agricultural resources; (b) improve the efficiency and competitiveness of the marketing system; (c) develop agroindustries to stabilize prices and increase employment, rural incomes and foreign exchange earnings; and (d) increase exports of agricultural products. Top priority has consequently been given to improving technology and infrastructure, through public investments in research and extension, rural roads, land development (mainly watershed management, irrigation and drainage), storage, agroindustries and marketing facilities. In addition, sector policies on credit, prices and foreign trade are to be modified to provide adequate incentives to the private sector. 1.12 Marketing and Prices. It is the Government policy not to try to influence price-setting mechanisms through heavy intervention or price controls. Support prices for the few commodities purchased by IDEMA (para 1.09) are set as closely as possible to world market levels and the Government has been progressively removing existing price controls at producer, wholesale, or retail levels. Rather, the Government aims at improving the efficiency and competitiveness of the system by expanding and improving the road network, investing in marketing infrastructure in association with the private sector and improving price formation through better price and market information and strengthening of the Agricultural Exchange. In line with this policy, a project is being prepared, for submission to IDB for financing, to construct two more wholesale markets for perishables in Barranquilla and Bucaramanga ("Centrales de Abastos") and associated sub-regional collection centers ("Centros de Acopio"). 1.13 Agricultural Credit. In order to secure sufficient funding for the sector, while making agricultural credit policies compatible with general monetary policies (which are directed at fighting inflation), the Government has progressively increased FFAP interest rates to levels which would permit BOR to raise more funds from the capital market. Although implementation of this policy has not yet led to elimination of interest rate subsidies (para 1.08), periodic adjustments have progressively narrowed the gap between prevailing interest rates and inflation.  -4- 1.14 The Small-holder Subsector. While emphasis is being put on the modern agricultural sector as the main source of additional foreign exchange earnings and as a source of foodstuffs to complement the output of the tradi- tional sector, it is recognized that the latter contributes the major part of the national production of basic foodstuffs (para 1.05). Therefore, within the context of the overall sector policies, the development of the small-scale farmer subsector will continue to be assisted through specific programs, such as the Integrated Rural Development Program (DRI) and the provision of techni- cal assistance and credit to consolidate the agrarian reform process. Land re-distribution and colonization are to be carried out only in response to local circumstances in areas with both high pressure on land and unequal land distribution. The Multisectoral Programs in Rural Areas - Food and Welfare Strategies 1.15 In early 1975, the National Council for Economic and Social Policy (CONPES) approved an ambitious and wide-ranging National Food and Nutrition Plan aimed at increasing the availability of low-cost foodstuffs to the poorest 50% of Colombia's population and raising the income and improving the general welfare and nutritional status of this group. This was to be achieved through multisectoral and coordinated actions in production, marketing, pro- cessing, subsidized food distribution and the provision of infrastructure and social services. The first phase of this food and nutrition strategy was incorporated in the 1975-78 National Plan for Social and Economic Development through the first-stage implementation of two multisectoral programs, the Integrated Rural Development Program (DRI) (para 1.19) and the National Food and Nutrition Program (PAN) (para 1.16). Support and appropriate funding for both programs were continued by the present Government, which took office in 1978, and incorporated into PIN. The Bank is partially financing both programs through the Integrated Nutrition Improvement Project (Loan 1487-CO), in support of PAN, and the Integrated Rural Development Project (Loan 1352-CO), in support of DRI (para 1.25). 1.16 PAN is a welfare-oriented program aimed primarily at improving the nutritional status of the most vulnerable groups of Colombia's poorest marginal urban and rural population (especially pregnant women, lactating mothers and pre-school children). PAN presently covers seven Departments and the Special District of Bogota and aims at providing an integrated package that includes community health services, potable water supply and sanitation facilities, nutrition education, distribution of subsidized processed food and promotion of family gardens. 1.17 DRI, on the other hand, is essentially production-oriented and, while substantial amounts are spent on infrastructure and social services to increase the well-being of those living in rural communities, it aims mainly at developing small-scale farms of less than 20 ha to the fullest extent possible in order to provide the farm families with a substantially higher income from self-sustaining operations. The impact of the program on food production was considered a cornerstone of the previous Administration's national food strategy and the present Administration considers it as one element of its general food strategy which emphasizes removing the bottle- necks that hamper general productivity increases and prevent a more efficient flow and use of agricultural products (paras 1.11 and 1.12). Within PIN, the primary objectives of DRI are therefore regarded as the improvement of incomes and standard of living of small-scale producers and increased production of foodstuffs.  - 5 - 1.18 Since both PAN and DRI are expanding to almost nationwide coverage and PAN is shifting its emphasis from marginal urban areas to rural areas, there will be frequent cases of overlap. Coordination mechanisms are dis- cussed in paragraphs 5.02 through 5.04. The Integrated Rural Development Program 1.19 Phase I. Full implementation of the DRI Program started in July 1976 after a one-year experimental period. A total of 13 national public institu- tions are participating, plus various regional entities. This first phase was to take place in selected areas in eight Departments (Map IBRD 15802) over a period of five to six years at a cost of approximately US$273 million. To help finance the program, the Government obtained loans from public external development agencies, for a total of US$130 million. The Bank, with US$52 million (Loan 1352-CO), was to partly finance the program in the Departments of Antioquia, Narino, Cauca and Cundinamarca; the Inter-american Development Bank (IDB), with US$64 million, was to finance it in the departments of Boyaca and Santander; and the Canadian International Development Agency (CIDA), with US$14 million, was to finance it in the departments of Cordoba and Sucre. The World Food Program has also been participating in DRI since 1980 by distributing food to some of the beneficiaries of the program. 1.20 As of the end of December 1980, in all areas (para 1.19), the DRI program was assisting 2,468 communities ("veredas" 1/) in 226 municipalities ("municipios" 1/). At the end of 1981, direct beneficiaries (defined as those receiving credit and individual technical assistance) numbered close to 70,000 farm families; while an additional 145,000 rural families were estimated to be benefiting indirectly from the technological improvements, infrastructure and social services provided. The total rural population deriving some benefit from the program is estimated at about 1.2 million people, or about 15% of Colombia's total rural population. These achievements, after five and a half years of implementation, represent 70% to 75% of the 5-1/2-year targets originally set for Phase I (92,000 direct beneficiaries and 1.7 million people). 1.21 The DRI program has, over the years, gained considerable popularity in rural areas and political support at all Government levels and in the legislature. Success can be attributed to the following factors: (a) its concentrated focus on poverty in selected veredas with the largest population and development potential by coordinating the investment programs of most public entities involved in the rural sector; (b) a systematic approach to the selection of high priority communi- ties and investments, which has been increasingly effective in screening out investments and minimizing political interferences. The program has thus to a large extent rationalized public investment in the rural areas attended; 1/ A "vereda" is a community of about 50 to 100 families. An average of about 25 "veredas" constitutes a "municipio," an administrative subdivision of the department, with its administrative seat ("cabecera municipal").  - 6 - (c) the provision of credit according to regulations, incorporated into a credit manual specific to the program, which ensure that credit is provided in sufficient amounts and on terms consistent with the farmers' development needs and their cash flow situation (para 1.29); (d) the Program has been able to secure the participation of beneficiaries and communities in the programming and execution of works (the mechanisms of community participation are described in Chapter V); and (e) the Program has been able to generate a strong commitment in field and regional staff of the executing agencies. This is quite remarkable, considering that several entities have been unable to provide them with the necessary support because of continuing financial problems (Annex 1). 1.22 Phase II. The Government plans in a second phase, during the period 1981-86, to extend the DRI program to 126 municipalities in eight new Depart- ments (IBRD Map 15802), reaching as many as 49,000 more direct beneficiaries. The Government has asked the Bank to help finance the extension of the Program in 55 municipalities in four of these new Departments, and IDB to assist in the remaining 71 municipalities. IDB has recently processed a US$64.6 million loan to help meet the cost of the program in these areas (estimated at US$118.6 million). All new areas to be covered are contiguous with Phase I areas. C. Bank Involvement in the Rural Sector 1.23 Since 1966, the Bank has made 12 loans, totaling US$296.6 million, to Colombia for the agricultural sector. Project Performance Audit Reports have been issued for four of them, including Loans 502-CO (Atlantico I Irriga- tion), 624-CO (First Agricultural Credit), 651-CO (Second Livestock Development) and 739-CO (Caqueta Land Colonization - Phase I). They are, however, of little relevance to the proposed project. Other Bank operations in the rural sector include the Integrated Nutrition Improvement Project, a recent Rural Roads Project, a Village Electrification Project in seven Departments of the Atlantic Coast, and the Integrated Rural Development Project. A Rural Basic Education Sub-sector Project was appraised in March 1982. 1.24 Eight agricultural projects are being implemented, four of which were made in support of INCORA's agrarian reform efforts: the Second Atlantico Development Project (Loan 849-CO, to the Government for US$5 million); the Caqueta II Rural Settlement Project (Loan 1118-CO, to the Government for US$19.5 million); the Cordoba II Agricultural Development Project (Loan 1163-CO, to the Government for US$21 million); and the Third Agricultural Credit Project (Loan 1737-CO to INCORA for US$20 million). Other operations include the Second Agricultural Credit Project (Loan 1357-CO to Banco de la Republica for US$64 million), the Irrigation Rehabilitation Project (Loan 1996-CO to HIMAT for US$37 million), the Integrated Rural Development Project (Loan 1352-CO to the Government for US$52 million) and the Upper Magdalena Pilot Watershed Management Project (Loan 2069-CO of US$7.5 million to INDERENA). The Integrated Rural Development Project (Loan 1352-CO to the Government) 1.25 The loan, US$52 million for a project with total costs of US$131 million, became effective in August 1977 and partially finances implementation of the DRI program in four Departments (para 1.19) over a period of five years.  - 7 - 1.26 As of December 31, 1980, after four years of implementation, 72% of project funds were committed. By the end of 1981, it is estimated that over 90% of funds were committed. As of March 26, 1982, disbursements of the Bank loan amounted to US$39.8 million, or 76% of the total amount. The loan is expected to be fully disbursed by the end of 1983. 1.27 As of December 31, 1981 a total of about 30,000 smallholders were receiving credit and individual technical assistance from the project (the five- year target was 40,000), and an estimated additional 74,000 families were deriving indirect benefit from the project, bringing the total number of beneficiaries to about 600,000. 1.28 While overall implementation is quite satisfactory, some components have encountered problems because of insufficient commitment by the implement- ing institutions to necessary sector policies (Health) or institutional weak- nesses (Natural Resources, Marketing) which are further described in Annex 1. However, the project has never suffered from insufficient counterpart funding. 1.29 Implementation of the credit program, which accounts for about half of the project's total costs, has been according to appraisal estimates. The average amount of credit received annually by project beneficiaries (in 1981 about Col$45,000, or US$820) was substantially above the average amount of credit other small-scale farmers have received from Caja Agraria, as was also the credit received per hectare financed. Also, the terms and conditions of the DRI credit were perceived by the farmers as especially favorable since resources were provided in sufficient amounts; with terms and grace periods tailored to the cash flow requirements of the farm; and interest was not charged in advance. Up to the end of 1980, over 90% of all subloans were secured by personal signature versus only about 50% of subloans made by Caja Agraria to other small-scale farmers. Credit was closely associated with individual technical assistance in planning the farmer's requirements and carrying out the farm development plan. The credit delivery and supervision systems appear to have been effective since arrears as of the end of December 1981 amounted to 4.6% of project portfolio and were noticeably below the general Caja Agraria average of 1980 (13%). 1.30 It appears that, at least in the areas where data are available, the project has led to substantial increases in productivity and production. In the Department of Antioquia, a comprehensive survey carried out in 1979 shows that, between 1975 and 1978, yields of major crops on farms of direct project beneficiaries increased by 33% to 60%. In the Department of Narino, field records indicate that yields have increased by 50% on average between 1976 and 1980. The area under cultivation and the cropping intensity have also somewhat increased, so that total production has risen significantly. In Antioquia, in two years, direct beneficiaries have doubled their participation in the national and departmental production of potatoes, maize and beans, the main staples in the area and nationwide. Although the performance of the DRI program has certainly been better in these two Departments than in the Depart- ments of Cauca and Cundinamarca, for which only partial data are available to this date, it appears that the program is reaching its desired objective.  - 8 - 1.31 The weakest link in the DRI program has been an inadequate coverage of marketing activities. This has been in part because of the inherent diffi- culties in dealing with marketing of perishable agricultural produce and largely because of institutional weaknesses of the agency in charge of the marketing advisory service (Annex 1). Fortunately, most of the project areas are relatively well connected to major markets and food prices have been relatively high during the past five years. Nevertheless, local market surpluses have developed on occasion. Marketing could become an important constraint to increased production and pro- ductivity if more attention is not given to developing an expanded and systematic approach towards exploring marketing possibilities and modalities before production is encouraged. 1.32 Full assessment of the impact of the project is not possible at this stage, since the majority of beneficiaries has been incorporated into the pro- gram for only two or three years. Such an assessment will be possible only when the farmers have had sufficient time to take full advantage of the infrastructure built, or being built, and services offered, which is not likely before the end of 1983. Also, all efforts were initially directed towards establishing proper mechanisms for programing and coordination at all levels, and it was not until 1978 that attention began to be paid to evaluation of impact. II. THE PROJECT AREAS 2.01 The project areas (IBRD Map 15802) include: (a) 55 municipalities in the Departments of Huila, Tolima, Meta and Caldas (Phase II areas); and (b) the 154 municipalities of the first project (Phase I areas). A list of municipalities is provided in Schedule A. The Selection of Phase II Areas 2.02 The selection of the Phase II areas was made using the basic metho- dology developed for the preparation of the first project. All the socio- economic districts of the country, and then all municipalities in the selected Departments were ranked, according to criteria, indicators and weights which sought to measure agricultural potential, the presence of public sector institutions and socio-economic conditions and infrastructure. Particular importance was given to production criteria, such as the concentration of small-scale farms, their production potential and the exclusion of areas where coffee production is significant. The selection process is further described in Annex 2. Location, Climate and Soils 2.03 The project areas, Phase I as well as Phase II, are mainly located in densely populated parts of the Andean Highlands. The topography is pre- dominantly mountainous and soils are mostly of volcanic origin. Farms are often on poor soils and steep slopes. A wide range of climatic conditions is found, as shown below, for the areas designated for Bank financing: Percentage of Farmland in Phase I Phase II Project Areas Located in: Areas Areas - Very Cold Zone (above 3,000 m) 7 12 - Cold Zone (2,000 m to 3,000 m) 37 26 - Temperate Zone (1,000 m to 2,000 m) 37 32 - Hot Zone (below 1,000 m) 19 30 100 100  - 9 - Temperatures vary considerably. In Phase I areas, average yearly temperatures range from 120C in the cold zones to 25 C in the hot zone. In Phase II areas, the averages range from 15 C in the cold zone to 29 0C in the hot zone. Rainfall varies among and within areas from 550 mm to 2,120 mm in Phase I areas and from 890 mm to 3,100 mm in Phase II areas. There are two distinct rainy seasons, February to June and September to November. The distribution of farms in Phase II areas according to climatic zones and size categories is further detailed in Annex 6, Table 2. Socio-economic Characteristics 2.04 The main characteristics of the population of the project area are summarized below and the size distribution of farms in Phase II areas is further detailed in Annex 6, Table 3. Phase I Phase II Areas Areas Population No. of Departments 4 4 No. of Municipalities 154 55 Population (million) 2.1 0.9 Rural Population (million) 1.3 0.6 Rural Population as % of Total Population 62 66 Farm Distribution Total Number of Farms 194,000 88,000 Farms with less than 20 ha 175,000 70,000 Farms with less than 20 ha as % of Total No. of Farms 90 80 Average Agricultural Area /1 per Farm of less than 20 ha 4.0 ha 4.2 ha Land Tenure % of Farms in Ownership 86 70 Rented or Sharecropping 12 14 Other /2 2 16 Land Use on Farms of Less Than 20 ha Total Agricultural Area (ha) 695,000 294,000 % Under Crops, of which 66 68 - annual crops 28 14 - permanent crops 28 41 - fallow 10 13 % Under Grassland 34 32 /1 Agricultural area includes areas suitable for crop and livestock produc- tion (including fallows). It does not include unused or unusable land. /2 Includes land held in trust or communally owned or in the process of succession (8%), invaded land (2%) and land in farms having more than one form of tenure (5%).  - 10 - Production 2.05 A large variety of annual, semi-permanent and permanent crops is grown in the project areas, mostly maize and beans, potatoes, cassava, sugarcane for panela (non-centrifugal sugar), plantain, rice and vegetables. In Phase I areas, relatively more importance is placed on growing potatoes and vegetables while in Phase II areas, the main crops are staples (cassava, maize, beans and upland rice) and semi-permanent and permanent crops, such as plantain, sugar- cane and cacao. Mixed and relay intercropping is widespread, the main crop associations being maize/beans, potatoes/maize/beans and maize/arracacha. Most small-scale farmers own one or more cows in addition to a variety of minor animal species (pigs, poultry, rabbits, guinea pigs and bees) which make an important contribution to the family diet. Productivity is low because of often poor soils, inadequate cultural practices, poor seeds and insufficient use of manure, fertilizers and other inputs, but the absence of technical assistance, credit, and secure markets are the main constraint to production increases. Production Support Services 2.06 Credit. In the 55 municipalities of Phase II, Caja Agraria has an extensive network of 53 agencies, almost one per municipality. In 1978, 23,150 subloans were made to small-scale farmers by Caja Agraria through these agencies, which indicates that only about a third of all small-scale farmers in those municipalities did receive credit in that year. Though most small- scale farmers have had credit experience with Caja Agraria, it has been intermittent. The average subloan amount in 1978 was Col$ 19,400 (US$480), close to the countrywide average for Caja Agraria subloans to small-scale farmers during that year (Col$ 20,500 or US$510). The expansion of credit in Phase II areas has been hampered by lack of resources, resulting in rationed (only about a third of costs per hectare are financed) and delayed credit, with emphasis on short-term operations (74% of total operations in 1978). 2.07 Technical Assistance. In Phase II areas, technical support is provided to small-scale farmers on a limited basis by ICA, INCORA and the Departmental Secretariats of Agriculture (SDAs). ICA provides technical assistance, veterinary services and also controls the quality of inputs through four regional and eight district offices in the project area, which are staffed with 26 professionals and 45 sub-professionals. Insufficient staff and lack of vehicles and allowances for travel costs seriously constrain ICA's work. In, or near, the project areas, ICA operates 2 experimental stations, 2 national research centers, one demonstration and six diagnotic centers. 2.08 The SDAs are part of the administrative structure of the local (Departmental) Governments. In the four new DRI Departments, they manage seven research and demonstration centers. In 1980, they had a total technical staff of 89, but only about 15 were providing technical assistance to small- scale farmers. In 1980, INCORA, with 39 technicians distributed among 15 agencies, was assisting about 1,730 families in land reform settlements located in the municipalities of the Phase II project areas. 2.09 Agricultural Supplies. In the Phase II project areas, basic seed is produced by ICA and sold to Caja Agraria and 43 authorized certified seed producing enterprises. ICA, Caja Agraria and 18 of these enterprises produce seed in the  - 11 - project area. Caja Agraria also has 79 distribution outlets for agricultural inputs and supplies in the four Departments, 36 of which are located in the 55 municipalities, where it is often in competition with private distributors. Many cooperatives are also involved in the provision of inputs. 2.10 Marketing. There are some 32 agricultural cooperatives in the 55 Phase II municipalities. Of these, 14 are formed by coffee growers. Small- scale farmers, however, usually market small amounts of a wide range of products sold at the farmgate to intermediaries. Marketing efficiency and competition are constrained by the lack of access roads, price information and collection centers. 2.11 Some of the country's main coffee zones are adjacent to the project areas. In these, the Federation of Coffee Growers of Colombia (FEDECAFE) has been active for years in promoting diversification. Farmers' groups that take part are provided with technical assistance and credit for marketing non-coffee products grown in coffee areas as well as surrounding areas. Many of these groups have associated to gather and sell perishable products on the main markets (such as FRUVERCAFE, the fruit and vegetable cooperative of small-scale coffee producers) or through their own supermarkets. Physical Infrastructure 2.12 While all Phase II project areas are well linked to the most important markets by the highway network, production (particularly of perishables) is seriously constrained by the lack of access roads to farming areas. The existing road network in the project area totals 4,980 km, including 3,640 km of rural roads, or less than 0.2 km per square kilometer. Many of the exist- ing roads are impassable during the rainy season. 2.13 In the Departments of Huila, Tolima and Meta, the proportion of rural households with electrical service is less than the national average in rural areas (12.8%, 10.7% and 0%, respectively, versus 13%). In the Department of Caldas, service coverage (45%) appears high, but is concen- trated in the coffee areas, which are not within the project area. 2.14 In the four Phase II project departments, about 24% of the rural population has access to a safe water supply. However, service is concentrated on agglomerated communities and in areas where the Diversification Program of of FEDECAFE is operating, particularly in Caldas and Tolima. Social Services 2.15 In the Phase II project area, health conditions are generally poor, with a high incidence of infectious diseases associated with malnutrition and lack of clean potable water. Although physical infrastructure, in terms of number of existing local hospitals, health centers and health posts is fairly adequate (207, or 1 per 4,300 inhabitants in the 55 municipalities), the quality of primary health care services is poor because of lack of staff, drugs, equipment and transportation and proper training. With respect to education services, the Phase II project areas have a school age population of about 140,000, about 60% of which are enrolled in some 3,900 classrooms - the project areas account for about 40% of the total school-age population of their respective departments - here  - 12 - also educational achievements are not so much constrained by the lack of infra- structure as by the poor quality of the services provided, particularly in the Departments of Huila and Tolima, where only about 12% of the pupils ever complete the full primary cycle (equal to the national average for rural areas), versus 18% to 20% for the departments of Caldas and Meta; and where they attend school for a total of only about 1.5 years (also about equal to the national rural average), versus 2.1 to 2.3 years in the departments of Meta and Caldas. III. THE EXECUTING AGENCIES 3.01 Excluding the National Planning Department (DNP), a total of 12 national agencies, all the main institutions involved in the rural sector, would participate in the execution of the project, 10 of which have been involved in the DRI Program for the past five years. In addition, an increasing number of relevant departmental entities are expected to participate along the same lines as other departmental services currently participating in the Phase I areas. 3.02 Caja Agraria, the main agricultural development bank in the country and the largest bank in Colombia, is a semi-autonomous public agency whose principal shareholder is the Government, under the general direction of the Minister of Agriculture. It is the principal source of credit for small-scale farmers and is also an important retailer of farm inputs throughout the country. 3.03 ICA is the main institution responsible for agricultural research and technology transfer, along with pest control, animal health and the control of the quality of inputs. INCORA (para 1.07) and most Departmental Secretariats of Agriculture - three in Phase I areas and four in Phase II areas (para 2.08) - have had no previous experience with DRI and would, on a limited basis, assist ICA in its task of technology transfer. The Colombian Institute for Renewable Natural Resources and the Environment (INDERENA), is responsible for protect- ing, administering and developing Colombia's natural resources, including the promotion of reforestation, fisheries and soil conservation. ICA, INCORA and INDERENA all are autonomous public entities dependent on the Ministry of Agriculture. 3.04 CECORA is a second-level cooperative organization, and therefore a private entity. Originally created to assist cooperative societies of land reform beneficiaries, its mandate also extends to other cooperatives and farmer groups. The Colombian Institute of Financing and Development of Cooperatives (FINANCIACOOP), is a private entity in charge of financing the cooperative sector. It is the major cooperative financing institution in the country. 3.05 With respect to the provision of rural infrastructure, the National Fund for Rural Roads (FNCV) is a public autonomous agency dependent upon the Ministry of Public Works and Transportation, responsible for the construction, upgrading and maintenance of rural roads, in cooperation with Departmental Secretariats of Public Works (SDOP's) and municipal authorities. The Colombian Institute for Electrical Power (ICEL), is a public autonomous agency dependent on the Ministry of Power and Mines, responsible for planning the electrical network and setting national standards for electrical installations in the  - 13 - twelve Departments of its area of influence. ICEL is the major shareholder of the departmental "Electrificadoras", which are responsible for the design and construction of installations and the production, transmission and sale of electrical power. The National Institute of Health (INS) is a public agency dependent on the Ministry of Health (MINSALUD), responsible for the provision of water supply and sanitation services in rural areas, either directly through its departmental offices or through the Departmental Health Services (SSSs), to which the responsibility for carrying out rural water supply systems funded through the National Budget is increasingly being delegated by INS. SSSs are public entities under the control of the respective Departmental Governors. Departments also have Departmental Water Supply Funds (FDA's) to finance locally funded projects. 3.06 The SSSs are also the main entities responsibl-e for health services delivery in rural areas. For that purpose, they are under the supervision of MINSALUD, which is responsible for policy-making, planning, funding and supervising government intervention in the health sector. The Ministry of Education (MINED) is responsible for the formulation of the education policies and the unification of academic standards and terms of service of educational personnel throughout the country. The Departmental Secretariats of Education (SDEs) have the administrative responsibility for running the school system, but recurrent as well as investment educational expenditures are controlled by the Regional Education Funds (FERs), the boards of which are made of representatives of MINED as well as of regional authorities. The Colombian Institute for School Buildings (ICCE), a public entity dependent on MINED, is responsible for building and equipping schools. Pilot Experimental Centers (CEPs) are dependencies of MINED, in charge of executing new curricular programs. 3.07 Finally, the newly created autonomous Regional Development Corporations (CRDs) in the Departments of Tolima, Caldas and Huila, are public agencies dependent on DNP in charge of planning, funding and carrying out projects of regional interest. In some areas, they would, on a limited basis, substitute for INDERENA, INS or FNCV. Their participation, as well as the participation of the various departmental secretariats would be defined on a case per case basis, according to their implementation capacity and the comparative effectiveness of the pertinent national agencies in their area of influence. 3.08 A summary of functions, funding and performance of the main institu- tions is provided in Annex 1 of this report. IV. THE PROJECT A. Origin and Formulation 4.01 The Government of Colombia has requested a Bank loan of US$53.0 million to help finance the Second Integrated Rural Development Project. The proposed project is part of a planned expansion of the DRI program contemplated in the PIN (para 1.11). The project was prepared by the General Directorate of PAN and DRI in DNP, with Bank assistance.  - 14 - 4.02 Government authorities have decided that the continuation of the program in the Phase I areas should be financed mostly out of national resources, in order to progressively establish the permanence of the program in these areas independently from external financing. For this reason, with the exception of some additional funding for credit operations in the Bank- financed Phase I areas, which aim at consolidating achievements, the proposed project would finance expansion of the DRI Program to new areas. However, at negotiations, an assurance was obtained that the Government would provide, or cause to be provided, all credit funds and farm and marketing advisory services necessary to allow the direct beneficiaries of the first project to complete the planned development of their farms and to maintain the income level associated with the technology they have adopted as a result of the first project. In addition, every year, the Government would present to the Bank a program of activities in the Phase I areas in these respects. B. Objectives and Brief Description Objectives 4.03 The main objective of the project would be to improve the standard of living of the population in a number of selected rural areas (para 2.01). A second objective would be to contribute to the increased availability of basic foodstuffs at reasonable prices for the two thirds of the Colombian population living in urban areas. Brief Description 4.04 The project would, over a five-year period, seek to accomplish these objectives by: (a) developing about 35,000 farms of less than 20 ha (direct benefi- ciaries), including 28,000 in the 55 municipalities of Phase II areas (para 2.01) and 7,000 in the 154 municipalities of the first project (additional to those already attended in Phase I areas), through the provision of credit, advisory services and training (including for tree planting and fish ponds); (b) promoting group marketing and processing activities in Phase I and II areas through the provision of credit and advisory services; (c) improving physical infrastructure in the Phase II municipali- ties through the construction or improvement of about 540 km of rural roads, the construction or expansion of about 126 piped water supply systems for the benefit of about 52,000 people, and the extension of the electrical network to serve an additional 4,800 households; and (d) expanding and improving primary health care services throughout the Phase II project area and improving the quality of primary education services provided in two of the four departments of Phase II areas.  - 15 - 4.05 The project would provide funding for the expansion of the administrative and technical services of the executing agencies, including the General Directorate of the DRI and PAN programs in DNP (DNP/PAN-DRI) which is in charge of overall coordination, programing, control, monitoring and evaluation (Chapter V). Activities of the executing agencies would be governed by the terms of subsidiary agreements entered into with DNP (Schedule B). 4.06 The proposed loan would be to the Republic of Colombia. The Government would bear the foreign exchange risk. C. Detailed Features Production 4.07 Farm Development. The project would finance farm development costs through the provision of credit to participating farmers. Subloans would finance: (a) seasonal expenditures for crop production and livestock main- tenance; (b) medium- and long-term investments in semi-permanent and permanent crops, livestock, farm infrastructure, machinery and equipment, tree planting and fish ponds; and (c) home improvement (including electrical connection) after the farmer had participated no less than 12 months in the credit prbgram and demonstrated satisfactory creditworthiness. 4.08 An estimated 35,000 farmers would receive credit under the project, according to the following schedule of incorporation: ---------------- Project Year ----------------- 1 2 3 4 5 1. No. of Farmers (Cumulative) - Phase II Areas 2,800 8,400 15,000 23,000 28,000 - Phase I Areas 3,100 5,000 6,200 7,000 7,000 Total 5,900 13,400 21,200 30,000 35,000 2. Credit Requirements (US$ million) 1/ - Phase II Areas 1.7 6.7 14.0 21.4 26.2 - Phase I Areas 1.9 4.2 5.9 6.9 7.2 Total 3.6 10.9 19.9 28.3 33.4 3. Projected Recuperations during Previous Year (US$ million) 1/ - Phase II Areas - 0.9 3.1 7.1 13.2 - Phase I Areas 1.2 2.8 4.3 5.7 Total - 2.1 5.9 11.4 18.9 4. Net Credit Requirements (US$ million) 1/ - Phase II Areas 1.7 5.8 10.9 14.3 13.0 - Phase I Areas 1.9 3.0 3.1 2.6 1.5 Total 3.6 8.8 14.0 16.9 14.5 1/ In March 1982 constant terms.  - 16 - 4.09 Credit would be made available by Caja Agraria to participating farmers upon the presentation of integrated farm development plans prepared with the assistance of the farm advisory service (ICA, INCORA or the SDA's). In order to be eligible,Afarmers would have to have: (a) holdings located in a vereda incorporated into the program; (b) a total farm area not in excess of 20 ha; and (c) gross assets (including land) not exceeding Col$ 3.0 million (US$49,180), such limit being adjusted automatically every six months or every year in accordance with the variations in the national consumer price index. Further adjustments would be possible, though not automatic, should it be demonstrated, to the satisfaction of the Bank that increases in land values in the project areas have exceeded those in the consumer price index. Identical automatic adjustments would be made to the maximum indebtedness of farmers under the project (para 5.22). A tentative distribution of Phase II credit beneficiaries by departments, type of climate and farm sizes is shown in Annex 6, Table 3. 4.10 It is expected that 50% of total requirements would be for short- term and 50% for medium- and long-term credit. Since the proceeds of subloan recuperations would be relent under the project, only the costs corresponding to credit requirements net of recuperations (US$57.8 million, including US$45.7 million for Phase II areas and US$12.1 million for Phase I areas) were accounted as project costs. 4.11 By Year 5, an estimated 157,500 ha would have been included in the farm development plans (4.5 ha per farm), of which 101,500 ha would be under crops with financing from the credit program (2.9 ha per farm on average not including about 0.1 ha under coffee), in addition to pasture improvements and a large number of various animal species on an additional 52,500 ha (1.5 ha per farm). A distribution of estimated areas financed by activities and the phasing of the lending program and of recuperations of subloans are presented in Annex 6, Tables 4 through 9. 4.12 In order to ensure timely review of credit applications, disburse- ments and investment control, Caja Agraria as agreed annually with DNP/PAN-DRI, would designate or appoint credit inspectors as required, estimated at about 70 at full development (one per 400 beneficiaries) in the 53 Phase II agencies, together with district advisers (about 7) and one supervisor per Department (4), whose primary responsibility would be the DRI credit program, and provide them with appropriate transportation means and administrative support. An assurance was obtained at negotiations in this respect. 4.13 Marketing Development. The project would finance the provision of credit to individuals, cooperatives or other farmers' associations for (a) working capital for purchase of crops and inventories; (b) machinery and equipment for sorting, grading, packing, and storage; (c) infrastructure for gathering and storage; (d) exceptionally, transportation equipment; and (e) feasibility studies and technical assistance contracts. Groups, other than cooperatives, eligible to receive credit would be those in which at least 75% of the members are smallholders eligible for receiving credit under the project (para 4.09). Cooperatives eligible to receive financing would be those in which at least 50% of the members are eligible for receiving credit under the project. Exceptionally, whenever group marketing and processing  - 17 - has been shown not to be economically feasible for specific commodities in an area, and when no marketing as well as financing alternative exists, credit would be made available to individuals, identified by the Marketing and Processing Advisory Service, willing to offer project farmers favorable terms and stable markets, provided they market or process a large proportion of the production of DRI beneficiaries in the area. 4.14 Phase II Areas. Credit requirements for working capital have been calculated assuming that, by Year 5, 15% of direct beneficiaries would partici- pate in group marketing operations, for about 20% of the production sold. Priority would be given to established cooperatives and to a few products of major importance in each area. At the district 1/ or municipal level, emphasis would be put on produce gathering posts. It is expected that seven posts would be financed (one in each district) in addition to about nine primary posts at the municipal level. The purchase of transportation equipment (about five vehicles per department) would be exceptional and reserved to groups that handle large volumes regularly. 4.15 Phase I Areas. In Phase I areas, credit would be provided to the 32 marketing groups formed during the implementation of the first project and to several of the cooperatives existing in the area, which, because of Caja Agraria's statutory limitations on cooperative lending (Caja Agraria cannot lend to cooperatives amounts exceeding 25% of their paid-in capital), have not been able to receive credit funds during the first project. 4.16 Processing Development. The project would provide financing for the establishment, expansion or diversification in Phase I as well as Phase II areas of about 40 small food processing industries (such as jam, preserves or sauce manufacturing), which would benefit the project areas by increasing rural productivity; by permitting a more efficient use of crop and livestock products; and by providing additional employment to rural workers. This type of "cottage industry" would have an average sub-project cost of about Col$ 700,000 (US$11,500) and an average subloan amount of about Col$ 600,000 (about US$10,000). The project would also finance the establishment, or expansion of about 15 larger size agroindustries (such as those manufacturing ingredients for animal feed or small dairy plants) aimed at providing stable outlets and prices to a large number of farmers in a given area. This type of sub-project would have an average cost of about Col$ 6 million (about US$100,000) and require an average subloan amount of about Col$ 5 million (about US$80,000). The Advisory Service for Marketing and Processing (para 4.24) would help prepare and review their feasibility. 4.17 Subloans would be made to cooperatives, farmers' groups and indivi- duals for construction, machinery and equipment, permanent working capital, feasibility studies and technical assistance contracts for enterprises located in project municipalities in a proportion expected to be about 50% working capital, 35% for machinery and equipment and 15% for construction and other expenditures. Groups eligible for marketing credit would also be eligible to receive credit under this component. In order to be eligible, individuals would have to either qualify as direct beneficiaries of the project or meet the criteria referred to in para. 4.13 above. 1/ A district consists of about nine municipalities. There are seven districts in the project Phase II areas.  - 18 - 4.18 FINANCIACOOP is allowed to lend to cooperatives, precooperatives, groups without legal personality as well as to individuals, and would be responsible for credit for marketing and processing. However, all subloans for marketing and processing would, at least initially, need to receive the approval of the departmental technical committees (paras. 5.11) and of the DNP/PAN-DRI regional director. Advisory Services and Training 4.19 Farm Advisory Service. The project would finance the costs over five years of local adaptation trials, demonstration plots and technical assistance services to be provided to the beneficiaries of Phase II areas. More specifically, the project would finance: (a) the cost of field and other staff as described in paragraph 4.20; (b) about 96 four-wheel drive vehicles, 359 motorcycles, field and office equipment; (c) inputs and materials for the adaptation trials and demonstration plots; (d) training of field agents; and (e) all other incremental recurrent expenditures. 4.20 ICA's field staff requirements in Phase II areas have been calculated assuming a ratio of farmers to agent of 45 to 1 the first year, 60 to 1 the second year and 80 to 1 subsequently. Estimated staffing, all considered as incremental, by year 5 is as follows: Research Staff Technical Assistance Staff ICA regional directors 3 Professionals 9 ICA district directors 9 Assistants 9 Professionals 70 Skilled workers 9 Sub-professionals 350 Administrative staff 17 Sub-total 27 Sub-total 449 Additional staff at ICA-DRI headquarters would include two professionals and two support staff. A monitoring and evaluation unit would be formed in ICA, with one director, two professionals and two secretaries. 4.21 ICA would have sole responsibility for the design and testing of technological packages. However, under the supervision of ICA, extension work and farm credit planning could also be the responsibility of some SDAs selected on a case-by-case basis, as under the first project, and of INCORA in veredas where over half of the potential beneficiaries are INCORA settlers (para 2.08). Where INCORA and the Secretariats participate, only their exist- ing staff would be used, so that personnel costs would not be charged to the project. While all farmers within the selected veredas would be eligible for receiving technical assistance, it is expected that such services would focus on beneficiaries receiving credit from the program. 4.22 In Phase I areas, by December 1981, after five years of implementation of the ongoing project, the average ratio of farmers to agents was 90 to 1 (versus 100 to 1 expected at appraisal) and the total sub-professional staff involved in technical assistance was 354.  - 19 - It is estimated that the proposed additional 7,000 benefiaries could be attended by the existing staff over the five-year period 1982-86, according to the schedule of incorporation presented in paragraph 4.08. Therefore, the project would not finance additional technical assistance in these areas. However, an assurance was obtained that the Government would provide them with the necessary farm advisory services. 4.23 The extension staff would be responsible for the preparation of farm plans to be used as a basis for the provision of technical assistance and for the projections of credit requirements of individual farms over a period of four to five years. Such work, however, is presently taking an excessive proportion of technical assistance time and substantial time savings are possible which could result in lower technical assistance costs. Consequently, for farms with less than 2 ha, the farm development plan would consist of very simple financial projections prepared by Caja Agraria or the Advisory Service, normally based on model budgets prepared and periodically updated by ICA, for activities and technological levels typical to each area. For farms with more than 2 ha, the Advisory Service would prepare individual integrated farm plans. With respect to the provision of technical assistance, while all farmers would benefit from technical training provided by SENA and group technical assistance organized by the Advisory Service, individual technical assistance would be provided only to those farmers with more than 2 ha. At negotiations, assurances were obtained that by July 1, 1983, ICA, in coordination with DNP, Caja Agraria and SENA, would have developed and started application of appropriate methods of group technical assistance and farm planning suitable to farms with less than 2 ha. In the meantime, farm planning and technical assistance would continue to be provided to all farmers individually. An assurance was obtained during negotia- tions that the above arrangements for individual and group technical assistance would be accepted by FFAP as meeting its technical assistance requirements for rediscounted subloans (paras 1.08 and 4.55). 4.24 Advisory Service for Marketing Operations and Rural Industries. Under the first project, CECORA had responsibility for technical assistance for marketing operations (including credit planning), but its performance has been disappointing because of frequent changes in management, instability of generally inexperienced staff and lack of operating funds (Annex 1). Under the proposed project, CECORA would be responsible only for the operation of the market intelligence service. FINANCIACOOP would take over the responsibility for technical assistance for marketing and processing and SENA would handle promotion of group marketing and training. Other experienced institutions such as the Diversification Program of FEDECAFE, (PRODESARROLLO), which has been actively involved in technical assistance for marketing (including price information) and processing of small-scale farmer produce from the coffee or adjoining areas since the early 1970's, or IDEMA, would be invited on an ad-hoc basis to participate in the identification and design of sub-projects. Coordi- nation of those institutions would be the responsibility of DNP/PAN-DRI, which would have a specialized marketing division (para 5.05), and through a marketing coordination sub-committee (para 5.11). 4.25 The project would, over a period of five years, finance the incremen- tal costs to CECORA of operating the market intelligence service in the Phase II areas. Financing would cover: (a) at headquarters, five additional staff, office furniture and equipment, per diem and other recurrent expenditures; (b) nine additional staff in two regional offices (one office in Bogota with two staff  - 20 - stationed in Ibague and Neiva, and one office in Manizales), two 4-wheel drive vehicles, office equipment and furniture, per diem and other recurrent expenditures; and (c) renting of telex lines and the cost of radio messages and publications. 4.26 With respect to FINANCIACOOP, the project would, for Phase II areas, finance: (a) 50% of the headquarter's costs of a technical assistance unit, including the salaries of six staff and the cost of one vehicle, office furniture and equipment and associated per diem and recurrent expenditures; and (b) the cost of four departmental offices, each including five staff, one vehicle, office equipment and furniture, per diem and associated recurrent expenditures. 4.27 The signature of a subsidiary agreement between the Borrower and FINANCIACOOP, satisfactory to the Bank, stating their respective responsi- bilities in the financing of credit operations (para 4.18) and the provision of technical assistance for marketing and processing in Phase II areas, the draft of which was reviewed and commented upon by the Bank during negotiations, would be a condition of effectiveness. With respect to the Phase I areas, an assurance was obtained at negotiations that the Government would provide the beneficiaries borrowing under the project for marketing and processing, with the required advisory and price and market information services. 4.28 Advisory Service for Natural Resources. The project would finance the costs of technical assistance services to be provided by INDERENA to Phase II beneficiaries, for: (a) the planting by farmers of the equivalent of about 5,700 ha of eucalyptus trees or fast-growing native species; (b) the construction and stocking of about 300 fish ponds, with either tilapia or trout; and (c) the planting of about 100 ha of trees around threatened potable water sources as a protective measure. More specifically, the project would finance a total staff (all additional) of 55 at regional level at full development, including eight professionals, 33 sub-professionals, and 14 support staff. The project would also finance eight four-wheel drive vehicles, 33 motorcycles, field and office equipment and furniture, all associated recurrent expenditures, and the cost of the subsidy for tree seedlings (para 4.29). 4.29 Half of the area planted with trees would be expected to be grown by farmers for their commercial value and these would require credit and indivi- dual supervision. The other half would be planted with subsidized seedlings distributed by INDERENA at about half of their cost as woodlots to supply the family fuelwood or live fences. Seedlings would be produced by INDERENA in its existing nurseries or bought from nurseries of other organizations in the project area, all of which have sufficient capacity. Fish fingerlings would be purchased from INDERENA's existing production facilities. 4.30 Finally, in coordination with ICA, INDERENA would review the soil and water conservation implications of ICA's technical recommendations and agree with ICA on simple, corrective measures to be incorporated in ICA's technical packages and in SENA's training courses. 4.31 INDERENA has just completed a full internal reorganization, which was embodied in Presidential Decree 72 of January 15, 1982, within which the responsibility for managing the DRI sub-program has been assigned to a special division of a Sub-direction of Implementation of Integrated Programs. This sub-direction will orient and control DRI-related activities at the field level, which will be carried out by special sections within INDERENA's regional offices. This new structure clears up the previous confusion of responsi- bilities over the sub-program, which has been a major cause for unsatisfactory performance under the first project.  -21 - 4.32 Training and Community Organization. SENA would be responsible for the training component of the project, which is designed to complement and support the action of the various advisory services in Phase II areas. Such training would consist of: (a) about 700 induction/organization courses to inform all potential direct and indirect beneficiaries of the selected communities of the objectives and operation of the program and to organize community representation in local (vereda) assemblies; (b) about 3,200 technical courses in crop and livestock production for approximately 46,000 participants. Topics would be selected in consultation with the community through the Vereda Assembly and with the advisory services; (c) 52 induction and 116 technical upgrading courses for the staffs of the executing agencies for about 1,040 and 2,330 participants, respectively. The technical courses would emphasize farm management, soil and water conser- vation practices, credit planning, group organization, technical transfer methods and group marketing; and (d) promotion of group marketing and training of cooperatives and other groups in administration and management, cooperativism, accounting, produce handling and food technology; and training of farmers in produce quality improvements, grading, packing and other produce handling practices. 4.33 The project would finance training over five and a half years, including retroactive expenses for training carried out in Phase II areas since February 1981. With respect to items (a) to (c) above, costs include financing of personnel expenditures, which in the peak year (1984) would provide for about 47 instructors and 24 support staff at regional level and an additional six staff members at headquarters; about nine four-wheel drive vehicles, 38 motorcycles, four mobile units, audiovisual equipment, teaching materials and inputs and all associated recurrent expenditures. With respect to promotion and training for marketing and processing (item (d)), the project would finance the cost of four departmental units, each one consisting of one coordinator and three instructors, with one vehicle, audiovisual equipment and materials, transportation and subsistence allowances for trainees and other recurrent expenditures, and of a headquarter unit, with two advisers, one secretary, and per diem allowances. Infrastructure 4.34 Rural Roads. FNCV would be responsible for the rural roads component. The project would finance the design, construction and supervision of about 270 km of new rural roads and the improvement of about 270 km of existing rural roads in Phase II areas. It is estimated that each kilometer of new or improved roads would benefit about 580 ha of agricultural land in the hands of small-scale farmers. A determining factor in the final selection of roads by DNP would be the cost per head of population benefited, which would be on average equivalent to about US$37 in March 1982 constant terms. In March 1982 terms, the average cost per km of new construction was estimated at US$40,000 and of rehabiliation at US$19,000 (excluding designs and supervision). Selection criteria under the DRI program are consistent with those applied for the selection of roads under a Bank-financed Rural Roads Project (para 1.23).  - 22 - 4.35 Rural roads designs are determined by FNCV Regulation No. 448 of- April 10, 1975, which are reasonable and no modifications are envisaged under the project. Civil works would all be contracted out. Engineering and super- vision would be either contracted out or carried out by FNCV. 4.36 Potable Water Supply. INS, or the SSSs under INS supervision, would be responsible for the implementation of this component which would bring drinking water to about 52,000 people (about 8,500 families) living in about 126 rural communities of Phase II areas. The project would finance construc- tion costs, and an additional 17% to cover the cost of INS supervision and administration and 4% for the preparation of studies and designs. 4.37 Each system would serve an average of about 70 households (400 persons) through individual house connections. The great majority of these systems would be new constructions, but some would be extensions or involve the upgrading of existing systems. The majority of the schemes would be fed by gravity, since most of the project area is located in or near mountainous areas. A small number of systems would require pumping either from surface water sources or shallow wells and a few deep wells would be drilled. 4.38 All systems would be designed following INS-established criteria, which are acceptable. Design values for daily demand, including losses, vary from 80 to 150 liters per capita, sufficient to meet needs for human consumption. Per capita investment would, in constant March 1982 terms, average the equivalent of US$140, except for deep-well systems, for which it would average US$185. 4.39 While most systems would rely on high quality water sources and would not require treatment, water derived from sources not meeting World Health Organization Drinking Water Standards regarding bacteriological contam- ination would at least be disinfected. INS is currently carrying out studies to identify solutions to the problem of disinfecting and to determine the appropriate physical treatment for rural water supply systems. By December 31, 1983 INS would, to the satisfaction of the Bank, submit a plan defining its strategy for providing cost effective disinfection for systems fed by bacteriologically contaminated water sources and would promptly carry out this plan in the Phase II municipalities. An assurance was obtained in this respect. 4.40 Rural Electrification. The project would finance the provision of electrical services to about 4,800 households in the Phase II project areas. The veredas chosen for the program would be close to existing electrical lines and be sufficiently populated so that the investment per house connection would average US$1,100 (in March 1982 constant terms). Electrical installations would be limited to: (a) extending existing 13.2 kv transmission lines which are within 5 km of a vereda; no higher voltage transmission lines or substa- tions would be financed; (b) installing 13.2 kv and low voltage distribution lines (120/240 volts) with the pole-mounted transformers inside the vereda to bring low voltage electric service to the houses; and (c) constructing the installations inside the houses. 4.41 ICEL would be responsible for overall implementation of the component and for procurement of materials. The "electrificadoras" would be responsible for contracting the works and subsequently for operating and maintaining the systems.  - 23 - Social Services 4.42 Health Services. MINSALUD would have overall responsibility for this component, which would aim at establishing a total of about 82 primary health care units to achieve an 80% coverage of the population in the munici- palities of Phase II areas. The project would finance: (a) repairs to 60 existing health posts and eight existing health centers; (b) construction of about 12 new health posts and three new health centers; (c) repairs to the primary health care units of 10 existing local hospitals to serve as a base for the primary health care system; (d) all the necessary equipment and materials for these facilities, including 27 ambulances, 76 motorcycles or bicycles for the field medical staff and communication equipment; (e) initial training of para-professional staff ("promotoras") and (f) in-service training of all staff, with emphasis on the organization and delivery of primary health care services in rural areas. 4.43 The project would finance operating costs, including personnel, over four years, and four vehicles for four departmental supervision teams, one per department of Phase II areas. All other operating costs would be borne by MINSALUD (para 5.19). These teams, to be attached to the SSSs, would consist of a physician, a registered nurse, a sanitation engineer and a driver. They would be responsible for supervision and quality control and support to the primary health care staff, physical and financial control of primary health care expenditures, and monitoring and on-going evaluation of the health component at the departmental level. The sanitation engineer would collaborate with INS or the sections of the SSSs responsible for checking the quality of water provided to the rural communities. 4.44 Following an evaluation of the primary health care system which was carried out in 1979 as part of the Government's commitments under the Integrated Nutrition Improvement Project (para. 1.15), the Minister of Health appointed an advisory group within the office of the General Secretary to make policy recommendations, set up procedures and propose a plan of action for (a) a more rational location of health facilities, (b) improved physical, financial and managerial control over investment and recurrent expenditures in primary health care services, (c) supervision and training and (d) community participation. The advisory group has completed its working program, and policies satisfactory to the Bank have been adopted in most of these respects. However, at negotiations, assurances were obtained that by December 31, 1982, MINSALUD would present proposals, satisfactory to the Bank, for the establishment of mechanisms and procedures to improve the delivery of primary rural health care services, more specifically: (i) to provide adequate support from MINSALUD central level to the four departmental supervision teams; (ii) for the SSSs to maintain adequate physical and financial records of all expenditures in primary health care in the project areas; (iii) for the four supervision teams to provide adequate professional and administrative support to the primary health care medical staff in the health posts, health centers and local and regional hospitals of the project areas; (iv) for the four supervision teams to maintain a set of performance indicators to monitor the coverage and quality of the service provided under the project; and  - 24 - (v) to carry out in-service training of the health staff in the project departments in the objectives, methods and procedures of primary health care delivery. 4.45 Primary Education. The project would finance the first phase of the implementation of the Government's ten-year program to upgrade the quality of rural primary education, in the project municipalities of the departments of Huila (during the first three years) and Tolima (during the last two years), which are the most deprived of the four project Departments in terms of educational achieve- ments (para 2.15). This program centers around: (a) the use of already developed educational inputs aiming at providing the full five-year primary cycle in small, incomplete, rural schools with one or two classrooms and teachers ("Escuela Nueva") and at upgrading the quality of education offered in already complete schools, with five grades, classrooms and teachers ("Experimentacion Curricular"); and (b) the decentralization of school administration, supervision and planning at the school district level ("Nucleos"), 1/ such districts receiving appropriate administrative and pedagogical support at the zone, department and national levels. The Bank is to support the first three-year phase of this national program through a sub-sector loan (paras 1.23 and 4.47). 4.46 The project would finance the implementation of the above-described packages in all the primary schools of about 80 Nucleos, selected for their high concentration of DRI Veredas, including: (a) the construction of, or repairs to, classrooms and water supply and sanitation facilities of existing schools; (b) the provision of school furniture and teaching materials; (c) training of teachers, supervisors, Nucleo directors, zone chiefs and department administra- tors; and (d) the provision of vehicles and office equipment for Nucleo directors, zone chiefs, supervisors and department administrators. 4.47 The responsibility for management and implementation would be shared among the various structures at national, departmental, zone and nucleo levels which have been identified to carry out the Rural Basic Education Sub-sector Program of the Ministry of Education (Plan de Fomento Educativo para las Areas Rurales y Centros Menores de Poblacion) and would be based on procedures and criteria, satisfactory to the Bank, applicable to the Subsector Program (as defined in Appraisal Report No. 3896-CO for a Rural Basic Education Sub-sector Project) with one exception. The exception would be the selection of Nucleos and the phasing of their incorporation, which would be the responsibility of DNP/PAN-DRI. At negotiations, an assurance was obtained in this respect. The proceeds of the Loan as well as counterpart funds from the National Budget would be channeled to the Fund of the Ministry of Education (FONDO/MEN), an entity with separate legal personality which would be the Borrower under the proposed Basic Education Sub-sector Project and the executing agency for this component. FONDO/MEN would transfer these funds to the FERs, which in turn would channel them to the regional representatives of ICCE, the SDE's and the CEPs (para 3.06) under their normal operating procedures. In addition to the signature of a subsidiary contract between DNP/PAN-DRI and FONDO/MEN, a condition of disburse- ment under the education component would be that implementation contracts, satisfactory to the Bank, had been signed between the FONDO/MEN and the Adminis- trative Boards of the FERs of Huila and Tolima. 1/ A "nucleo" normally consists of 10 to 15 schools.  - 25 - Project Administration and Management, Monitoring and Evaluation 4.48 In order to handle the eight new departments of Phase II, including the four Bank-financed Departments, the project would finance the hiring by the General Directorate of the PAN and DRI Programs in DNP (DNP/PAN-DRI) (para 5.02) of additional staff at headquarters as well as in the regional offices. At headquarters, the additional staff would consist of six profes- sionals, one assistant and two support staff; the project would also finance two vehicles for the group in charge of monitoring and all associated recur- rent expenditures. Since the headquarters' staff would dedicate about half of its time to the Bank-financed areas (four Departments out of eight), the Bank project would finance half of headquarters' costs. 4.49 At the regional level, the existing Regional Directors of the PAN Program would also become Regional Directors of the DRI program. In each regional office, the project would finance the cost of an assistant director for DRI, a statistical clerk, two-thirds of the cost of an engineer, two vehicles, office furniture and equipment, and all other associated recurrent expenditures, over a period of five years. 4.50 DNP/PAN-DRI would also draw on funds, provided through the project, totalling about US$320,000 for technical assistance contracts with individuals, consulting firms or with agencies such as the Interamerican Institute for Cooperation on Agriculture (IICA) or international research centers, needed to support and orient the work of the agencies in charge of technical assistance and training for marketing and processing (about 65 man-months in total), and for study tours and seminars. DNP/PAN-DRI would contract services for (a) monitoring and evaluating the cooperatives and other groups assisted and the work of the executing agencies; (b) identifying and studying agroindustrial processes; (c) financing special technical assistance services in produce handling; (d) identifying and studying export possibilities for specific products; and (e) organizing direct marketing links with chains of supermarkets or retail stores; (f) improving market information services; and (g) financing any study required for improving the effectiveness of the technical assistance services and training provided to the beneficiaries of the project. Finally, about US$50,000, would be used for study tours and seminars for the staff of the executing agencies and DNP and for members of the participating cooperatives and farmers' groups. 4.51 Finally, the project would finance the full incremental costs of project evaluation, including repeat surveys in Antioquia and Cauca, which are Phase I Departments. While detailed impact evaluation through comprehensive surveys would be carried out by a special division within the Agrarian Studies Unit of DNP, on-going evaluation and ad hoc studies would be carried out by the Evaluation Division of DNP/PAN-DRI. Since the evaluation units are already fully staffed, the project would only finance contracts with individuals or firms needed to carry out surveys or ad hoc studies (including the contracting of systems analysts, statisticians, surveyors, staff for verification, coding and key punching, programming services and computer services) for a total estimated cost of Col$ 7.5 million over five years (US$123,000) (Annex 4). At negotiations, an assurance was obtained that, by no later than February 28, 1983, DNP would have carried out and processed a socio-economic baseline survey in at least two of ICA's districts in the Phase II project areas; and that such surveys would be repeated no later than by February 28, 1987.  - 26 - Total Project Costs /1 (US$ million) Baseline Foreign Local Foreign Total Cost Exchange Production Farm Development - Phase II 31.1 14.6 45.7 32 32 - Phase I 8.2 3.9 12.1 9 32 Subtotal 39.3 18.5 57.8 41 32 Marketing Development - Phase II 2.4 0.6 3.0 2 21 - Phase I 1.1 0.3 1.4 1 21 Subtotal 3.5 0.9 4.4 3 21 Processing Development - Phase II 1.4 0.4 1.8 1 22 - Phase I 0.8 0.2 1.0 1 22 Subtotal 2.2 0.6 2.8 2 22 Subtotal Production 45.0 20.0 65.0 46 31 Advisory Services & Training (Phase II) - Farm Advisory Services 12.6 2.1 14.7 10 14 - Natural Resources Advisory Service 2.6 0.2 2.8 2 7 - Marketing & Processing Adv. Serv. 2.6 0.2 2.8 2 7 - Training 7.1 0.8 7.9 6 10 Subtotal 24.9 3.3 28.2 20 12 Infrastructure (Phase II) - Rural Roads 10.1 7.9 18.0 13 44 - Rural Electrification 3.1 2.1 5.2 4 40 - Water Supply 4.4 1.5 5.9 4 25 Subtotal 17.6 11.5 29.1 20 40 Social Services (Phase II) - Health Services 2.8 1.6 4.4 3 37 - Primary Education 11.1 1.8 12.9 9 14 Subtotal 13.9 3.4 17.3 12 20 = ~= = =5 Management, Monitoring & Evaluation 2.2 0.2 2.4 2 8 Total Baseline Costs 103.6 38.4 142.0 100 27 - Physical Contingencies 1.5 0.8 2.3 2 33 - Price Contingencies 20.2 7.9 28.1 20 28 Total Project Costs 125.3 47.1 172.4 122 27 /1 Updated to March 30, 1982.  - 27 - D. Project Costs 4.52 Total project cost, excluding beneficiaries' contribution in labor, are estimated at US$172.4 million, including contingencies. These costs include US$4.4 million in taxes (taxes on inputs purchased by farmers and taxes paid by some executing agencies which are not tax exempt for equipment and vehicles). Contribution of family labor to farm development is estimated at US$19 million, excluding contingencies. The foreign exchange component is estimated at US$47 million, or 27% of total project cost. Project baseline costs are updated to March 30, 1982. Physical contingencies equivalent to 2% of total baseline costs have been added, based on 10% of estimated costs of civil works for roads, water supply systems and rural electrification and education and health infrastructure. Price contingencies have been calculated separately for local and foreign costs, and a correction was also applied for the Bank's projected devaluation of the Colombian peso. An estimated annual phasing of project costs by components and a breakdown of project costs by category of expenditures are shown in Colombian pesos in Annex 6, Tables 10 and 11. Total project costs are summarized on the preceding page. E. Financing 4.53 The proposed Bank loan of US$53 million (including the front-end fee) would finance 30% of total project costs, excluding the value of labor contri- bution by beneficiaries. The Bank loan would finance the entire foreign exchange cost of the project, and US$5.1 million of local costs (3% of total project costs). Some local currency expenditures would be financed in order for the Bank to retain a meaningful participation in the extension of the DRI program to the new areas. 4.54 The beneficiaries' contribution to the cash costs of the project would be US$4.4 million (3% of total project costs). In addition, they would contribute US$23.0 million in labor (with contingencies), so that their total contribution would account for 14% of the gross project costs of US$195.4 million (total project costs plus the value of labor contributed by beneficiaries). Although the minimum contribution required toward meeting farm development costs would be lower (para 5.22), it is expected that beneficiaries would put up, on average, about 24% of farm development and marketing and processing development costs in cash and family labor. For potable water systems, the communities would be required to make an initial contribution of 15% to 20%, depending on their socio-economic status (18% on average), in the form of cash, labor and/or materials. For electrical distribution systems, beneficiaries would be required to contribute 25% of total costs, in cash or labor. Caja Agraria would make subloans to beneficiaries to finance their cash down-payment for electrification at terms and conditions similar to other DRI credit operations (para 7.09). Finally, the communities would be required to contribute 10% of civil works for health posts and centers and local hospitals. Their contri- bution to the physical upgrading of school facilities, which would vary according to the economic standing of the communities and the availability of local labor and materials, is expected to be at least 10% of such costs. 4.55 The Government would finance no less than 65% of subloans for farm development through Caja Agraria with funds to be provided from FFAP. The balance of sub-loan amounts would be provided by Caja Agraria out of its own resources. The Government would ensure that appropriate arrangements are  COLOMBIA SECOND INTEGRATED RURAL DEVELOPMENT PROJECT Project Financing (US$ million) Entities Beneficiaries Government FFAP Own Resources Bank Amount % Amount % Amount % Amount % Amount % Total Production Farm Development - - - - 37.5 65 20.3 35 - - 57.8 Marketing and Processing Development: (FINANCIACOOP) 0.7 10 2.2 30 - - 1.1 15 3.2 45 7.2 Subtotal 0.7 1 2.2 3 37.5 58 21.4 33 3.2 5 65.0 Advisory Services and Training Agriculture and Livestock - - 7.0 48 - - - - 7.7 52 14.7 Marketing and Processing - - 1.4 49 - - - - 1.4 51 2.8 Natural Resources - - 1.4 49 - - - - 1.4 51 2.8 Training - - - - - _ 3.8 49 4.1 51 7.9 Subtotal - - 9.8 35 - - 3.8 13 14.6 52 28.2 X Infrastructure Roads - - 9.0 50 - - - - 9.0 50 18.0 Water Supply 1.1 18 1.6 28 - - 3.2 54 5.9 Electrification 1.3 25 0.5 10 - - 0.5 10 2.9 55 5.2 Subtotal 2.4 8 11.1 38 - - 0.5 2 15.1 52 29.1 Social Services Health 0.1 3 1.8 41 - - - - 2.5 56 4.4 Primary Education 0.6 5 5.5 42 - - - _ 6.8 53 12.9 Subtotal 0.7 4 7.3 42 - - - - 9.3 54 17.3 Management, Monitoring and Evaluation - - 1.8 76 - - - - 0.6 24 2.4 Baseline Costs 3.8 3 32.2 23 37.5 26 25.7 18 42.8 30 142.0 Contingencies 0.6 2 7.0 23 7.9 26 5.5 18 9.4 31 30.4 I/ Total Project Costs 4.4 3 39.2 23 45.4 26 31.2 18 522 30 172.4 1/ Excluding the front end fee.  - 29 - made between FFAP and Caja Agraria to secure the proposed funding of credit operations (Schedule D). FINANCIACOOP would finance at least 12% of marketing and processing credit operations out of its own resources, the remaining 88% being financed by the Government, from the National Budget (up to 38%) and from the Bank loan (50%). SENA would also contribute 49% of the costs of the training component out of its own resources. ICEL and the "Electrificadoras" would finance about 10% of the cost of electrification, mostly as staff time needed to design the works and supervise their execution. all remaining funds would come from the national budget. A summary of the respective financing shares is shown on the preceding page. At negotiations, an assurance was obtained that the Government would provide, or would cause Caja Agraria and FINANCIACOOP to provide, all funds required to carry out the credit program of the project, as well as all funds needed after project implementation by the beneficiaries of the project to complete the planned development of their farms and enterprises. 4.56 The Government allocated funds in the 1981 and 1982 budgets to start a training program in the areas of the Second Project and initiate activity for most of the project components. These funds were, or are being, used under the programing criteria and procurement and disbursement procedures in force under the ongoing Bank-financed project. Most of the funds spent in 1981 were for training, technical assistance and designs and studies for civil works. Training of staff and communities started shortly after appraisal so that the DRI's objectives and institutional requirements would be well under- stood by the start of the project in 1982. Since experience under the first project has shown that the benefits of training are quickly lost unless immediately followed by tangible program actions, the Government included funds in the 1982 budget equivalent to the counterpart funding of the first year of the project. Therefore, eligible expenditures made in Phase II areas after February 1, 1981 under each one of the components would qualify for retroactive financing, for a maximum aggregate amount of US$10.0 million. The Bank share of such expenditures is estimated at US$5.0 million (9% of the total loan amount). F. Procurement Works 4.57 Civil works contracts not exceeding the equivalent of US$1 million, for the construction and upgrading of rural roads, water supply systems, electrical networks, health facilities and schools totaling US$35 million including contingencies, would be awarded according to local competitive bidding procedures satisfactory to the Bank, with foreign bidders having opportunity to participate. However, because of their small size and limited scope, these contracts would not interest companies not already operating in Colombia, or even those not already established in the regions where the sub-projects would be located. Goods 4.58 Four-wheel drive vehicles and motorcycles (US$3.1 million including contingencies), ambulances (US$520,000), pipes and pumping equipment for the water supply component (US$2.9 million) and electrical distribution equipment (US$3.8 million) totaling US$10.3 million would be procured through international competi- tive bidding in accordance with Bank Guidelines. Qualifying domestic manufacturers would receive a preference in bid evaluation of up to 15% or the import duty which- ever is the lower.  - 30 - 4.59 A wide range of field, office equipment and furniture, training and communication equipment, medical equipment, school furniture and teaching materials totalling US$7.1 million (including contingencies) would be procured in many dispersed purchases spread over five years under local competitive pro- cedures satisfactory to the Bank, with foreign bidders having the opportunity to participate, provided that each purchase, or appropriate group of purchases does not exceed the equivalent of US$150,000 and that, in aggregate, they would not exceed US$1.0 million. Farm inputs and equipment would be purchased by individual farmers and associations through normal commercial channels. A wide range of international and local manufacturers of vehicles, equipment, materials and agricultural inputs are represented in Colombia and competition is satisfactory and servicing and spare parts are available. Contract Review 4.60 All bidding packages estimated to cost over US$150,000 equivalent for equipment, or over US$700,000 equivalent for civil works, would be subject to the Bank's prior review of procurement documentation resulting in a coverage of about 10% of the total estimated value of works contracts and about 90% of contracts for goods. The balance of contracts would be subjected to random post review by the Bank after contract award. Experience under the first project has shown that the executing agencies are well aware of Bank require- ments and have generally followed procurement regulations satisfactorily. 4.61 Consulting and other contracted services would include about 90 man- months totaling US$570,000 (including contingencies) at an average gross cost of US$4,800 per month (in March 1982 constant terms). Though foreign consultants would not be excluded, it is expected that the expertise for required services (mostly marketing, processing and evaluation) would be available in Colombia. The services of consultants would be engaged in accordance with the "Bank Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" (August 1981). Assurances were obtained at negotiations that the procurement procedures specified in this and preceding paragraphs would be followed.  - 31 - G. Disbursements 4.62 Disbursements of the Bank loan would be made over a period of seven years, against the following expenditures: Amount Disbursement US$'000 percentage (1) Subloans for marketing and processing 3,150 50% of amounts dis- bursed by FINANCIACOOP (2) Civil works (including admin- istration, design and supervision) - Roads 9,900 50% - Water supply 1,850 50% - Electrification 900 50% - Health services 630 50% - Primary education 3,400 50% (3) Vehicles, equipment, office and school furniture and teaching materials - Advisory Services 1,500 100% of foreign expendi- tures and 60% of local expenditures - Training 420 " - Water supply 1,490 - Electrification 1,930 - Health services 1,300 - Education services 2,450 - Project management 100 (4) Consultants and other contracted services 500 100% (5) Operating expenses and training - Advisory services 9,340 50% - Training 3,490 50% - Health services 630 50% - Education services (training only) 1,420 50% (6) Unallocated 7,817 (7) Front-end fee 783 TOTAL 53,000  - 32 - 4.63 Standard documentation would be required for disbursements, estimated at US$14.0 million including contingencies, against vehicles, equipment and furniture, consulting services and, for contracts above US$200,000 equivalent, against civil works. Statements of expenditures would be used for disbursements, estimated at US$38.2 million, against all other expenses, including subloans (US$3.7 million), civil works (US$16.1 million) and recurrent expenditures (US$18.4 million ). Supporting documentation would be retained by the executing agencies for periodic review by DNP and Bank supervision missions. Disbursement Schedule 4.64 Disbursements would be made according to the following schedule, which is generally consistent with experience under the first project and disbursement profiles of similar projects in Latin America, assuming project effectiveness in September 1982: Bank ------------------------ (US$ million) -------------