Colombia - Agricultural Research and Extension Project

Document of The World Bank FILE o FOR OFFICIAL USE ONLY Report No. P-3579-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$63.4 MILLION TO THE INSTITUTO COLOMBIANO AGROPECUARIO WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR AN AGRICULTURAL RESEARCH AND EXTENSION PROJECT I May 12, 1983 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso - Col$ Average Calendar 1981 Average Calendar 1982 US$1 = Col$54.491 US$1 = Col$64.102 Col$1 = US$ 0.01836 Col$1 = US$ 0.0156 Exchange Rate Effective April 21, 1983 US$1 = Col$75.07 Col$1 = US$0.0133 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS CIAT Centro Internacional de Agricultura Tropical International Center for Tropical Agriculture CIMMYT Centro Internacional de Mejoramiento de Maiz y Trigo International Maize and Wheat Improvement Center CIP Centro Internacional de la Papa International Potato Center ICA Instituto Colombiano Agropecuario Colombi- Agricultural Institute IICA Instituto Interamericano de Cooperacion para la Agricultura Interamerican Institute of Cooperation for Agriculture DRI Desarrollo Rural Integrado Integrated Rural Development Program FFAP Fondo Financiero Agropecuario Agricultural Financing Fund PLANIA Plan Nacional de Investigacion Agropecuaria del ICA National Plan for Agricultural Research of ICA PLANTRA Plan Nacional de Transferencia de Tecnologia para la Agricultura National Plan for the Transference of Technology for Agriculture COLOMBIAN AGRICULTURAL INSTITUTE FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY COLOMBIA AGRICULTURAL RESEARCH AND EXTENSION PROJECT I LOAN AND PROJECT SUMMARY Borrower: Instituto Colombiano Agropecuario (ICA) Guarantor: Republic of Colombia Amount: Equivalent of US$63.4 million (including front-end fee) Terms: 17 years, including four years of grace, at the standard variable interest rate and other charges Project Description: The project is aimed at increasing the capacity of ICA to improve and expand its research and technology transfer activities so as to assist the country in raising its agricultural output at competitive costs. The project provides for the following components: (a) research infrastructure development for about two veterinary laboratories, and 15 existing research centers and stations and one to be established, including: (i) civil works, comprising mainly repairs and modifications to exist- ing buildings, and land preparation on research stations, including drainage and internal roads; (ii) equipment, comprising mainly scientific instruments-, laboratory equipment, vehicles, farm equipment and laboratory and office furniture; and (iii) library and documeatation services and computing facilities; (b) technical assistance and training comprising about 14.5 man-years of consultancy services, postgraduate degree training for about 270 staff, and short courses for a further 250 staff; and (c) incremental operating costs comprising the salaries and associated costs for about 300 new research staff, a salary premium for about 190 exist- ing and 230 new research workers to attract and retain high-level staff, and operating costs for vehicles, equipment and facilities included in the project. The project would be implemented over a six-year period, beginning in mid-1983. This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Risks The project faces no special risks, although realization of the expected benefits will depend on the pace of diffusion and adoption of new technologies by farmers; the rate at which experienced, former research staff can be reengaged and new staff trained; the efficiency of the mechanisms for research programming, administration, coordination and review; and the con- tinuity in support for agricultural research. These risks are reasonable considering especially (a) the closer link that will be established between agricultural research and extension based on the review of the national agri- cultural extension system to be financed under this project; and (b) the mechanisms for establishing and reviewing research priorities that are in place and that will be strengthened under the project. Estimated Costs: US$ Million Local Foreign Total Percentage Research Infrastructure Development 17.8 27.2 45.0 32 Technical Assistance 3.2 8.6 11.8 8 Incremental operating costs: - personnel costs 54.7 - 54.7 39 - general expenses 22.9 7.3 30.2 21 Baseline cost 98.6 43.1 141.7 100 Contingencies 55.3 9.4 64.7 46 - physical (1.5) (1.1) (2.6) (2) - price (53.8) (8.3) (62.1) (44) Toal Project Cost 153.9 52.5 206.4a/ Front-end Fee on Bank Loanl/ - 0.2 0.2 Total Financing Required 153.9 52.7 206.6 Financing Plan US$ Million Percentage Local Foreign Total ICA 143.2 - 143.2 69 Bank 10.7 52.7 63.4b/ 31 Total Financing: 153.9 52.7 206.6 100 a/ Including local taxes of US$3.5 million. h/ Including front-end fee of US$158 thousand. 1/ Bank loan assumed as US$63.4 million.  - iii - Estimated Disbursements: Bank FY 1984 1985 1986 1987 1988 1989 1990 Annual 2.9 17.3 20.6 12.6 6.3 3.4 0.3 Cummulative 2.9 20.2 40.8 53.4 59.7 63.1 63.4 Rate of Return: Because of the nature of the project, no rate of return has been calculated. Staff Appraisal Report: Report No. 4384-CO, May 12, 1983.  I  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INSTITUTO COLOMBIANO AGROPECUARIO FOR AN AGRICULTURAL RESEARCH AND EXTENSION PROJECT I 1. I submit the following report and recommendation on a proposed loan to Instituto Colombiano Agropecuario (ICA) with the guarantee of the Republic of Colombia, for the equivalent of US$63.4 million to help finance an agri- cultural research and extension project. The loan would have a term of 17 * years, including four years of grace, will bear a front-end fee of US$182 thousand and carry interest at the rate of 1/2% per annum over the cost of the Bank's Qualified Borrowings. PART I - THE ECONOMY 2. An Economic Report on Colombia (3556-CO) was distributed to the Executive Directors in September 1981. An economic mission visited Colombia in July 1982 and its report will be distributed to the Board shortly. This section reflects the mission's major findings. Country data sheets are presented in Annex I. Background 3. The Colombian economy has become more resilient to external shocks as a result of the structural changes that have occurred over the past thirty years. Rapid economic growth has resulted in a substantial structural trans- formation of the country from a predominantly rural and self-contained eco- nomy to a more diversified urban, industrial, services and open economy. Colombia has reached a point where population pressure on land no longer increases much, if at all. Public sector investment and output now play a greater role, primarily as a result of increased activity on the part of decentralized agencies and public enterprises. Also, non-coffee exports, particularly exports of manufactured goods, expanded rapidly and the range of products sold abroad widened considerably. The growing urban-industrial- services oriented economic activity and a rapid expansion of surplus labor in rural areas attracted by higher wages and better services in the cities has given rise to rapid rural-urban migration. This phenomenon, together with the increased participation of women in the labor force, has been instru- mental in reducing poverty and improving income distribution over time. Financial and capital markets have evolved pari-passu with the growing needs of the economy, and Colombia has become an active participant in inter- national capital markets.  4. Real GDP per capita rose by about 2.4% on average during the 1950-81 period, with each succeeding decade registering greater gains in per capita income. This was the result of lower population growth, which after having remained in the 3.0% to 3.5% range during the 1950s and early 1960s, declined dramatically after 1965 as a consequence of a sharp fall in the fertility rate. Greater economic and educational opportunities for women, rapid rural-urban migration, rising per capita income and increased effec- tiveness of family planning programs contributed to the decline in fertility. Colombia's population is presently growing at an annual rate of 2.0%. As a result of the high proportion of women now entering childbearing years, this rate of population growth is likely to continue until the early 1990s. 5. The combination of rising per capita income and expanded public services has brought about a significant improvement in the welfare of the poorest, in absolute and relative terms. As a result of increased sanitation control, improved diets and better health care, the crude death rate fell by about 50% and life expectancy rose from 48 years in the early 1950s to 63 years currently. The child mortality rate declined from 11 per thousand in the early 1960s to 4 per thousand in the late 1970s. Infant mortality fell to 56 per thousand in the late 1970s, from about 124 per thousand in the early 1950s. School enrollment ratios have increased substantially at all grade levels since the 1960s and, by the late 1970s, 79% of urban children aged 7 to 14 were enrolled in school. The poorest income groups have experienced the greatest increases in electricity and water services in recent years and have benefitted more than the average of the population from services of the national health system. In spite of this progress, Colombia remains largely underdeveloped, with a relatively small modern sector super- imposed on a broad, traditional and economically poor base. Development has been concentrated in relatively few areas of the country, public services are still not available to many of the rural and urban populations and unemploy- ment and underemployment are relatively high. The coverage of health care and water supply requires further improvement, and adequate housing is not available to a substantial portion of the population. Rapid migration to the large and medium-sized cities has created urban development problems, with attendant social difficulties. Moreover, in spite of the steady increase in per capita income over the past 30 years, substantial efforts are still required to improve and extend the benefits of development to the poorest income groups. 6. In large part, the achievements of the past 30 years were the results of government efforts to stimulate the productive sectors, provide the required economic and social instrastructure and establish an effective institutional base in the economy. In the 1950s and early 1960s, development policy favored import substitution supported by high tariff protection and the provision of economic infrastructure by the public sector. It was during this period that the country's major communication and transportation net- works were developed and the transformation to a semi-industrial economic structure began in earnest. By the mid-1960s, the prospects for further import substitution were substantially diminished, and the country was con- fronted with great economic uncertainty, arising from the fact that economic activity and the balance of payments were heavily influenced by developments in the world coffee market. In order to ease this constraint, during 1967 the authorities adopted an outward-looking development strategy, expanding  - 3 - and diversifying exports and, among the export markets, increasingly tapping the Andean Group countries. Export promotion policies, including frequent small exchange rate devaluations, export tax rebates and other export incen- tives were introduced and the authorities began lowering tariffs somewhat and freeing capital markets from controls as means of raising efficiency and increasing the competitiveness of Colombian goods in external markets. These measures were highly successful in relieving the foreign exchange constraint and stimulating growth and employment. However, by the mid-1970s the economy was once again experiencing difficulties caused primarily by the world recession and by excessive Central Bank financing of the Central Government's overall fiscal deficit. Recent Economic Developments 7. In late 1974, the Government introduced a wide range of measures designed to correct the structural and policy weaknesses prevailing in the economy at that time. Before these reforms were fully effective, the economy was subjected to strong inflationary pressures arising from a sharp increase in world coffee prices. The increased receipts from coffee exports, together with some official surrender of foreign exchange from illegal exports, caused a turnabout in the balance of payments. Incomes rose rapidly and stimulated aggregate demand; inflation accelerated. Economic growth also accelerated, and unemployment fell substantially, both in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated overall surpluses averaging about 1% of GDP during the 1976-78 period and, by the end of 1979, net official international reserves had risen to about US$4.1 billion, equivalent to about 12 months imports of goods and non-factor services. 8. While beneficial in many respects, the foreign exchange boom had a somewhat negative impact on the evolution of the Colombian economy, largely as a consequence of the need for measures to stabilize the economy. Public investment was curbed, thereby delaying some badly needed additions to econo- mic and social infrastructure. The rate of currency devaluation was slowed, and the conversion of export receipts into pesos was delayed to moderate the growth of domestic demand, with adverse effects on export expansion and diversification. Also, the Government was compelled to maintain high reserve requirements and expand controls over credit thereby reducing, in real terms, the financing available to the private sector via the official capital market. 9. The stabilization measures were virtually unchanged from early 1977 through 1979 and were partially successful in restraining aggregate demand growth; but relatively high inflation persisted. In response to the increas- ing stabilizing effects on aggregate demand and the troublesome financial market distortions caused by inflation and the extended period of monetary restraint, the authorities began in late 1979 to adjust the stabilization program. The rate of peso devaluation was advanced to increase export incen- tives and reduce borrowing abroad, and in early 1980, credit restraints were relaxed by lowering reserve requirements. At the same time, interest rates on time deposits captured by commercial banks and development finance companies--and on lending therefrom--were freed from controls. To offset the inflationary effects of these measures, the authorities further liberalized import payments and adopted the policy, supported by the emission of new  - 4 - short-term certificates, of not expanding the subsidized selective credit operations of the Central Bank in excess of the resources captured from private savings for this purpose. The authorities also increased the sur- veillance and control of the illegal export trade. The effects of the above measures were not immediately noticeable. Real GDP growth declined to 4% in 1980, unemployment started to creep up, and inflationary pressures continued. 10. In 1981 the external economic situation took a turn for the worse and the problems continued into 1982. Real GDP growth which had decelerated to 2.5% in 1981 fell to 1% in 1982. Agricultural output was hard-hit in 1982 as the production of coffee, cotton and oil seeds dropped sharply as a result of low international prices, reduced fertilizer use and adverse weather. Industrial activity remained stagnant on account of depressed aggregate demand, and unutilized capacity continued to increase, particularly in manu- facturing. After experiencing a surplus for six years, a deficit emerged in the resource balance in 1981 of about US$1.5 billion, with a similar outcome estimated for 1982. The latter year's deficit resulted mainly from a drop in real exports by about 6%: major reasons were the slowdown in world demand and the reduction in Colombia's coffee export quota in the International Coffee Agreement. Although net foreign exchange reserves declined by about US$800 million, Colombia's net international reserves were still equivalent to nearly eleven months of imports of goods and non-factor service at year end. Inflation began to slow at the end of 1982, leading to a 25% average for the year. Towards the end of 1982 the Government introduced a series of measures designed to stimulate aggregate demand. The rate of peso devalua- tion was accelerated to improve competitiveness abroad, the housing construc- tion industry was provided with incentives to mobilize an increasing amount of resources, open market operations were discontinued to increase liquidity in the economy, and in early 1983 the stabilization measures introduced in 1977 began to be dismantled, while at the same time the Government proposed legislation designed to reduce the fiscal deficit. Development Strategy 11. The Government's strategy for accomplishing its development objec- tives is set forth in the recently formulated Estrategia Global de Desarrollo. This strategy emphasizes growth with equity with the purpose of expanding the benefits of development to Colombia's population. This is to be achieved through increasing participation of all social and regional groups in the process of economic growth. The strategy also places high priority on the resumption of growth while maintaining price stability. The strategy strengthens the previous emphasis on export promotion as a means of supplementing domestic demand and assuring balance of payments stability, and on policy measures designed to increase economic efficiency and raise insti- tutional capacity. It proposes a continuation of the large effort in public investment, giving high priority to energy and agriculture projects and to the provision of transport infrastructure. Economic decentralization, regional autonomy and the uniting of regional growth centers through improved transport, communication and financial links are directed towards creating an integrated national market. The development plan's strategy also places emphasis on the promotion of both small-scale and commercial agriculture as a means of diversifying and increasing exports, assuring adequate domestic food  - 5 - supplies, holding down inflation and contributing to the Government's nutri- tion and welfare goals. Industrial policy objectives are to provide an envi- ronment of certainty, along with adequate credit and infrastructure, so that entrepreneurs are encouraged to invest and expand output. Because of its benefits in opening foreign markets, creating employment and bringing in new technology, private foreign investment is to be encouraged. The financial sector is also to be strengthened. The Government's approach to helping the poor takes on a new orientation in the development plan's strategy. Its efforts are focussed upon improving efficiency in the use of resources, broadening coverage of services and strengthening the social service institu- tions. Programs in the housing, health, and education sectors are to be better focused and integrated, and selected low income and disadvantaged groups, such as workers in the informal sector, children and unemployed youth, are singled out for special attention. Combined with a significant expansion in construction of low-income housing and the extension of the Integrated Rural Development (DRI) program, the new directions given to social programs are expected to raise significantly the welfare of low income groups in Colombia. 12. Colombia became a net oil importer in 1976, and by 1984 petroleum imports are projected to absorb about 21% of total merchandise exports. In the absence of rapid energy development, energy shortages could become a major constraint on growth later in this decade. Resolution of the energy problem depends on the country's success in developing its abundant domestic energy resources--hydroelectricity, coal and natural gas--and also upon increasing petroleum exploration and development. The strategy for doing this will require energy pricing policies that rationalize consumption with energy resource availabilities, a least cost program of investments, suffi- cient domestic and external financing for these investments, strengthened sector institutions, improved program execution capability and rapid carrying out of investments. Although planning and policy making have improved sub- stantially in many energy sector institutions in recent years, further improvements in overall sector planning and coordination are needed. A recently completed National Energy study carried out by the Government is providing the basis for seeking such improvements. Additionally, recent oil pricing decisions have gone a considerable way towards providing the correct signals for regulating consumption and encouraging production. The prices paid to producers (primarily foreign companies) for "incremental" and "new" crude provide adequate production incentives, and the retail prices of petro- leum products have been increased substantially in recent years, which on the whole reflect international levels. 13. Colombia's agricultural growth performance has slowed down markedly in recent years. Both demand and supply constraints have been responsible for this. To increase output, utilization of additional acreage for cultiva- tion is projected to involve greater investment than in the past, implying the increasing need to pursue options of yield improvements. In addition to productivity gains, additional land could and should be brought under irriga- tion and/or drainage for more intensive cultivation. Watershed management and forestry development should also become integral parts of a long-term strategy for growth and for conserving the natural resources. The generation and delivery of technological innovations should receive priority in the array of long-term measures. Research and extension institutions are in need  -6- of rehabilitation and strengthening. Marketing constraints also need to be relaxed if higher production is to be sustained. Sufficient credit availabi- lity for production and marketing is also essential. Recently the Government initiated a major policy redirection to address these issues and the develop- ment plan assigns a key role to future investments in the sector. 14. Colombia's high transportation costs and inadequate services could become a constraint on economic growth, affecting particularly the develop- ment of the country's vast coal reserves and its agriculture. The State Railway is in poor condition and the road network needs maintenance and reha- bilitation. The authorities have begun to take steps to improve the country's infrastructure and the development plan assigns an important share of future investments to the sector. An important part of this effort is the ongoing Rural Roads, Railway Rehabilitation, and Highway Sector Projects. Investment and its Financing 15. A large increase of public sector investment will be required in the next several years to carry out the development strategy outlined in the development plan. Over the 1983-86 period, such investment is expected to increase by about 8% p.a. in real terms, The energy and transportation sectors are expected to account for the bulk (about half) of this investment; however, sizeable real increases in investment are also expected in the small- and medium-scale agriculture, housing, nutrition and health, industry (including mining), water and sewerage, and education sectors. Overall, public fixed investment is projected to average 9% of GDP during the 1983-86 period, and is expected to total Col$1,800 billion (about US$15.3 billion). Private investment will have to increase also during this period to provide the goods and services required by the expanding economy. 16. This increase in investment will demand a major resource mobiliza- tion effort on the part of Colombia's public sector. The buoyancy of the tax system (excluding coffee tax revenues and receipts from earnings on foreign exchange holdings), which has declined in recent years, will have to be increased through new taxes and better tax administration, resources will have to be used more efficiently, and the charges levied for public services will have to be raised substantially in real terms. A package of measures to tackle some of these issues has been recently presented to Congress for its approval. Since this effort is expected to coincide with increased private sector demand for investment resources, the importance of measures to expand domestic savings cannot be over-stressed. The recent capital market libera- lization should encourage savings. A significant increase in voluntary private savings is not likely, however, as long as inflation remains high. Consequently, stabilization remains a sine qua non for the country's future growth and development. Growth and Balance of Payments Prospects 17. Given the country's strong resource base and sound economic manage- ment, Colombia's growth prospects for this decade are reasonably good and significant advances in economic welfare are anticipated. However, because of the decline in coffee prices and the weakening in exports caused by the international recession, in addition to the need to increase imports to  develop the country's resource potential and restore higher economic growth, the current account deficit of the balance of payments is projected to average US$2.7 billion per year during 1983-86, equivalent to 6% of GDP. Over a third of the deficit is projected to be financed by reducing foreign exchange reserves and by direct foreign investment. By the end of this period, net official international reserves would have fallen to a level slightly over four months of imports of goods and non-factor services (a level which is adequate for Colombia) without prejudice to the country's creditworthiness. This should be sufficient to support an average growth of real GDP of 4.2% during this period. Beyond 1986, the current account deficit should improve as a result of increasing export proceeds (particu- larly coal) and a leveling-off of imports. The current account deficit would gradually fall to less than 4% of GDP by 1990, To achieve real GDP growth of 4.2% per annum during 1983-86, gross fixed investment will have to expand to about 25% of GDP, up from 19% in the early and mid 1970s and 22% in recent years, and to avoid too large an increase in foreign indebtedness, gross national savings would need to average about 20% of GDP. 18. Gross external capital requirements are projected to total US$11.7 billion in current prices for the 1983-86 period, for an annual average requirement of about US$3 billion. Net foreign investment is expected to account for US$1.8 billion during 1983-86e Direct capital inflows should provide about US$0.1 billion. The total of these inflows should provide about 16% of the gross external financing required. Of the remaining 84% (US$9.8 billion) about US$4.1 billion (over two-fifths), has been either com- mitted or is expected to be secured from multilateral and bilateral sources, while the difference, US$5.7 billion, will need to be borrowed abroad from financial markets.At the end of 1981, Colombia's public and publicly guaranteed external debt disbursed and outstanding amounted to US$5.1 billion, equivalent to 11% of GDP. The Bank/IDA share of this external debt was 23%. Reflecting the recently increased Colombian borrowing from commer- cial sources, this share is expected to remain below 25% during 1983-86. The public debt service ratio at the end of 1981 was 16% and is expected to climb to 23% by 1986, peak at about 28% in 1989 and then decline gradually. The World Bank's share in public debt service is expected to remain below 25% during 1983-86. With continued sound economic and financial management, Colombia is expected to maintain its creditworthiness through and beyond the 1983-90 period. PART II - BANK GROUP OPERATIONS IN COLOMBIA 19. The proposed loan, the 99th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$3,601.1 million (net of cancel- lations). Of this amount the Bank held, as of March 31, 1983, US$2,834.4 million; IDA made one credit of US$19.5 million for highways in 1961. Dis- bursements have been completed on 63 loans and the IDA credit. During 1972- 77 disbursements averaged US$86 million equivalent per year, then declined slightly to US$82 million in 1978 but increased to US$215 million in 1980 and US$250 million per year in 1981 and 1982, reflecting the higher level of com- mitments in the late 1970s. While disbursements in Colombia have been slower  - 8 - than those recorded in the Latin American Region for similar projects, con- centrated efforts to overcome problems to initiate project execution has resulted in significant increases in the disbursement record over the last eight months. The gradually improving performance of social sector institu- tions in the execution of Bank-financed projects, the gradual containment of inflationary pressures, which should allow relaxation of fiscal restraint, and the increased Bank lending for infrastructure projects, all point to a higher level of disbursements in the future. IFC has made investments and underwriting commitments of US$80.7 million in 27 enterprises and, as of March 31, 1983, it held US$21.9 million. Annex II contains a summary state- ment of Bank loans, the IDA credit and IFC investments as of March 31, 1983 and a brief report on the status of the 35 ongoing projects. 20. During the past 17 years, Bank lending to Colombia has become quite diversified. While before 1966, 22 loans out of a total of 25 loans made to Colombia were for power and transport projects, since then, from a total of 73 loans only 21 have been made to these sectors. In addition, all four loans for education, 13 of the 15 loans for industry, 14 of the 16 agricul- tural loans, one loan for nutrition, two loans for urban development and all nine loans for water supply and sewerage, were made after 1966. The diversi- fication was indeed a desirable aim as it helped provide close contact with a broader range of Colombia's development problems. The experience gained has served to identify areas in which the Bank's role can only be a marginal one and, thus, to enable lending to be focussed upon sectors in which the Bank's presence can have a meaningful impact. 21. Bank lending to Colombia in FY82 consisted of loans for watershed management, railways, highways and rural development totalling US$291.3 mil- lion equivalent. In addition to the loan presented in this report, the FY83 program includes an already approved loan for rural education and a loan for coal engineering. Work is also underway on projects for electric power, agricultural diversification, agricultural marketing, fertilizers, water supply and sewerage, irrigation and drainage, and ports for possible con- sideration by the Executive Directors during the next two years. 22. The proposed Bank lending is consistent with the Government's development strategy. To help Colombia develop renewable sources of energy, a sizeable part of the proposed lending would be for hydropower. The Bank intends to assist in the development of coal mines which hold potential to help Colombia meet part of its energy requirements and in diversifying exports. Bank financing in the energy sector would also assist in strengthening major institutions and in mobilizing external finance, particu- larly through the launching of a new power sector development facility, as most of the projects would require substantial cofinancing. Qther future loans would finance agriculture and industry to support the Government in its efforts to raise overall productivity, income and employment, and to increase and diversify exports. Closely related to these objectives would be Bank lending for infrastructure that would facilitate the increasing inter- regional flow of goods and services. Finally, several loans are being pre- pared in support of the Government's efforts to help the lowest 50% of the Colombian population. Proposed lending for rural electrification, further rural development, agricultural credit, water supply and sewerage, and irrigation projects are principally designed to improve the standard of living of the poor.  -o g - 23. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB and bilateral sources provided about 75% of total exter- nal financing to Colombia in the 1961-72 period, their share had decreased since then to some 60% for the 1975-82 period and is expected to decline further to about 30% of external capital requirements during the eighties. Like the Bank, IDB has given increased emphasis to projects with a poverty orientation and has financed projects in low-cost housing, urban and rural development, settlement, university education, water supply, rural electrifi- cation and land erosion control. In the future, it proposed to assist Colombia in developing sources of domestic energy and in expanding productive sector activities to help generate increased employment. USAID has supported programs in education, rural development and small farm development, but is ,phasing out its program in Colombia. The Government of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional financing for basic needs and regional integration projects. PART III--THE AGRICULTURAL SECTOR AND AGRICULTURAL RESEARCH AND EXTENSION1/ Sectoral Performance and Problems 24. Agriculture remains the most important sector in the Colombian economy, accounting for roughly one quarter of GDP. Within the sector, crops and livestock products contribute about 53% and 40% respectively to the gross value of production, the rest being derived from forestry, fishing and other rural activities. Agricultural activities provide employment for some 2 million people, representing about 27% of the national labor force. Further- more, the sector has contributed between 68% to 75% to the total registered export earnings of the country in recent years. Coffee continues to be the largest export item, although the combined share of other agricultural categories--such as bananas, fresh-cut flowers, tobacco, cotton and cattle-- in total registered commodity exports has risen to about 20% in 1981, while coffee's share has fallen from over 60% during 1977-80 to about 48% in 1981. 25. In the past two decades agriculture grew at an estimated annual rate of nearly 4%, which was about one percentage point below the growth rate for the economy as a whole. The sector's growth rate since 1979, however, has slowed down to 2-3% annually. During the last two decades 55-60% output growth was derived from area expansion, except for coffee, for which output growth was primarily obtained from yield increases. The yields of land under major export crops is comparable with international average levels but for many other commodities, especially food crops, yields remain low and the scope for improvements in these cases is substantial. Performance of live- stock has been disappointing, with little productivity increases recorded in beef and milk production over the last decade. 1! A Sector Memorandum entitled "Colombian Agriculture. Selected Issues and Some Directions for Strategy" (No. 4275-CO, dated January 31, 1983) has been circulated separately to the Executive Directors.  - 10 - 26. The output expansion in the 1970s was, to a large extent, driven by external factors such as high international prices for coffee. In the 1980s, on the other hand, the international economic environment facing many agri- cultural commodities has changed dramatically: prices of coffee and other important export commodities (cotton, rice, sugar, bananas, fresh-cut flowers, and beef) have declined substantially. At the same time, internal demand at present is not growing as fast as in the past as a result of a downturn in the domestic economy. Agricultural input costs remain high, partly on account of high domestic cost of importation and internal trans- portation. At the same time, real wages in rural areas have been rising for some time, which together with recent increases in the real minimum wage for agricultural workers, have led to higher costs of labor, increases in overall production costs, and in many instances a squeeze on profits of agricultural producers. Although technological progress has been significant in strength- ening profitability in the case of coffee and a few other export crops, its overall impact for the non-coffee commodities has been inadequate. On the other hand, since the incorporation of new areas into farming has begun to require much greater investment than in the past, and the labor force in rural areas is stagnant if not declining, future output growth will have to be derived increasingly from improvements in the productivity of land and labor based on the adoption of new technologies. Specifically, this will require strengthening of existing agricultural research and extension efforts, and the provision of greater farmer training to upgrade the sector's human capital. A description of some of the existing efforts in research and extension, their salient problems and selected policy options are reviewed below. Agricultural Research and Extension 27. Agricultural research can be traced back to the 1870s, and since then has evolved through an intricate network of public and private sector research stations. Today, while the bulk of agricultural research is being carried out by ICA, especially with regard to food crops, specific commodity research efforts are performed by a number of producers' federations. Among these, the most effective operations are carried out for coffee and sugarcane by CENICAFE and CENICANA respectively. These two institutions account for 20-30% of total expenditures for agricultural research. ICA coordinates its research activities with these institutions, and occasionally carries out contract research for them. 28. Agricultural research efforts have deteriorated during the last decade mainly because of a neglect of agriculture in general, and of under- funding of research in particular. During the 1970s the amount devoted to agriculture in the Government's national investment declined by an annual rate of 7% in real terms and presently stands at about 8%, Total agricul- tural research expenditures by ICA, CENICAFE and CENICANA as a percentage of GDP in agriculture (at factor cost) declined from 0.36% in 1970/71 to about 0.25% from 1974 until 1981. This proportion may be compared with an average of 0.42% for middle-income Latin American countries. 29. The impact of agronomic research and extension, while varying sig- nificantly across commodities, has had a beneficial effect on the achievement of: (a) increased technical efficiency (e.g., increased yields); (b) change  I- it in the composition of agricultural output; (c) reduced production risk (e.g., lessened variability in yields); and (d) lowering production costs. These achievements have benefited producers and consumers to varying degrees, but the impact, nevertheless, has been insufficient to stem the decline in the international competitiveness of the Colombian agriculture in general, and to keep food prices from rising at a rate higher than that of inflation. Today, the market prices of a number of agricultural commodities (maize, soybeans, sorghum, wheat, beans and barley), are above border price levels by more than 50%, and are sustained at such levels by import restrictions and by high internal transportation costs. Also, for several crops, there is a danger that yields cannot be sustained, unless plant breeders and pathologists con- tinue developing varieties that are resistant to newly developing pests and diseases. However, it is in the areas of cultural practices such as time of seeding, land preparation, water and fertilizer use and pest control, where special efforts are required to develop research recommendations that are adapted to location-specific ecological and socio-economic circumstances and can thus have an impact on the output of a great number of producers. In livestock, although progress has been made in veterinary research, animal nutrition, pasture and forage management, and beef cattle and dual-purpose cattle, research and extension efforts have to be expanded to increase milk yields and improve herd productivity. 30. Agricultural extension activities are highly fragmented, with res- ponsibilities spread among a number of public and private institutions. For many years extension services were provided almost exclusively for the medium- to large-scale farmers, and they are closely linked to the provision of agricultural credit. Without an approved plan by an authorized extension agent, a farmer cannot obtain credit from major financial intermediaries. In the past 10 to 15 years, however, the focus of public sector extension agencies has shifted towards small-scale farmer, while large farmers continue to benefit from commodity oriented private and semipublic producer federa- tions. The reorientation of the public extension agencies towards the smaller farmers was part of the Government's strategy to increase the avail- ability of low-cost foodstuff to the lower income groups in urban areas. This strategy was translated into two multisectoral programs, the National Food and Nutrition Program and the Integrated Rural Development Program (DRI). Under the DRI program, which aims at developing the production poten- tial of small-scale farms of less than 20 ha, extension services of ICA have been strengthened and widely expanded to cover about one-quarter of the small farmer population. The principal shortcoming in the technology transfer process, besides its limited coverage, is a lack of a comprehensive and up-to-date information data base on existing farmers, their dominant systems of production, location and resource endowment. This makes it difficult to design and direct efficient extension methods for farmers with differing resource endowments, and reduces the speed of the diffusion and adoption process. Government Strategy and Institutional Framework 31. In its strategy to revitalize the economy, the Government has accorded high priority to policies for agricultural and rural development, recognizing that ample untapped potential exists for such development. More rapid agricultural expansion is intended to meet the goals of achieving a  - 12 - fast rate of economic growth, greater price stability, export promotion, import substitution and more employment generation. Such emphasis, however, also recognizes the sectoral and macroeconomic constraints that have been emerging in the 1980s: low international prices for major exports, depressed domestic economy, lagging yields and profitability in the sector. 32. The formulation and execution of agricultural policy and public sector programs is the responsibility of the Ministry of Agriculture and within it, the Agricultural Sector Planning Office, which has the respons- ibility for planning and coordinating activities of the 18 decentralized institutions of the sector. This office maintains a close relationship with the agriculture and budget divisions of the National Planning Department, since the latter has to approve the sector's development plan and investment program. The Colombian Agricultural Institute (ICA) is responsible for agricultural research and extension, and for these purposes collaborates with other public and private entities, particularly credit institutions. The Agricultural Marketing Institute is responsible for the marketing and pricing of food grains. Other key agricultural institutions include: the Colombian Agrarian Reform Institute, which carries out programs of land distribution and farm support; the Natural Resources Institute, which is mainly responsible for conserving land, river basins and national forests; and the Institute for Hydrology, Meteorology and Land Improvement, which is in charge of irrigation and drainage works. The bulk of agricultural credit is provided by Caja Agraria (CAJA) and the Fondo Financiero Agropecuario, a rediscount window of the Bank of the Republic, from which funds are on-lent by banking institutions. In addition, there are other sources of agricul- tural credit such as the Banco Ganadero, which finances principally live- stock; the Banco Cafetero, which finances coffee and crop diversification; the Corporacion Financiera de Fomento Agropecuario y Exportaciones, which lends principally for export agriculture and agro-processing; and the Colombian Agrarian Reform Institute which, through CAJA and Banco Ganadero, makes available credit to agrarian reform beneficiaries. Agricultural inputs are mostly provided by the private sector. 33. In order to help realize the sector's potential and to restore its competitiveness in international markets, the Administration, as part of an ongoing policy dialogue with the Bank, has been reviewing policy options that can influence sectoral performance, especially through trade policies and policies in input and output pricing. In particular, added incentives are sought to be provided for production to check the rapid increases in food prices. Towards these goals, the Administration seeks to: (i) contribute to advances in the technical and managerial efficiency of agricultural pro- ducers, (ii) strengthen the institutions and industries with supply of tech- nical knowledge, inputs, and credit, and (iii) increase the allocation of public resources in carefully selected areas, such as generation and diffu- sion of agricultural technology, irrigation development, watershed manage- ment, crop and livestock development, marketing, credit and provision of inputs. These are areas where individual producers may not have the needed technical expertise, and find it difficult to finance the required invest- ments, partly because they are too expensive in relation to their operations, and the resulting benefits are likely to be widely shared and cannot be fully captured by those financing those investments.  - 13 - 34. Starting in 1979, ICA and the National Planning Department were requested to analyze the shortcomings of agricultural research, with parti- cular regard to food crops, and to present recommendations on how to improve the existing situation. As part of their findings, they recommended a react- ivation of the National Council and Fund for Research and Technological Development of the Agricultural Sector. This proposal is now under active study; the intent would be to draw the private sector into more active parti- cipation in agricultural research. The principal document that resulted from the analysis carried out by the two institutions is the National Plan for Agricultural Research of ICA (PLANIA) which, endorsed by the Administration, forms the basis for this project. The transfer and adoption of agricultural technology is to undergo a similar comprehensive review. This review will be financed under this project and it should lead to a substantial shortening of the time-lag between the development of agricultural technology and its adoption. Bank Strategy 35. From 1950 to 1965 the Bank made only two loans for agriculture in Colombia, each totalling US$5.0 million. Since 1966, lending to the agricul- tural sector has been intensified, and the Bank has made 13 loans totalling US$349.6 million equivalent. Three of these loans have been for agricultural credit, two for livestock development, two for colonization, three for irrigation/drainage, two to support the DRI and one for a pilot watershed management project. Most of the projects have focused on increasing produc- tivity, incomes and welfare of small farmers and at strengthening public sector institutions. Project Performance Audit Reports have been issued for five of them, including Loans 502-CO, 624-CO, 651-CO, 739-CO and 849-CO. In addition, an Impact Evaluation Report was issued in 1982 on the Atlantico Irrigation Project. While these projects were by and large successful, the irrigation and drainage projects experienced some technical difficulties and were hampered by institutional weaknesses of the Colombian Agrarian Reform Institute. Although none of these projects provides experience of direct relevance to the proposed project, they enabled the Bank to learn about the legal and administrative systems operating in this sector. These experiences have been of assistance in preparing the present project. 36. In the years ahead, it is intended to provide close support to the Government's agricultural strategy and its drive to modernize the less advanced small-scale farmers. Actions are under way to widen the lending program to encompass technological, research, extension and supply aspects of input use, the diversification of agricultural output, and its processing and marketing. In addition, it is planned to strengthen key sector institutions through investments in irrigation and drainage, watershed management, and in the livestock subsector and to continue to support the Government's rural development efforts. The Borrower--ICA 37. ICA is the successor organization to the Division of Agroeconomic Research in the Ministry of Agriculture. It was established in 1963 and is one of the many decentralized agencies reporting to the Minister of Agricul- ture, who serves as chairman of its Board. Other Board members are the Chief  - 14 - of the National Planning Department; the General Manager of the Colombian Agrarian Reform Institute; the Manager of the Coffee Producerst Federation; the Rector of the National University; a representative of the National Association of Small-Scale Farmers; and two members designated by the President of the Republic. This structure ensures participation by the national representatives of the main users of research results, but has been insufficient for local involvement of farmers in the shaping of research priorities or in the practical interpretation of the results of investiga- tion. This issue would be addressed by the present project. ICA is currently responsible for all public agricultural research, extension and graduate agricultural education, as well as for a number of regulatory and service functions which previously had been carried out directly by the Ministry of Agriculture. These functions include plant and livestock quaran- tine; the regulation and inspection of farm inputs, the certification of seeds; and rural development. ICA will be divested of these responsibilities as noted in Part IV. 38. The institute is directed by a General Manager operating through (a) five sub-managers responsible for departments of research, rural develop- ment, crop production, animal production and administration; and (b) nine regional managers each of whom has overall administrative responsibility for all ICA activities within defined areas of the country. Research activities are carried out at 27 research centers and stations distributed throughout the farming areas of the country: four national research centers and one national veterinary laboratory; 12 regional centers and one regional veterin- ary laboratory; and nine experiment stations. The research activities are coordinated with, and sometimes partially funded by, private institutions that conduct commodity specific research. Strong linkages have also been developed between ICA and several of the international research centers of the Consultative Group for International Agricultural Research (CGIAR). In addition, ICA has 30 diagnostic centers for animal diseases, and 13 labora- tories which provide services for the livestock sub-sector. Other comple- mentary services provided by ICA are a livestock quarantine station at Barranquilla; a specialized agricultural library; and a program for post- graduate training in agricultural sciences in association with the National University, where annually some 100 Colombian and foreign students are trained to the MS level. 39. At the end of 1982, ICA had a staff of about 5,800; 1,200 had pro- fessional qualifications, including 50 PhDs and 413 MSs. Only 2,200 of the ICA staff were directly engaged in the work of the research department with some 39 with professional qualifications. Approximately 70-75% of ICA's resources are budgetary contributions from the Government with the remainder coming from ICA sales and services, private sector funds and external funds. Its total volume of operations in 1981 amounted to about US$44.3 million equivalent, and US$15.7 million for its research department.' Of these expenditures approximately 70% were for personnel costs. This level of staffing for research was considerably below that of the early 1970s with expenditure for ICA's research department declining in constant pesos from 1970 until 1977. Only since 1978 have expenditures in real terms increased again, but in 1982 they were still about 13% below their 1970 level. 40. ICA's main problems in its research and extension functions relate to the proliferation of its duties and responsibilities, especially since  15 - 1968. This gradual overburdening of the institution with diverse functions led to a multipurpose organization that is difficult to manage. Also, sub- stantial underfunding (estimated at 25-40%) has led to a series of negative side effects: inability of the institution to attract and retain high calibre staff; severe imbalance in the ratio of salaries to operating expenses; incomplete and flawed experiments; reluctance by private sector entities to contract with ICA for research because it has lacked the staff and basic facilities; undue emphasis on commercial farm production on experi- ment stations as a source of revenue; reduction of research contacts with the international agricultural research centers, such as CIMMYT and CIAT, and the declining capacity of the national agricultural research system to adapt fully and utilize technologies being developed abroad. The above factors, combined with a lack of clearly established policy objectives for agricul- tural research and extension, have also resulted in some research activities that were not always sufficiently well defined or of direct relevance to pro- ducers' needs and national priorities. The project as designed will overcome these problems: clearly defined objectives for ICA's research efforts were established; the institution will be adequately staffed and funded; and it will be divested of its regulatory and control functions. PART IV - THE PROJECT 41. The proposed project was prepared by ICA. Following three prepara- tion missions the project was appraised in November/December 1982, Negotia- tions for the proposed loan were held in Washington from April 25 to April 29, 1983 with a Colombian delegation led by Dra. Cecilia de Rodriguez, Vice Minister of Agriculture and Dr. Jorge Serpa, Director of Public Credit, Ministry of Finance and Public Credit. A Staff Appraisal Report entitled "Colombia--Agricultural Research and Extension Project I" (No. 4384-CO dated May 12, 1983 is being circulated separately. A loan and project summary is placed at the front of this report. Supplementary project data are provided in Annex III. Project Objectives and Research Strategy 42. The proposed project is aimed at increasing the capacity of the Colombian Agricultural Institute (ICA) to improve and expand its research and technology transfer activities so as to assist the country in raising its agricultural output at competitive costs. To this end, the activities to be carried out under the project will be geared towards: (i) intensifying agri- cultural research for the most important commodities; (ii) promoting the dis- semination and application of results of agricultural research and carrying out studies on technology transfer; and (iii) training scientific and tech- nical personnel for service within ICA and the agricultural sector as a whole. 43. Following a comprehensive review of production constraints and the status of agricultural research in the country and abroad, carried out by the Government and ICA, in consultation with private crop and livestock pro- ducers, priorities have been established for specific commodity research programs and projects. The principal criteria used were: (i) the relative  - 16 - importance of each product (i.e., in food expenditure), taking into account estimated future income elasticities of demand; (ii) the importance (share) of the product in Colombia's value of exports; and (iii) the intensity of labor use (labor requirements per hectar) as a "proxy" for the social import- ance of each product. Based on each of these criteria the main agricultural commodities were ranked. These rankings were then combined in a single general priority index by using weights of .5, .25, and .25 for the abovemen- tioned criteria respectively, which reflect broadly the Government's overall economic and agricultural development policies. For reasons of limited financial and human resources, and excluding those export crops for which research is already being carried out by producers' organizations (mainly coffee and sugar), it was decided that research efforts under this project should concentrate on the most important commodities as defined by this index. The following programs were selected and their order of priority is: beef and dairy products; horticultural products; cocoa; cotton; maize; rice; sugarcane (panela); plantains; grain legumes; potatoes and cassava; perennial oil crops; poultry and tobacco. In addition, there will be a special associated and multiple cropping research program to determine the farming systems most appropriate to raising the standards of living of small-scale farmers. 44. The process of identifying research priorities for each commodity was carried out in four steps: (i) regionalization of the country into "ecologically homogenous zones"; (ii) characterization of each region and analysis of the principal production systems that are found in them; (iii) identification and analysis of the main "technological constraints" that have a negative impact on the production or productivity levels of the different products, under the specific environmental conditions that characterize each region; and (iv) identification and analysis of potential research topics or issues that were considered to be important to solve the technological con- straints faced by each product in specific regions. The first three steps were carried out through a national survey on the basis of which a techno- logical profile of the sector was formulated. The fourth step was carried out through working groups established for each product, in which research topics were decided upon in response to the technological constraints pre- viously identified. Concurrently, a complete inventory of ICA's research facilities was undertaken. Based on each station's importance for carrying out the commodity research programs described above, 17 research centers and stations were selected and their investment needs determined. This planning process of identifying research priorities in the agricultural sector and for each of the most important commodities, led finally to the definition of specific research topics or projects to be carried out under this project. As such, this comprehensive planning process with the participation of the public as well as private sector, constituted a major reexamination of the country's research objectives and has set a sound basis for the research endeavour to be supported by this project. 45. Most of the programs would concentrate on applied research to resolve immediate problems faced by farmers. Special emphasis would be given to screening local and foreign genetic plant materials, as well as to developing more efficient farming practices. Research activities would also include verification and demonstration of research results on private farms, with responsibility shared by the producers and ICA, so as to improve their  - 17 relevance and applicability to local conditions with their specific problems. There would be little if any basic research into fundamental biological and physical processes, but units specialized according to scientific discipline would be maintained and strengthened to form elements of multidisciplinary teams to carry out commodity-oriented research. 46. The crop research programs would involve plant pathology, entomol- ogy, physiology; soil science and plant breeding; similarly, the animal research programs would involve animal physiology, genetics, production systems, nutrition, pastures and forages, and veterinary sciences. In addi- tion, the research efforts of ICA's agricultural engineering division would be strengthened in particular to address the needs of small-scale farmers on steep hillside in terms of management of land and water resources; crop har- vesting, storage, and drying; and appropriate agricultural machinery. Finally, ICA's technical support services (statistics and biometry, socio- economic studies, library and communications) would also be upgraded to better design and evaluate individual research projects. 47. The execution of these programs calls for: (a) rehabilitation and equipping of existing laboratories and selected research and experiment stations; (b) near doubling of overall staffing levels;2/ (c) training of professional, technical support, service and administrative staff and improvements in the remuneration of scientific staff to retain high quality personnel; (d) provision of funds adequate to permit active research and the effective transfer of technology, while properly maintaining the buildings, equipment, vehicles and other facilities of ICA for agricultural research; and (e) strengthening of the administrative and financial management of ICA, including the development of effective systems for the management, access and use of general and scientific information, and exchange of experience with producers. Project Components 48. The project would be executed over a six-year period, beginning in mid-1983, and would comprise the following components: Research Stations and Programs: (A) the rehabilitation, development and equipping of 15 existing agricultural research stations and two veterinary laboratories (see map); and (B) the establishment of one new agricultural research station. The following types of investment would be carried out: (a) water, power and telecommuni- cation services; (b) land preparation, including drainage and internal roads; (c) civil works for one new research station, repairs and modifications to existing buildings, and the construction of some minor buildings, such as stores; (d) vehicles, machinery, furniture and equipment for farm, office and laboratory use; and (e) library and computing facilities. 2/ This level of staffing, phased-in over five years, would bring it back to its level of the early 1970s.  - 18 - Training--for about 270 staff at the post-graduate level and providing short courses for about 250 research and support staff. This academic training would lead to PhD and MS levels and, depending on the requirements, be undertaken inside or outside the country. The short courses, up to three months, would take place at a variety of institutions, including the international research centers, especially CIAT, CIMMYT and CIP. Consultant Services--national and international consultant services totalling 14.5 man-years for scientific, tech- nical, building design and management support to cover the gaps in the currently available skills of ICA's researchers. Incremental Operating Costs--salaries and operating costs for five years for about 300 new research staff and about 1,000 technical support staff, and a salary premium for about 190 existing and about 230 new research workers with PhD and MS qualifications to attract and retain high-level staff. Monitoring and Evaluation--activities to review and assess periodically the research and technology transfer activi- ties of ICA. Technology Transfer--review of the national farm extension systems and the preparation of a plan and policy document (PLANTRA) as a basis for strengthening the farm advisory services of ICA and other public and private institu- tions. This study, commencing in April 1983, is expected to be completed by the middle of 1984. Implementation Arrangements 49. Organization and Management. The project would be an integral part of ICA's overall research and technology transfer program. It would be carried out through ICA's established administrative and technical divisions coordinated by a unit to be formed for that purpose within the Office of Planning with the assistance of three consultants. The unit would be headed by a project coordinator and comprise the following three groups: (a) admin- istration; (b) human resources; and (c) monitoring and evaluation. Pursuant to a government decision in early 1983, ICA's functions of agricultural development, regulations and controls would revert to the Ministry of Agri- culture or be transferred to other public institutions of the agricultural sector by the end of 1984. This should enable ICA to concentrate on agricul- tural research and technology transfer, and thus on the central activities of the project. During negotiations, assurances were obtained that ICA, jointly with the Guarantor, would (a) prepare and furnish to the Bank for its com- ments, by December 31, 1983, a plan of action for divesting ICA from any regulatory and enforcement activities, and (b) not later than December 31, 1984, carry out such plan (Section 3.06 of the draft Loan Agreement and Section 3.03 of the draft Guarantee Agreement).  - 19 - 50. Planning for Implementation. The overall priorities and strategies for agricultural research described above were established at the end of 1982 to the level of particular commodity programs and individual research centers, taking into account the absorptive capacity of ICA and the country's capacity to sustain the prospective level of research. These programs are expected to continue to be broadly the same throughout the execution of the project and would be carried out by multidisciplinary teams at one or several of ICA's 17 existing research centers and the one to be established under the project. 51. The planning and review of specific research programs and projects would be carried out through: (a) research consultative committees and (b) research review meetings. The former would be established for groups of com- modity research programs and for each research center, and would comprise the respective director of the research center or commodity research program as chairman and farmers, research workers and extension agents. These commit- tees would meet periodically to agree upon the nature of the problems requir- ing investigation and to comment on the practical significance of research results produced by the respective programs and stations. Research review meetings would be reactivated to resume assessing the justification for ini- tiating or continuing individual research projects. These meetings, which had ceased to function because of lack of funds, are made up of the program coordinator who presides it, a member of ICA's Statistics and Biometry Division, a research worker from the division that proposes the research project and two other members of ICA's staff. They are convened periodically by the head of the corresponding division. In the course of the proposed project, the same research review meetings would be resumed and thereafter maintained. These meetings would include senior representatives of the research divisions involved and would take into consideration the views of the local research consultative committee and comments by the Bank and inter- national scientists. Assurances were obtained during negotiations that by no later than December 31, 1983, ICA would establish and thereafter maintain the research consultative committees described above, and by December 31, 1984 reestablish and thereafter maintain the abovementioned periodic research review meetings (Section 3.04 and 3.05 of the draft Loan Agreement). In addition, at about two-year intervals there would be reviews of (a) ICA's overall research strategy, and (b) ICA's commodity specific research objec- tives and accomplishments in which scientists of international reputation would take part. The first review of ICA's overall research strategy would take place at the beginning of 1985 shortly after the completion of the national study on technology transfer and extension (PLANTRA). During nego- tiations, an assurance to this effect was received (Section 3.03 of the draft Loan Agreement). 52. The transfer of funds for research programs, ICA's technology transfer division, and for the development, maintenance and operations of each research center or station would be done directly from ICA headquarters to the director of the center or station where the expenditure is to be incurred, and would not be channelled through the office of the regional director of ICA as at present. Increased responsibility and autonomy would thus be given to the directors of centers and stations to ensure that all research work, demonstrations and seed production is carried out in accord- ance with the needs of the surrounding farming community and consistent with  - 20 - the overall national research and development strategy for the agricultural sector, within the review procedures described above. In addition, small working funds would be established and maintained for each of the Borrower's research centers, research program and technology division to cover day-to- day expenses. An assurance was obtained during negotiations that the lines of control and transfer of funds would be consistent with the proposals in this paragraph (Section 5.05 of the draft Loan Agreement). 53. Staff Training and Use of Consultant Services. The Project Coordinating Unit, through its human resources group, would maintain under continuing review the skill-gap assessment conducted during appraisal for each of ICA's work units involved with agricultural research, extension or administration. This group would be responsible for locating training courses for ICA staff in accordance with the continuing skill-gap assessments and for external training; it would work in close collaboration with the Colombian Institute for Educational Credit and Advanced Studies Abroad that coordinates all training outside the country. In addition, this group would be in charge of locating and hiring external consultant services in accord- ance with Bank guidelines (Section 3.02 of the draft Loan Agreement). It would be a condition of disbursement from the corresponding category of the proposed loan that ICA had submitted a plan, satisfactory to the Bank, for the training of professional staff at the post-graduate level and the pro- vision of short courses under the proposed project (Schedule 1, para. 4(b) of the draft Loan Agreement). The plan would include (a) an outline program with criteria for the evaluation of the effectiveness of training; and (b) a format for quarterly reports to be submitted to the project coordinator. The latter will include, among other matters, particulars on staff requiring training, personnel under training, assessment of the quality and appro- priateness of training received by returning staff, and related administra- tive matters. Diffusion of Research Results 54. A key objective of the proposed project would be to improve the flow of research findings to farmers, particularly the small-scale producers, whose capacity and means to adopt new techniques is more limited than larger farmers. To this end, ICA's communication division will be strengthened so that it can be more effective in its role of transmitting research findings in a suitable form to public and private institutions, which, in turn, deliver the information to farmers. Also, within ICA, the coordination of its Research Department with its Rural Development Department, that provides direct extension advice to small-scale farmers under DRI, would be strength- ened. More verification and demonstration trials on farmers' fields would be jointly designed and managed by ICA's research and extension staff, and frequent meetings would be held between the staff of the two departments. Through the research consultative committees at the regional and local levels, members of the farming community would be able also to learn directly about the work being carried out at the research stations while presenting their suggestions for further investigations. These activities would strengthen the technical basis for ongoing integrated agricultural develop- ment projects (Loans 1352-CO and 2174-CO), the Irrigation Rehabilitation Project (Loan 1996-CO), and the Third Agricultural Credit Project (Loan 1737-CO). The project would not be confined to a specific project area, but  - 21 - most of the commodity research programs it includes have particular relevance to the problems of the densely populated small farmer sector in the inter- andean valleys. 55. While the existing extension system can cover the short-term exten- sion needs of a significant number of small-scale farmers, the authorities have recognized the need to build up the extension services to ensure that research findings are applied widely throughout the country. To this end, a national study on the transfer of agricultural technology would be carried out and financed under the proposed project. The Terms of Reference for this study were discussed during appraisal and were agreed upon during negotia- tions. This study, which should be ready by June 30, 1984, is expected to provide a basis for a national strategy and action plan (PLANTRA) to improve and coordinate all forms of technical assistance to the agricultural sector. The Bank would take part in the review of the final plan. This plan would be prepared by ICA with the assistance of the Government and should be finalized by the end of 1984 to serve as a basis for an investment project for which external financing would be required. Once results of PLANTRA become avail- able, they would also be used as an input to review the research priorities. Assurances to this effect were received during negotiations (Section 3.03 of the draft Loan Agreement and Section 3.02 of the draft Guarantee Agreement). Monitoring, Reporting and Evaluation 56. The Project Coordinator would be responsible for monitoring and reporting on operational progress for the duration of the proposed project, according to a program previously agreed upon by the Bank. Progress report- ing would be half-yearly and, upon the termination of the proposed project, a draft project completion report would be prepared by the Project Coordinating Unit and be submitted to the Bank. Evaluation of research results for each program and station, and their relevance to the needs of the farming community, would be evaluated by the research consultative committees (para. 52). The recommendations of the committees would be collated by the monitor- ing and evaluation group of the Project Coordination Unit and used in the planning of new research projects. Research results would be reviewed at least biannually through ICA's internal research review meetings against the stated research objectives for each commodity. The following special analyses would be carried out as part of the evaluation of project activi- ties: (a) impact of the commodity and farming systems research on production in the major agricultural regions; (b) evaluation of individual lines of research; (c) cost/benefit analyses of research programs where appropriate and feasible; and (d) socio-economic effects of the application of new tech- nologies. The recommendations arising out of these studies would be used to refine ICA's research programs as required. In addition, by the end of 1984, there would be the special review of research strategy and accomplishments of ICA as a result of the national study on the transfer of agricultural tech- nology (PLANTRA) referred to above and a comprehensive review of ICA's research strategy and accomplishments by the end of 1988 (Section 3.05 of the draft Loan Agreement).  - 22 - Project Cost and Financing 57. The total cost of the proposed project is estimated at US$206.6 million, including contingencies, of which US$3.5 million are local taxes, and the foreign exchange component is US$52.7 million, or 25% of total pro- ject cost. These costs are based on December 1982 prices, and include physical contingencies equivalent to 1.8% of total baseline costs (12% for civil works and station development and 5% for equipment). Price contingen- cies have been calculated separately assuming (a) local inflation rates of 23% in 1983, 22% in 1984, and 20% thereafter, and (b) annual escalation rates for foreign costs of 8% in 1983, 7.5% in 1984, 7% in 1985, and 6% there- after. A correction was also applied for expected exchange rate changes over time. 58. The average gross baseline costs per man-month of internationally recruited consultant services are estimated at about US$6,200 for a total of 150 man-months and at half this rate for 24 man-months of local consultancy services. Baseline training costs are equivalent to US$21,600 per man-year (PhD) for a total of 198 man-years and to US$12,660 per man-year (MS) for a total of 408 man-years. 59. A Bank loan of US$63.4 million equivalent is proposed to finance 31% of total project costs, to cover the foreign exchange cost and US$10.5 million of local costs (5% of project costs). The remaining US$143.4 million equivalent, or 69% of project cost, would be financed by ICA, mostly through budgetary appropriations from the Government. After project completion, the Government would continue to provide ICA with sufficient funds to sustain the level of research efforts brought about under this project. Assurances to this effect were obtained during negotiations (Section 3.04 of the draft Guarantee Agreement). Local currency financing is recommended to give the Bank a meaningful role in the project, and is in line with similar financing participation provided by the projects in the agricultural sector, and other operations with significant social impact in Colombia. A summary of project costs and financing appears in the loan and project summary on page ii above. Procurement and Disbursements 60. Because of their limited size and scope, civil works contracts totalling US$8.4 million, would be awarded according to local competitive bidding procedures that are satisfactory to the Bank, with foreign bidders having the opportunity to participate. The balance of civil works, about US$1.0 million, would be carried out by force account. Vehicles and labora- tory and other equipment, totalling US$27.1 million, would be procured through international competitive bidding in accordance with Bank guide- lines. Qualifying domestic manufacturers would receive a preference in bid evaluation of up to 15%, or the import duty, whichever is the lower. The balance of farm and office equipment and furniture, totalling US$10.4 million and research station and laboratory development investments (US$6.6 million), would be procured in many dispersed purchases spread over five years under local competitive bidding procedures. The services of consultants (US$1.2 million) would be engaged in accordance with Bank guidelines. The local and foreign training program (US$12.7 million) would be executed through mostly university services contracted abroad. Assurances were obtained during  - 23 - negotiations that the procurement procedures specified in this paragraph would be followed (Section 3.02, and Schedule 4 of the draft Loan Agreement). 61. In order to advance project execution, design studies for civil works, other studies, consultant services and improvement to the library and management information systems would be eligible for retroactive financing for expenditures incurred after January 1, 1983, for a total not exceeding US$1 million equivalent (Schedule 1, para. 4(a) of the draft Loan Agreement). In an effort to facilitate rapid project execution, a working fund would be established with US$1.0 million equivalent to cover about three months of local expenditures. The establishment of a special account for such a fund would be a condition of effectiveness and the ordering by the Government of the release of US$0.5 million equivalent would be a condition f of disbursement of US$0.5 million equivalent from the Loan Account to the fund (Section 2.03(b) of the draft Loan Agreement). In order to allow for the necessary time to complete the budgetary process, the Government would have up to 30 days to deposit the monies in the special account. Subsequent disbursements to replenish the fund would be carried out according to standard Bank procedures, but provided that the Government has already approved the release of ICA's share of the replenishment (Section 2.03(c) of the draft Loan Agreement). Every six months, the Government, the Bank and ICA would review the operation and size of the fund and agree on any necessary changes (Section 2.03(f) of the draft Loan Agreement). As required by Colombian law, project expenditures would be subject to ex ante control and approval of the Comptroller General's staff, but in any case they would also be subject to standard reviews by the Bank. 62. Disbursements would be made for 100% of expenditures for civil works (in the case of the new research station, only once detailed plans for the carrying out of this component have been furnished to the Bank); 100% of foreign expenditures and 60% of local expenditures for (i) equipment, materials, agrochemicals, spare parts, and furniture, and (ii) vehicles; 60% of local expenditures for incremental operating expenditures to be financed on a declining scale; 100% of expenditures for consultant services; 100% of foreign expenditures and 60% of local expenditures for local and foreign training and studies; and 50% of the total cost of scientific premia to be financed on a declining scale over five years. Accounts and Auditing 63. ICA would maintain separate project accounts for the proposed pro- ject in accordance with sound accounting principles and methods, consistently applied and in such detail as agreed to with the Bank. Consultancy services would be contracted towards the end of this year to review, by June 30, 1984, the existing system of accounting and to design a system to improve the pre- sentation and flow of information to management (Section 5.04 of the draft Loan Agreement). The project accounts and related basic financial statements would be audited annually, in accordance with sound auditing standards, by independent auditors appointed by ICA and acceptable to the Bank. The basic financial statements, together with the independent auditor's opinion on compliance by the Guarantor and Borrower with the obligations of the Guarantee and Loan Agreements, would be forwarded to the Bank not later than six months after the end of each fiscal year.  - 24 - Benefits and Risks 64. Much of the sector continues to employ traditional agricultural practices and rudimentary technology, and more than one-half of the past increases in agricultural production have been derived from area expansion. This expansion of the agricultural frontier will eventually be constrained by ecological conditions and by increasing transport and other costs. There- fore, a steady improvement of Colombia's agricultural production and incomes, especially among the small-scale producers, will require increasing and sus- tained efforts to raise agricultural productivity and efficiency, and to promote crop diversification. The proposed agricultural research project would directly contribute to attaining these goals by strengthening ICA's research planning and review mechanisms, and by providing the institution with well trained staff, having adequate facilities and operating funds. 65. The specific commodity and the multiple cropping research programs and projects have been chosen in response to Government policies and priori- ties, and according to the most promising research areas. Maize, wheat, barley, triticale (hybrid between wheat and rye), beans, potato, cassava and horticultural crops are principal food crops, grown by small- and medium- sized farmers. Production of these crops is labor intensive. Milk cattle, beef cattle, and dual purpose cattle have been selected for their importance in satisfying the internal demand for milk and meat, and to increase beef exports. The proposed research program, together with parallel Government programs in rural development and land settlement, are expected to be of sig- nificant benefit to a large number of farmers of all scales, especially small-scale farmers in the interandean valleys and in agrarian reform and colonization areas. 66. Although it is not possible to estimate the benefits of a research project of this type, in a sufficiently reliable manner to compute ex ante a meaningful economic rate of return, there is evidence from Colombia and other countries, based on the ex post calculation of rates of return on individual research programs through increases in yields, that well-designed agri- cultural research efforts have had economic rates of return as high as 90% and commonly over 30% where suitable associated economic policies are being carried out. The proposed project would have a major impact in strengthening the organization and production orientation of Colombia's agricultural research system. It would also assist ICA to consolidate its research efforts and help ensure continuity in the improvement of research planning and execution, to improve effective collaboration between private and publicly funded research, and to strengthen the linkages between research and extension services to cover sectorwide requirements for technological improvements. 67. Risks associated with the project lie with: (a) the adequacy of the linkages between research and extension services; (b) the difficulty of reengaging experienced, former research staff at the planned rate; (c) the efficiency of the mechanisms for research programming, administration, coordination and review; and (d) the continuity in support for agricultural research. The results of the study that led to the proposed project, involved all parties concerned with the generation and diffusion of agricul- tural technology and thus represents the consensus and commitment among them. In addition, the review of the national agricultural extension system  - 25 - will allow all relevant parties to focus on what improvements are needed nationwide in this area. The Government is committed to follow up this study with the required investments and other pertinent actions. The scientific premium foreseen under this project should enable ICA to attract and retain high calibre scientific staff, and the declining share of Bank disbursement against the scientific premium for research staff would enable ICA to gradually assume responsibility for these payments so that by the end of pro- ject execution this cost would be fully borne by the institution. The research programming, coordination, monitoring and evaluation mechanisms that are in place will be strengthened during the course of project execution and their effectiveness will be reviewed periodically. This should ensure that research remains well focused and produces useful results. The assurance of future funding for research will depend on the effectiveness with which the proposed project responds successfully to the needs of farmers. The careful attention to their problems, which is an essential feature of the institu- tional reformation of ICA, should ensure that research is well focused. With the competent staff already in ICA and the additional staff, facilities and funds to be provided by the project, the prospects for generating significant research results are good. This should ensure continuity of strong support for agricultural reseach. PART V - LEGAL INSTRUMENTS AND AUTHORITY 68. The draft Loan Agreement between the Bank and ICA, the draft Guarantee Agreement between the Republic of Colombia and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 69. Principal conditions of the loan are listed in Section III of Annex III. A condition of effectiveness would be that a special account for the working fund has been established by ICA. 70. Conditions of disbursement under the respective categories would be that (a) ICA has furnished to the Bank a plan of action for local and foreign training; (b) ICA has prepared a comprehensive justification for the establishment of one new research station; and (c) the Government has ordered the release of its initial contribution to the special account (US$0.5 million). 71. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 72. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments May 12, 1983  - 26 - ANNEX I Page I TABLE 3A COLOMBIA - SOCIAL INDICATORS DATA SHEET COLOMBIA REFERENCE GROUPS (WEIGHTED AVEgGES AREA (THOUSAND SQ. M.) M- MOST RECENT ESTIMATE)W- _ TOTAL 1138.9 MOST RECENT MIDDLE IC(E MIDDLE INCOKE AGRICULTURAL 356.0 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE GNP PER CAPITA (US$) 260.0 430.0 1330. 0* 1902.0 2323.9 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 494.4 637.9 913.6 1259.9 2107.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 15754.0 21266.0 26426.0* URBAN POPULATION (PERCENT OP TOTAL) 48.2 59.8 70.2 65.7 47.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 39.4 STATIONARY POPULATION (MILLIONS) 60.2 YEAR STATIONARY POPULATION IS REACHED 2070 POPULATION DENS ITY PER SQ. KN. 13.8 18.7 22.9 35.2 83.3 PER SQ. RM. AGRICULTURAL LAND 44.9 60.7 73.4 92.5 155.4 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 46.8 46.2 36.7 39.7 31.1 15-64 YRS. 50.3 51.1 60.0 56.1 61.2 65 YRS. AND ABOVE 2.9 2.8 3.3 4.2 7.7 POPULATION GROWTH RATE (PERCENT) TOTAL 3.1 3.0 2.3 2.4 1.6 URBAN 5.7 5.2 3.9 3.8 3.5 CRUDE BIRTH RATE (PER THOUSAND) 45.7 36.8 30.0 31.4 23.6 CRUDE DEATH RATE (PER THOUSAND) 13.6 9.7 7.9 8.4 9.2 GROSS REPRODUCTION RATE 3.3 2.6 1.9 2.1 1.6 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 115.4 142.1Ic USERS (PERCENT OF MARRIED WOMEN) .. .. 46.1 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 100.0 99.0 124.0 110.0 116.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 97.7 89.1 97.5/c 108.4 125.1 PROTEINS (GRAMS PER DAY) 53.7 47.5 49.17T 66.0 92.7 OF WHICH ANIMAL AND PULSE 27.8 24.2 24.97T 34.0 35.9 CHILD (AGES 1-4) MORTALITY RATE 11.2 6.0 3.7 5.6 9.2 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 53.1 58.9 62.8 64.2 67.6 INFANT MORTALITY RATE (PER THOUSAND) 93.4 70.6 56.4 64.2 65.1 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL 30.0/d 63.0 64.0/e 65.6 URBAN 54.971 88.0 73.0/ei 78.9 RURAL 6.87s 28.0 46.0/e 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL ,, 47.0 44.4/e 59.3 URBAN .. 75.0 60.0/e 75.3 RURAL .. 8.0 14.0/e 30.0 POPULATION PER PHYSICIAN 2638.9 Z189.5 1966.7/c 1617.3 1105.4 POPULATION PER NURSING PERSON 4220.4/f 1486.1 1252.6/;i 1063.5 634.4 POPULATION PER HOSPITAL BED TOTAL. 362.9 449.4 619.1/c 477.4 286.8 URBAN .. 377.5 542.Ort 679.8 192.0 RURAL .. .. .. 1903.4 ADMISSIONS PER HOSPITAL BED .. 22.9 29.8/c 27.3 20.0 ROUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 7/ URBAN .. 55 RURAL '. 5.97 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. 1.81 URBAN .. 1.6/p RURAL .. 2.47j ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 47.0/d 58.1/S URBAN 83.o7i 87.51 RURAL 8. U7Z 13. 7 ..  - 27 - ANNEX I Page 2 TABLE 3A COLO0BIA- SOCIAL INDICATORS DATA SHEET COLOMBIA REFERENCE GROUPS (WEIGHTED AVERAqES - MOST RECENT ESTIMATE) a MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 lb ESTIMATE lb LATIN AMERICA aC RIAlBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 77.0 103.0 128.0 104.3 102.9 MALE 77.0 101.0 127.0 106.4 107.1 FEMALE 77.0 105.0 129.0 103.3 99.0 SECONDARY: TOTAL 12.0 24.0 46.0 41.3 60.2 MALE 13.0 24.0 46.0 40.4 66.4 FEMALE 11.0 24.0 47.0 41.8 54.0 VOCATIONAL ENROL. (X OF SECONDARY) 30.8/h 20.2 21.6/c 33.7 31.6 PUPIL-TEACHER RATIO PRIMARY 37.6 38.2 32.5 29.9 25.8 SECOXDARY 10.9 17.2 20.8 16.7 22.2 ADULT LITERACY RATE (PERCENT) 63.0 80.8/, 79.1 75.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 5.7 11.2 18.1/c 42.8 51.0 RADIO RECEIVERS PER THOUSAND POPULATION 125.1 104.3 115.0 270.5 157.2 TV RECEIVERS PER THOUSAND POPULATION 9.5 38.1 76.6 107.7 123.7 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 50.0 ,, 48.7 63.7 112.3 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. 2.9 2.7 4.0 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 4726.5 6353.4 9006.8 FEMALE (PERCENT) 19.2 24.8 24.7 24.4 36.6 AGRICULTURE (PERCENT) 51.4 37.9 25.8 31.3 38.7 INDUSTRY (PERCENT) 19.2 21.0 21.2 23.9 25.9 PARTICIPATION RATE (PERCENT) TOTAL 30.0 29.9 33.8 33.6 44.5 MALE 48.8 45.1 50.8 50.4 56.3 FEMALE 11.5 14.8 16.7 16.8 32.8 ECONOMIC DEPENDENCY RATIO 1.7 1.6 1.2 1.3 0.9 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGH