Bolivia - Eastern Lowlands : Natural Resource Management and Agricultural Production Project

Document of The World Bank FOR OFFICIAL USE ONLY C#Z-, jl4_ -So Report No. P-5158-BO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 26.5 MILLION TO THE REPUBLIC OF BOLIVIA FOR AN EASTERN LOWLANDS: NATURAL RESOURCE MANAGEMENT AND AGRICULTURAL PRODUCTION PROJECT FEBRUARY 20, 1990 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 AND EQUIVALENT UNITS Currency Unit - Boliviano (Bs) Exchange Rate Effective December 31, 1989 US$1.00 - Bs 3.00 US$0.33 = Bs 1.00 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ADP - Agricultural Development Project ANAPO - National Association of Wheat and Oil Seed Producers BAB - Bolivian Agricultural Bank BCB - Central Bank of Bolivia CAO - Agricultural Chamber of Commerce for tiLe Orient CIAT - Tropical Agriculture Research Center CIDOB - Organization of the Indigenous Peoples of the Bolivian Orient COMEX - Export Complex of ANAPO, Ltd. CORDECRUZ - Santa Cruz Regional Development Corporation ENFE - Bolivian National Railway FEGASACRUZ - Livestock Federation of Santa Cruz FENCA - National Federation of Rice Cooperatives FINDESA - Santa Cruz Development Finance Corporation MACA - Ministry of Agriculture PROMASOR - Association of Maize and Sorghum Producers FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY BOLIVIA EASTERN LOWLANDS: NATURAL RESOURCE MANAGEMENT AND AGRICULTURAL PRODUCTION PROJECT Credit and Proiect Summary Borrower: The Republic of Bolivia. ; Executing Agency: Corporacion de Desarrollo Regional de Santa Cruz (CORDECRUZ), Centro de Investigacion de Agricultura Tropical (CIAT), Central de Indigenas del Oriente Boliviano (CIDOB), Producers' Associations of Santa Cruz (ANAPO, FEGASACRUZ, FENCA, PROMASOR). Beneficiaries: (i) Approximately 1,350 agricultural producers; (ii) CORDECRUZ; (iii) CIAT; (iv) CIDOB; (v) Producers' Associations (ANAPO, FEGASACRUZ, FENCA, PROMASOR). Amount: SDR 26.5 million (US$35.0 million equivalent) Terms: Standard, with 40 years maturity. ;nlending Tcrmb: Hiaximuit interest rate to subborrowers: certificate of deposit rate of financial intermediaries; interest (rediscount) rate to financial intermediaries: six- month quoted LIBOR; spread to financial intermediaries: up to five percentage points. Foreign exchange risk would be borne by credit beneficiaries. Cross-currency risk would be borne by the Borrower. Financing Plan: Government/CORDECRUZ US$ 6.6 million Beneficiaries US$ 3.7 million Financial Intermediaries US$ 2.7 million CIAT US$ 0.6 million Producers' Association US$ 0.4 million Federal Republic of Germany US$ 5.6 million IDA US$ 35.0 million ' Total US$ 54.6 million Economic Rate of Return: 18? Staff Appraisal Report: Report No. 8101-BO Map: No. 21877 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BOLIVIA FOR AN EASTERN LOWLANDS: NATURAL RESOURCE MANAGEMENT AND AGRICULTURAL PRODUCTION PROJECT 1. The following memorandum and recommendation on a proposed Credit to the Republic of Bolivia for SDR 26.5 million (US$35.0 million equivalent) is submitted for approval, The proposed credit, which would be repayable in 40 years, including 15 years of grace, at IDA's standard terms, would help to finance a natural resource management and agricultural production project for the Eastern Lowlands of Bolivia. The Federal Republic of Germany, through KFW, would provide a grant of US$5.6 million equivalent of cofinancing for the project. 2. Background. Agriculture is the most important sector in Bolivia in terms of its contribution to GDP, accounting for about 22% of total GDP in 1988, up from about 18% in 1978. It provides about 65% of total employment. Agricultural exports in 1988 were US$88 million down from US$124 million in 1980. This is about 15% of total exports, or 80% of non-mineral/hydrocarbon exports. 3. The Bolivian Government's strategy for agricultural development calls for efforts to ircrease agricultural productivity and incomes in the Altiplano, Valleys and Eastern Lowlands regions. A national goal is to increase raticnal and environmentally-sound expansion of agricultural exports and import- substitution commodities in order to obtain new sources of foreign exchange, thereby improving the country's balance of payments. This strategy is to be carried out in the context of the administration's market- and private-sector oriented agricultural policy which is reflected in the fact that commodity price distortions are minimal. Land policy, however, has seriously constrained long- term sector development. Some measures are being taken: land tenure, a nationwide long-term issue, is being addressed under an ongoing IDA-operation, the Economic Management Strengthening Operation (EMSO); land taxes have been introduced recently and will be monitored as part of IDA's policy dialogue with the Government; land pricing is to be addressed through legislative or other regulatory measures. 4. The Eastern Lowlands comprises the largest area of untapped agricultural potential in Bolivia. Commercial agriculture is expanding rapidly there and increasing number of small farmers are moving to the Eastern Lowlands from the Altiplano. Available information indicates that the region seems particularly suited for expanding production of soybean (produced in rotation with wheat, sorghum and sunflower seed) and, eventually, for other crops. With limited scope for substantial yield increases, additional production depends on rational expansion of the cultivated area, into some of the 14 million ha with suitable soils. However, the area is also endowed with a rich natural resource base which needs to be managed soundly and protected. Government strategy envisages putting in'o place a solid environmental framework. The strategy includes establishing and managing a Land Use Plan to guide future development, including support for agriculture and protection of natural resources and the interests of indigenous peoples. 5. The Ministry of Agriculture (MACA) maintains overall responsibility for agricultural sector policy and coordination in Bolivia, with many sector  activities in the Eastern Lowlands carried out by regional public sector entities. The private sector is also involved in the formulation and implementation of regional sector activities. The more important public and private regional institutions are: the Santa Cruz Regional Development Corporation (CORDECRUZ-regional planning, coordination, extensior. and financing), the Tropical Agriculture Research Center (CIAT-agricultural research and technology transfer), the Santa Cruz Development Finance Corporation (FINDESA- credit), and several private sector producers' organizations under the umbrella of the Agricultural Chamber of Commerce (CAO), responsible for extension and marketing. The Organization of the Indigenous Peoples of the Bolivian Orient (CIDOB), a grass-root indigenous organization, is important in promoting indigenous peoples' land rights. The level and quality of administration and services provided by these institutions is good compared to national counterpart services. To play the roles needed for the Government's aforementioned strategy, however, they require strengthening in regional planning and coordination, natural resource management, and agricultural research and extension. 6. Rationale for IDA Involvement. The proposed project, together with the recently approved IDA Export Corridors Project, forms an integral part of IDA's strategy for Bolivia and for the agricultural sector. IDA's involvement would help expand the production of non-traditional agricultural exports and import- substitution commodities to cushion the decline in export earnings from hydrocarbons and minerals. The proposed project is also a cornerstone of IDA's environmental strategy for Bolivia. It would assist in ensuring that the development of the Eastern Lowlands would be based on a comprehensive, long-term regional perspective, within which agricultural production and export expansion could take place while protecting the natural resource base. The credit aspects of the project fit well into IDA's strategy for reforming the Bolivian financial system, liberalizing financial markets and restoring private sector confidence following the hyperinflationary crisis of the early 1980s. 7. Project Objectives. The major objectives of the project would be to: (i) assist in initiating the long-term, rational management of the Eastern Lowlands natural resource base; (ii) increase agricultural production, and expand exports and production of import substitution commodities by about US$52 million over a three-year period (over 50Z of the value of agricultural exports in 1988); (iii) develop the technology and credit mechanisms to increase and sustain commercial agriculture productivity and to raise family income of small subsistence farmers; (iv) improve the rural infrastructure of the Eastern Lowlands; (v) introduce a land pricing policy supportive of sound agricultural development; and (vi) improve the living conditions and level of education of the "ayoreo" indigenous group (11 communities totalling about 2,000 people), and help demarcate the tribal lands of the ayoreo and chiquitano communities 8. Project Description. The project would finance the preparation of a Land Use Plan for the Eastern Lowlands which would be the basis for the long-term development of the region. The overall plan would be completed by December 31, 1991, and would encompass the results of agroecological surveys, mapping, and studies on soils, water, forestry, livestock, protected areas and indigenous lands. Technical assistance would be provided for protecting forest reserves and national parks, particularly the largest in the region, the Noel Kempf Mercado National Park. Provision of agricultural and marketing credit (over a three-year period), research, extension, technical assistance, and improvement of about 100 kms of existing rural roads (no new construction) and maintenance of about 200 kms would support expected incremental annual production of some 200,000 tons of soybeans and about 30,000 tons of wheat. This would also lay the groundwork  - 3 - for further sustainable expansion of export crops, primarily soya, over the seven-year life of the project. A small pilot credit system, along with the provision of extension services, would be developed for subsistence farmers to discourage slash-and-burn agriculture and help them develop into commercial producers. Technical assistance and funding would be provided to the indigenous ayoreos communities, to assist in training and community organization, secondary education, social and productive infrastructure and demarcation of the tribal lands of the ayoreo and chiquitano communities. The project would also support the introduction of a market-based system for pricing public land. 9. To help ensure environmentally-sound development of the region, no land clearing would be financed under the project and a system of permits and controls on land clearing would be introduced under the Land Use Plan. Moreover, development of agricultural production is expected to be concentrated in an area of 2.2 million ha (about 7? of the region's surface) which, based on soil studies financed by a Project Preparation Facility advance (PPF), has been found consistent with sustainable agricultural development (Map No. 21877). Terms and conditions of the credit line would be consistent with the Central Bank's other foreign lines of development credit which are acceptable to IDA in the context of Bolivia's ongoing financial sector reform. The interest rate to subborrowers would be the weighted average certificate of deposit rate. The Central Bank would rediscount subloans at the six-month quoted LIBOR and the financial intermediaries would be allowed a spread not to exceed five percentage points. The foreign exchange risk would be borne by the beneficiaries and the cross- currency risk by the Borrower. 10. The project would be implemented by public and private regional institutions under the coordination and supervision of an umbrella Regional Commission. CIAT would be responsible for technology development and transfer; extension would be provided through CORDECRUZ and existing producers' associations; CORDECRUZ would also be responsible for the natural resources and the rural roads components, and CIDOB, a grass-root indigenous organization, for the indigenous groups component. Technical assistance to strength.en their capacity to carry the expanded responsibilities would be provided under the project. A Project Unit would coordinate the project. It would be located within CORDECRUZ but operate under the guidance of the Regional Commission representing the private agricultural sector (CAO), the public regional sector (CORDECRUZ), the national public sector (Ministry of Agriculture) and the participating implementing agencies. Credit would be made available through the Central Bank's existing rediscount facility for onlending through commercial banks, FINDESA and Banco Agricola Boliviano (BAB), to the extent that they meet eligibility criteria. Prior to its participation, BAB would also have to carry out the restructuring program agreed with IDA under the Financial Sector Adjustment Credit (Cr. 1925-BO). An international environmental coLnittee would be established with participation of internationally known Bclivian and foreign experts and scientists. The committee would meet annually to provide independent monitoring and evaluation of the prQ3ect's implementation and its environmental impact, and serve as the basis for annual tripartite meetings between the Ministry of Agriculture, the coordinating Regional Commission in Santa Cruz and IDA. The total cost of the project is estimated at US$54.6 million equivalent with a foreign exchange component of US$29 million (53?). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Bolivia are given in Schedule C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 8121-BO dated February 20, 1990, is also attached.  - 4 - 11. Actions Agreed. The main agreements reached with the Borrower are that: (a) final terms of reference for the preparation of the Land Use Plan would be prepared and the consultants hired by June 30, 1990; (b) the Government would, by December 31, 1991, enact regulations for the adoption and enforcement of the Land Use Plan satisfactory to IDA, and deve'opment plans prepared thereafter would be in accordance with the Plan; (c) no official agricultural credit would be given for land clearing in the Eastern Lowlands, unless the Natural Resource Department (NRD) of CORDECRUZ approves it on the basis of the Land Use Plan or, in the interim, on the basis of farm soils studies; (d) the Government would provide adequate counterpart financing and would cause CORDECRUZ, CIAT and the Producers' Associations to provide their contributions to the financing plan; (e) the Government would introduce legislation in Congress by December 31, 1990 requiring market pricing for the sale of public lands (except for indigenous communities and small farmers) and charge market prices by December 31, 1991; (f) six additional staff would be incorporated into the NRD by June 30, 1990; (g) CORDECRUZ would carry out two complete forest cover surveys by December 31, 1991 and December 31, 1993, and two partial surveys by December 31, 1992 and December 31, 1994; (h) agreed research consultants and research staff, and an extension consultant would be hired by CIAT by June 30, 1990; (i) CIAT would submit to IDA (through the Project Unit) the final five-year extension training program by October 31, 1990 and annual operational research and extension training plans, and progress evaluations by October 1 of each year, starting October 1, 1990; (j) the agreed incremental extension staff would be hired by June 30, 1990; (k) CORDECRUZ would submit satisfactory annual operational plans for road improvement and maintenance by October 1 of each year, commencing October 1, 1990; (1) consultants for the indigenous peoples component would be hired by October 1, 1990 and they would prepare a detailed feasibility study, and an action plan by June 30, 1991; (m) CORDECRUZ would provide staff to the Project Unit for the duration of the project by June 30, 1990; (n) the Project Unit would submit to IDA six-monthly project progress reports for all the components except credit which would be submitted by the Central Bank, by March 31 and September 30 of each year, starting in March 31, 1990, and annual consolidated work programs by October 31 of each year, starting October 31, 1990; (o) the Government would establish the independent Environmental Committee by June 30, 1990; the committee would provi:e to MACA, the Regional Commission and IDA annual assessments of project objectives and effects on the environment by March 31 of each year, starting on March 31, 1991; these entities would hold annual tripartite meetings to review the reports. Conditions of effectiveness would be that: (a) the Government has created the Regional Commission satisfactory to IDA and contractual agreements are signed between the Borrower and CIAT, CORDECRUZ and CIDOB; (b) the terms, regulations and procedures for the rediscount credit line under the project are adopted by BCB's Board; and (c) the Project Unit has been established. Conditions of disbursement for the credit component would be that: (i) soil studies of the agricultural development project areas and the first region-wide forest cover survey have been completed; and (ii) at least one Participating Agreement has been signed between BCB and one financial intermediary. A condition of disbursement to the individual producers' organizations would be that they have signed subsidiary agreements with the Borrower. 12. Benefits. The major benefits of the project would be of two types. First, the project would help rationalize the long-term development of the Eastern Lowlands, introduce better land-clearing methods and cultural practices, demarcate and protect the areas to be maintained as forest reserves and national parks, thereby contributing significantly to the preservation of the resource base of the region. It would also assist in defending the land rights of the  - 5 - ayoreos and chiquitanos indigenous groups and improving the standard of living of the layoreos." Second, the project would, over a five-year period, help expand the annual production and export of soybean by about 200,000 tons and the production of wheat by about 30,000 tons and provide the technological suppert for expanding the production of other crops. The expansion of exports and reduction of required imports would provide direct balance of payments relief through a substantial annual increase/savings of foreign exchange, estimated to reach about US$52 million in year 1992, or about 532 of total agricultural exports in 1988. The project would also assist the Government efforts in improving the agricultural policy environment for the development of sustainable agriculture, especially in regarl to land pricing, and initiate or expand credit coverage to about 1,350 farmers. 13. Risks. This is a high risk project, but suited to the development role of IDA in helping to bring about sustainable agricultural development in harmony with the environmentally-fragile Eastern Lowlands of Bolivia. There are three main risks: (a) demand s.!de risks related to possible fluctuations in export prices, and the continued market for exports particularly for soya, the main crop. These risks are reduced by the relatively good prospects for world soya prices and the fact that soya prices have been historically rather stable. Production levels expected under the proiect would be insignificant in the world market (less than 1%); (b) supply side risks, i.e., sustainability of yields, production costs and transport costs. The project would minimize these risks by strengthening technology development and transfer to improve the efficiency and sustainability of crop production, and through improvements in the rural transport system (including rural roads under the project and the railroad tc the Brazilian border under IDA's Export Corridor Project). The credit risk fund would also encourage small farmers to develop sustainable cropping e2chniques. Overall, these measures would deepen the ability of the region to adapt to changing external market circumstances and to take advantage of market opportunities, thus further reducing the long-term commodity risk; and (c) the environmental risks that come from the competing demands for agricultural development within the resource-rich Eastern Lowlands. To minimize these risks, the project would introduce measures to control the areas where land clearing and cropping would take place, and help demarcate and protect national parks, forests and indigenous peoples reserves. 14. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of IDA and recommend that the Executive Directors approve the proposed credit. Barber Conable President Attachments Washington, D.C. February 20, 1990  -6- Schedule A BOLIVIA EASTERN LOWLANDS: NATURAL RESOURCE MANAGEMENT AND AGRICULTURAL PRODUCTION PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Costs: a/ Local Foreign Total ------(USS milli-on)