Document of The World Bank FOR OFFICIAL USE ONLY Rwort No. 9633-BO STAFF APPRAISAL REPORT BOLIVIA AGRO-EXPORT DEVELOPMENT PROGRAM (AEDP) NOVEMBER 26, 1991 Country Department III Latin America and the Caribbean Regional Office I his document has a restdcted distribotIon and may be used by npients only In tbe pertonnance of etir offdc dute Its contets may st otheise be diclsed without World Bank authozaton. CURRENCY AND EOUIVALhNTS Currency Unit - Boliviano (Bs) Exchange Rate Effective Juno 1991 US$1.00 - Bo 3.525 US$0.28 - Be 1.00 WEIGHTS AND MEASURES Metric System ABBREVIATIOWS AND ACRONYMS ABP - Annual Business Plan AEDP - Agro-Export Development Program ANGOBOL - Bolivian Angora Limited B&J - Agricultural Bank of Bolivia BEF - The Bolivia Export Foundation CF - Chile Foundation CORDECRUZ - Regional Development Corporation of Santa Cruz EMPROCC - The Enterprise to Process Cochineal EMCASCA - Brazil Nut Company FAD - Finance and Administration Division FINFLOR - Flowers Financing Limited FP - Federation of Peasants GON - Government of the Netherlands IBTA - The National Agricultural Research Institute Om - Operational Manual PPAR - Project Per'ormance Audit Report TD - Technical Division SERVIFLOR - Flowers Service Limited VDF - Vaca Diaz Foundation GOVERNMENT OF BOLIVIA FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY BOLIVIA AGRO-EXPORT DEVELOPMENT PROGRAM (AEDP) Table of Contents Page No. I. CREDIT AND PROJECT SUMMARY .................................. 1 II. THE AGRICULTURI L SECTOR 5... .... ........ .5 Background ....... * O. . * . *. * . . . . .5 Potential and Constraints for Agricultural Production ....... 6 The Altiplano .....e ...... 00........0..7 The Vall-s and Yungas .8..... . . ..... . ...... . .....8 The Lowland. .. . .... ... ...ee ................ ... . 9 Agricultural Exports - Contribution to lxports ...... 9 Constraints for Expanding Agricultural Exports se ........ 10 Bank/IDA Strategy in the Agricultural Sector and Export Development ..... ........ ....... 11 Experience with Past Lending . .i....... . 12 III. THE PROJECT .. .. .9. ....... . *. ... 14 Introduction . . ............ .. ........ . ... 14 Rationale for IDA Participation 15.............. .. 15 Project Objectives .... . ...... ..... . ........ ........ 15 Detailed Project Description ........15..................... 15 Project Costs .................. * .......... 22 Project Financing .....999...*.$** ...... .... 23 Procurement .................... ..... 23 Disbursements ................*o. ......24 Accounting and Auditing ....*se............9-9.9..... 25 This report is based on the preparation report and technical annexes (listed in Appendix 1) prepared by DHV consultants and on the findings of an IDA preparation mission which visited Bolivia in June 1990. The mission comprised: Messrs./Nmes. Ruderfer (Task Manager), Velarde (Financial Analyst), Joss (Operations Asst.), McMahon (Agriculturalist), Consultants: Asherman (Marketing Expert), Meyer (Institutional Development/Foundacion Chile), Alvarado (Environmentalist/Agriculturalist). The preappraisal mission (December 1990) consisted of Messrs./m-es. Ruderfer (Task Manager), McMahon (Agriculturalist), Pollner (Financial Analyst), Hoffman (Legal); Consultants: Mulder (Financial Analyst), Amorin (Economist), and Melman (Sociologist). The AEDP was appraised in April 1991 by Messrs. Ruderfer and Johnson (Financial Analyst). Peer reviews were done by Messrs./Mmes. Barham (LA3TF), Ramachandran (LATTF), Chee-Awai, Ebiri (IFC). Messrs. Yoshiaki Abe (LA3) and Douglas A. Forno (LA3AG) are the Department Director and Sector Division Chief respectively for this operation. 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. Rate No. IV. AEDP IMPLEMEETATION ....***........................... 25 The Executing Agency - BEF ..... **..*............***........ 25 The Functions and Responsibility of BEF'. Management .......... 26 Monitoring, Evaluation and Reporting ..... ...........o ....... 28 Environmental Impact .................... ..................... 28 V. FIMANCIAL AND ECONOMIC JUSTIFICATION, PROJECT BENEFITS AND RISKS . ... ............ ... ..... ...... 29 Financial Projections ....... ..... ............ .......... 29 Economic Benefits and Risks ................. . . . . .............. .. 30 VI. AGREEMENTS REACHED AND RECOMfENDATIONS ...................... 31 ANNEXES lo Exports Performance (1980-1989) .............................. 34 2. Physical/Environmental Potential and Constraints for Production of Selected Export and Import Substitution crops ...... 0.............................. ............... so ....... 35 3. Donor Supported Organizations and Agricultural Export Oriented Projects ........... .. .................... 37 4. Financial and Operating Guidelines, and Definitions and Arrangements for Establishing BEF's First Five Enterprises - Corporate Structures, Divestment and Financial Policies..... 39 5. Tentative Program for Research and Extension to Develop the Four Products ....... 0 .................. 0............................... 47 6. Project Cost Suimary, Flow of Funds, BEF and Beneficiary Portions of Enterprise Costs, Procurement A-rangements and Disbursement Schedule ..... . . .............. . .. . 53 7. Audit Requirements and Disbursement Procedures ............... 58 8. Organizational Chart (BEF) .. . . . .......................... . . . . 62 9. Monitoring and Control Arrangements of BEF's Enteprises and Indicative Performance Parameters for the AEDP for the First Two Years .. . . ............ ..... 0....... 63 10. Management of the Environmental Aspects of the First Five Enterprises ........... ........ . .. . ....... . 67 11. Financial Statements - BEF . ......... ....... . . . ....... ....... 70 12. The Methodology and Assumptions Underlying the Economic and Financial Analysis .... .... . ....... ... ...... ....... 72 13. Prices, Production and Marketing . ......... ...... 81 Appendix 1. Selected Documents and Data Available in the Project aile ......pBNo.........224.......3........ 90 Map: IBRD No. 22843 BOLIVIA AGRO-EXPORT DEVELOPMENT PROGRAM (AEDP) I. CREDIT AND PROJECT SUMMARY Borrwowrs The Republic of Bolivia Executing Agenelv The Bolivia Export Foundation (BEF) Credit Amount: SDR 16.6 million (US$22.5 million equivalent) T rms: Standard, with 40 years maturity Onlendint Terms: The Government of Bolivia (GOB) would pass on the IDA credit to BEF on the following terms and conditions: (a) SDR 9.8 million (US$13.2 million equivalent) as a grant for new product development; and (b) for private enterprise development, SDR 6.8 million (US$9.3 million equivalent) as a loan denominated in dollars, for 25 years, including five (5) years of grace (interest accrued in Years 1 through 5 would be repaid over Years 6 through 25), carrying interest at a rate equal to either eight percent (8SZ) or LIBOR plus two percentage points, whichever is the greater. BEF would assume the foreign exchange risk and the GOB the cross-currency risk. Cofinancina: The Government of the Netherlands, US$9.0 million equivalent. Proiect Obiectives The proposed Agro-Export Development Program (AEDP), and Description: would develop during a five-year period the mechanisms to assist Bolivian farmers and entrepreneurs to take advantage of demand in international markets for high value agricultural products for which Bolivia has a comparative advantage, but lacks the technical, managerial and financial means to exploit such opportunities. The proposed program would: (a) develop the newly established (September 1991) Bolivia Export Foundation (BEF) as a private, autonomous, self- financing organization, which would form financially sound, agro-based subsidiaries and joint ventures with small- and medium-scale entrepreneurs and investors; (b) introduce improved production, processing, marketing and management technology to upgrade the capacity of BolJvian producers and exporters to compete in international markets; (c) expand agricultural production in Pn environmentally sound manner; and (d) generate employment and capital accumulation in order to improve the income and standard of living of poor farmers, women's groups, urban and rural laborers. -2- To this end, the AEDP would coneist of three components and would finance: (i) the operations of BEF, including its enterprise investment program which, initially, vould consist of five joint ventures and subsidiaries (US$22.6 allion) to produce and export four high value agricultural products identified during the preparation of the ABDP. This component is based on detailed feasibility studies for the following enterprises/products which meet the technical and financial criteria needed to qualify for BEF's financing, i.e., ARGOBOL (angora vool); EMPROCC (cochineal- and carmine); FINnLOR (flowers); EMCASCA (Brazil nuts) and VACA DIEZ Foundation (VDF) (Brazil nuts and agro-forestry research in the Amazon region). BEE's board of Directors, appoin od in June 1991, is expected to complete its review in early 1992 of the five enterprises and with the help of the management team present for IDA's approval the first year Annual Business Plan (ABP) for BEF; (ii) the employment of an internationally recruited management firm (administration, including fees for Board of Directors (US$5.5 million)) to provide four experts to operate BEF, and its enterprises, while concurrently training Bolivian counterpart marsagers and staff to take over the BEF by the end of five years; and (iii) the provision by BEF of technical assistance (US$8.0 million) to carry out market research and feasibility studies for identifying additional investment opportunities, for exporting of agricultural products, tentatively identified during preparation, such as leather, 1lama/alpaca wool, silk, natural rubber? essential oils, potpourri, quinoa, natural sweeteners (Stevia Rebaudiana) and others. Benefits and Risks: The financial and economic rates of return for AEDP, based on expected benefits from the enterprises already identified, are 20Z and 27%, respectively. Most of the beneficiaries in AEDP's enterprises would be small farmers and small- to medium-scale entrepreneurs. Some 4,000 permanent jobs are expected to be created, of which an estimated 1,000 would be for women. The AEDP would increase exports and foreign exchange earnings and provide a self-sustaining mechanism capable of identifying and establishing viable new agricultural enterprises. The program is thus expected to play a role in reestablishing private sector initiatives in the 1/ An inse-t parasite of the prickly pear cactus containing carminic acid which is an organic red coloring agent used in the food and cosmetic industries. -3- agriculture sector in Bolivia. One of the risks is that B51 may fail to develop the capacity to establish and manage profitably export-oriented enterprises within the projected time frame. This could happan if macroeconomic performance and business environment in Bolivia or in international marketa wera to deteriorate. On the Zcv-rmment' part, it continues to deepen its program of economic adjustment. On BEF's part, its diveralfied export portfolio should minimize this risk. The AIDP includes safeguards to reduce operational risks related to the implementation of the project, which inter alia includes (a) consultation between IDA and the Board regardiug action on the feasibility studies and B53's work program through the preparation of the AEP; (b) strong representation on BEF's Bnard of Directors of prominent local businessmen and donors to ensure a business like orientation for BEIP; (c) the selection of a highly experienced international management firm to ensure that BE! would be managed efficiently; (d) build- in safeguards for selection of profitable investments by BEF on the bacis of a comprehensive criteria agreed with IDA for appraising, evaluating and implementing investments, including prior approval by IDA of each feasibility study, covering economic, financial, technical and social aspects of each enterprise as contained in the Operational Manual (OM); and (e) close supervision and monitoring of BEE's operations, including a mid-term performance assessment linked to a monitoring and evaluation system. The mid-term review would identify problems and make it possible to take remedial actions as necessary, at the early stages of implementation. - 4 - CREDIT AND PROJECT COST SUMMRY TABLE Local For2i&n T,tal ---- (US$ million) -------- 1. Enterprise Investments 4.0 15.6 19.6 2. Management Fee - BE? 0.8 3.0 3.8 3. Research & Product Development, Tech. Assistance, Training Office, Equipment, Vehicles, Supplies 1.6 6.5 8.1 4. Interest Long-Term 3.2 0.4 3.6 Loans TOTAL BASELINE COST 9.6 25.5 35.1 Price Contingencies 1.3 3.3 4.6 TOTAL PROJECT COST 10.9 28.8 39.7 Financing Plan IDA 2.2 20.3 22.5 Government of Bolivia 3.7 0.4 4.1 Government of the Netherlands 0.9 8.1 9.0 Beneficiaries: Contribution to Equity 2.7 - 2.7 Fees paid for BEF Services 1.4 - 1.4 Total 10.9 28.8 39.7 Estimated Disbursements: ----------------------Bank Fiscal Year---------------------- 1992 1993 1994 1995 1996 1997 1998 1999 - -------------------(US$ million)------------------------ Annual 0.7 2.5 2.7 3.6 4.5 4.5 3.6 0.4 Cumulative 0.7 3.2 5.9 9.5 14.0 18.5 22.1 22.5 Economic IRR: 272 Map: IBRD No. 22843 - 5 - II. THE AGRICULTURAL SECTOR Background 2.01 The performance of the agricultural sector and exports of non- traditional products have been influenced by the positive macroeconomic policies, and the rising confidence of the Bolivian public in the Government's management of the economy. The 1985 Boliviant adjustment program ended the hyperinflation and removed extensive economic controls which constrained development. A sharp devaluation of the Boliviano, increases in public sector prices, and reductions in Government expenditures to the level financeable by available funds, practically eliminated the massivs fiscal deficit and restored price stability. At the same time, the Government of Bolivia (GOB) instituted a comprehensive liberalization of markets, including the removal of price controls, establishment of an auction system to determine the exchange rate, elimination of most quantitative trade restrictions, reductions of tariff rates, elimination of controls on interest rates and foreign currency transactions, reductions of state intervention in private sector wage and employment decisions, and measures to improve the efficiency of public sector administration. The GOB sustained the adjustment program in the face of severe declines in export revenues and considerable domestic opposition. 2.02 The adjustment program was highly successful in stabilizing the economy and in reducing internal and external imbalances. For the first time in nearly a decade the economy attained a positive GDP growth rate of 2.6% in 1987, and prudent macroeconomic management permitted the recovery to be sustained with steady GDP growth of 2.7% on average through 1990 and expected to reach over 4% for 1991. The GOB's strategy for sustained economic growth is based on maintenance of stable macroeconomic policy; private sector investments in the productive sectors; a shift in GOB's role to focus its investments on provision of physical infrastructure (e.g. roads, water) and social infrastructure (e.g. education, primary health care); and improving the capacity and the efficiency of public administration. A structural adjustment credit of SDR 30.0 million (US$40.0 million equivalent) was approved by the Board on September 16, 1991 to assist the GOB to divost its assets in the productive and banking sectors, and to strengthen financial markets. The new investment, hydrocarbons and mining laws, enacted in 1990/91 have encouraged new private investments in two of the three major growth sectors in Bolivia-- the mining and hydrocarbons sectors. The third area of potential growth is agriculture, where significant growth has been recorded over the past few years, but which requires greater investment activity by local entrepreneurs and foreign investors. 2.03 To stimulate growth, generate employment, especially in the rural areas and to help offset losses of foreign exchange earnings due to the collapse of tin prices, the GOB is keen to expand exports. But this will need the support and active investments by local entrepreneurs and foreign investors within a business environment wherein there is still a high perception of risk, especially in regard to investment in agriculture. The proposed AEDP which would be implemented by an autonomous, private self- financing foundation, the BEF would help to develop the financial and technical mechanisms through which small- and medium-scale farmers, and entrepreneurs can be encouraged and supported to expand production and agro- industrial exports. Potential and Constraints for Agricultural Production 2.04 Agricultre, is the moat important sector in Bolivia in terms of its contribution to GDP, accounting for about 21S of total CDP in 1989 up from about 181 in 1978. It also accounts for about 402 of total mployment. Growth rates of agriculture have shown wide annual fluctuations during the 1980s, ranging from a decline of 161 in 1983, to an increase of 232 in 1984. At about US$111.8 million in 1988, agricultural exports represented only about 192 of total country legal exporta, but they almost doubled in 1989 to US$207.6 million, representing 25.52 of total legal exports (Annex 1). Apart from hydrocarbons, agriculture provides the most likely source of export expansion and income growth over the tmedium term (income per capita in Bolivia, an IDA country, was US$641 in 1987). The total area cultivated nationwide during the main suwaer crop season (December-April) has varied between about 1.0 million and 1.4 million ha in recent years. This is equivalent to about 1X of the total land area of the country. About 251 of the area planted in the main season is planted with a second crop during the winter season (May-October) and there is also an additional 400,000 ha of pasture. The structure of agriculture is heavily biased towards the production of food crops with maize (280,000 ha), potatoes (125,000 ha), wheat and rice (90,000 ha each) leading the way. By contrast, the combined area of the main commercial crops, i.e., soya, cotton, sugarcane and coffee, accounted for about 235,000 ha in 1989. 2.05 Over the past decade, and with the exception of soybeans, there have been no significant gains in crop productivity. This has been attributed at least in part, to deficient planting material and the low use of fertilizer. In some cases (potatoes, sugarcane) the reduction in yield has been considerable. Bolivia still imports about 801 of its wheat (275,000 ton annually) and 601 of its milk (200,000 ton annually). Much of these imports come through donations from the EEC and the USA. 2.06 Bolivia is divided into three major agro-ecologically regions: (a) the Altiplano; (b) the transitional valley regions; and (c) the lowlands. The densely populated Altiplano and valley regions are characterized by traditional small-scale agriculture, which provides most of the food consumed in the urban centers. The lowlands, especially the eastern part, is the area which produces most of the commercial crops. The relative importance of the three regions in terms of area, population ea,J agricultural share of the GDP, is indicated in the table below. A summary of the potential products and the constraints for further increasing agricultural production for export/import substitution in the three major agro-ecological regions is presented in Annex 2. The AEDP would finance further research to determine the export potential for some of the products reviewed in Annex 2. - 7 - Ecological Area Population Area Share of Region (m (Z) (2 of total) Cultivated Agri. GDP (2) Altiplano 246,000 22.4 51.0 43 20 Valle$ 168,000 15.3 27.5 28 35 Lowlands/ Asazonian 1,100,000 62.3 21.5 29 45 Total 1,514,000 100 100 100 100 Source: INE 1989, Agricultural Sector Update. The AltiDlano 2.07 The Altiplano, which is an inter-mountain plain that ranges in altitude between 3,500 and 4,200 m, has a harsh environment for agriculture. Most crops and livestock are farmed under rainfed conditions with the main constraints for increasing prodiction being low rainfall, poor soil and frost. Rainfall ranges from 600 mm in the north to 150 mm in the south and is irregular in distribution. Some parts of the Altiplano have only 150 frost- free days a year. 2.08 Most of the agriculture in the Altiplano consists of subsistence farming and typically involves cultivation of a few crops, the principal ones being potatoes, barley, broad beans and quinoa. Yields are very low with potatoes yielding about 5 t/ha and cereals yielding less than 1 t/ha. Except for the more fertile soils around La:e Titicaca, the possibility of increasing yields of these crops is minimal due to poor soils and the harsh environment. 2.09 In the drier southern area of the Altiplano (150 mm of rainfall) animal production predominates. It is estimated that there are about 9.6 million sheep, and 2.5 million llamas and alpacas. These animals are raised by small farmers who are among the poorest in Bolivia and depend almost totally on their animals for income to buy staple foods. 2.10 Although the overall prospects for improving traditional agriculture are not very encouraging, the Altiplano has some promising products. For example, quinoa is native to the Altiplano and was once the main cereal of the Incas. This cereal is high in essential amino acids and has an ever-increasing uarket in the developed world, being marketed as a health food. The old varieties were high in bitter alkaloids, such as saponin, and therefore had to be pre-treated before cooking. The lack of development of appropriate technology for removing saponin has been a major barrier to acquiring significant amounts of quinoa for export. However, two new developments in recent years have increased the prospects for the export -8- of quinoa from Bolivia. The National Agricultural Research Institute (IBTA), has developed two new varieties which are low in saponin and further research in this area may result in new breakthroughs. At the same time, UNDP has been funding research to new methodologies for desaponification. The major risk for exporting quinoa from Bolivia is the possibility that other countries could produce and sell quinoa competitively before Bolivia could solve its production and technological problems. Quinoa is one of the products tentatively listed for further production and marketing research under AEDP (par&. 3.10). 2.11 Another product unique to the Altiplano is llama and alpaca wool and hides. These cameloids are native to the Altiplano and there sppears to be substantial potential ror exporting llama and alpaca wool products. Presently exports are limited by infant industry constraints, mainly unreliable supplies of high quality wool. Similar constraints have retarded the production and export of hides and leather goods from these animals. The management of alpaca and llama herds is further complicated by the poor quality of forage available and difficulties of organizing small producers into viable production and marketing units. Financing has been tentatively allocated for further applied research under AEDP to determine the feasibili_j of producing and exporting these products. This would complement the research to be initiated in pastures and land improvement under the Agricultural Technology Development Project (Credit 2216-BO)(paras. 2.19 and 2.24). The Valles and Yunaas 2.12 The Valles and Yungas regions form the eastern slope of the Cordillera de los Andes and is the transition zone between the Altiplano and the Eastern Lowlands. This region is characterized by the minifundio, with most holdings under one hectare, and by its wide range of climatic conditions (from temperate to tropical). This makes it possible to produce a large variety of different agricultural products. However, because of the low level of technology and the small size of farms, the bulk of the arable land is dedicated to maize and potatoes, with smaller areas sown to cereals, such as wheat and barley. Very little research has been done on alternative products and this remains one of the main challenges for the development of agriculture in this part cf Bolivia. Nevertheless, a start has been made, with the development of flowers around the city of Cochabamba. After initial difficulties, mainly due to lack of appropriate technology, the export of flowers has been expanding. AEDP would provide additional support for this (para. 3.08 (c)). 2.13 Other potential products for exports from this area range from temperate fruits and vegetables to perennial tropical crops. Presently, the main bottlenecks for exporting these products are lack of appropriate production technology and poor infrastructure. In many cases technology could be imported, but in all cases it would have to be tested and adapted to Bolivian conditions. Cochineal, essential oil, potpourri, natural sweeteners (Stevia Rebaudiana) and silk are examples of some of the products to be considered for further research and development under the AEDP (paras. 3.08 (b) and 3.10). -9- The Lowlands 2.14 The lowlands are the vast, sparsely populated plains which may be divided into semi-arid savannaha of the Chaco in the South, gradually changing into the semi-humid wooded areas of northern Santa Cruz, Beni and Pando. In the Santa Cruz region (i.e., the Eastirn Lowlands), the major crops in terms of area cropped are: soybeans, rice, sugarcane, maize, cassava, sorghum, cotton and wheat. Soybean has become Bolivia's most important export crop; its production area increased from 10,000 ha in 1976 to about 142,000 ha in 1990. Wheat, sorghum and sunflower seed production are also increasing, primarily as winter crops in rotation with soybean. Production of cotton, formerly an important export crop, has declined sharply as a result of pests and disease, as did sugarcane because of abolition of subsidies. In the Beni region, livestock production is the most important agricultural activity, followed by forestry (timber). In the tropical forest areas of Pando and northern Beni, the agricultural economy is largely based on the collection and exploitation of Brazil nuts and, to a lesser extent, rubber. The expansion of exports of Brazil nuts together with complementary development of food crops would very likely be an important activity under AEDP (para. 3.08 (e)). 2.15 The agricultural potential of the lowlands is largely unknown, particularly in the Beni and Pando regions, but preliminary land resource studies indicate considerable potential, provided it is developed in a sustainable and environmentally sound manner. Bolivia is in an envious position because its Amazonia region is largely untouched. It is in a position, therefore, to learn from the hard-won experience of others. Research is urgently needed on agro-forestry systems for the Amazonia region to replace the current "slash-and-burn" method of agriculture by the increasing number of colonizers coming from the Altiplano region. Some potential exists for crop diversification based on agro-forestry, such as achiote, black pepper, medicinal plants, etc. This would help overcome the "boom and bust" cycles so typical of these Amazonian economies based on single products, such as rubber and/or Brazil nuts collection. As part of the preparation of the proposed two joint ventures--export of Brazil nuts and the agro-forestry development (para. 3.08 (d) and (e))--the Government of the Netherlands (GON) has provided over US$1.0 million equivalent for carrying out an environmental, agro-ecological and socioeconomic assessment of the Amazonian region of Bolivia. The assessment started in October 1991 and would be completed in eight months. Terms of reference for this study were agreed with IDA and they are available for reference in the Working Papers (Appendix 1). Agricultural Exports - Contribution to Exports 2.16 Until recently, agricultural exports have played a minor role in total exports from Bolivia. In 1980, agricultural exports accounted for US$147 million or 14% of total exports. In 1985, earnings from agricultural exports dropped to US$34 million or 5Z of total exports, but rebounded in 1987-88 to about US$110 million, or 19X of total exports. A record of US$207.6 million was reached in 1989, or about 25.5% of total exports. Traditionally, five products (corfee, wood and wood products, sugar and - 10 - leather) have accounted for the bulk of agricultural exports. In 1980, this group of products accounted for 711 of agricultural exports, but their share dropped to about 45% in 1989 as exports of soya and derivatives have grown from about US$7 million in 1980 to US$52 million in 1989 (251 of total agricultural exports). Other products with growing markets have been Brazil nuts, which rose from about US$3 million in 1980 to about US$10 million in 1989, and angora wool exports, which increased from US$0.1 million to US$0.37 million between 1987 and 1989. Cochineal and carmine exports were US$0.2 million during 1988-89; and flower exports rose from US$0.04 million in 1987 to over US$0.5 million in 1989. Studies commissioned in 1986-87 have indicated that Bolivia could increase its agricultural exports to about US$400 million per year by the Year 2000. The most promising products and their potential contribution are wood products (US$200 million) and livestock (US$100 million). Soybeans, coffee, Brazil nuts, flowers, alpaca/llama, leather and silk could account for another US$100 million. A brief description of donor supported organization and agricultural export oriented projects is provided in Annex 3. 2.17 The increase in agricultural exports, especially in 1988-89, was due to a number of factors. Response to a stable set of overall economic policies, a depreciation by 4.5% in real terms in 1989 and by 5.1% in 1988 which has realigned the real exchange rate with what can be considered its long term pattern. Anecdotal evidence indicates that competitiveness has improved. Interviews with private sector representatives in 1988-89 emphasized the exchange rate as a constraint on domestic production, while in 1990, there was a general perception that the exchange rate was at a reasonable level. Improvements in river transport helped to remove one of the principal constraints on soya exports. Constraints for Expanding Agricultural Exports 2.18 Exports of agro-based products have historically been promoted on an ad hoc basis with little sustained public sector support for producers and exporters. Until recently, priority has traditionally been given in Bolivia to developing the mining sector. Consequently, agricultural technology is at a low level for most crops, extension services are inadequate, and long-term programs for crops production for export has been limited. In the past ad hoc attempts to export some agricultural products from Bolivia have met with setbacks mainly because of lack of management know-how and quality control with selling abroad. Thus the perception has been created that it is highly risky to invest in agriculture in Bolivia. This perception is further compounded by: (a) an international reputation that quality of product from Bolivia is highly variable, a result of inadequate technology development and know how of international market standards; (b) reluctance of local banks to provide long-term loans to support agricultural development other than to a small number of large farmers; (c) unfamiliarity of banks with the evaluation of pre- and post-shipment loan applications, and with such matters as insurance and letters of credit; (d) absence of timely, reliable and easily accessible information about potential markets, prices and international standards; and (e) lack of experienced managerial capacity for dealing with the complexities of vertically integrated production, processing and - 11 - marketing, especially as regards to infant agroindustry development. These problems are compounded by poor marketing infrastructure for agricultural goods. The national road network is not well connected, especially between potential pi'oduction areas and shipping centers, nor are there storage and packing facil'ties for handling agricultural products. Likewise, the railway system is poorly managed and cannot be fully relied upon to deliver shipments on schedule. However, the management of the railways is being strengthened with an IDA Credit for US$37.0 million for the Export Corridors Project (Credit 2012-BO) of May 1989. To be able to function within these constraints, buyers and sellers of agricultural products have had to establish a long and complex chain of marketing agents, often consisting of the farmers, the local buyers in the village, the truck owner who often is also a producer, the wholesaler, the distributor, and the network of retailers. The presence of these intermediaries has increased the cost of handling products and reduced the profitability to the final producers. Finally, communication with major international trading centers are further constraints because of a shortage of reliable telephone and telex lines. Bank/IDA Strategv in the Agricultural Sector and Export Development 2.19 IDA's strategy in the agricultural sector and for the proposed AEDP, reflects its support for the market- and private-sector-oriented agricultural development policy of GOB. Central to IDA's lending strategy for Bolivia, in addition to the support for structural adjustment (para. 2.02), is the need to expand exports to provide much needed foreign exchange. This would be pursued in a more diversified manner than in the past to avoid an overdependence on a single product and by implementing investments through private institutions like the BEF, as well as through viable public sector organizations like the Regional Development Cooperation for Santa Cruz (CORDECRUZ). The Eastern Lowlands: Natural Resources Management and Agricultural Production Project (Credit 2119-BO) of March 29, 1990, the first IDA operation in the agricultural sector after a hiatus of six years fits well with this approach (para. 2.24). The project is designed to promote the sustainable expansion of soya production and other crops, and the rational use of the region's natural resources in the context of the long-term regional development of the Eastern Lowlands. The longer-term strategy, as stated in the Banks's Agricultural Sector Review under preparation, is to support the sector's objectives by redirecting public sector investment to strengthen marketing, irrigation and infrastructure, especially small-scale works and the generation and transfer of agricultural technology. The latter part of the strategy is being implemented, in the first instance, with the support of the Agricultural Technology Development Project, referred to in paras. 2.11 and 2.24, which is designed to develop and apply the technology needed for increased productivity in the Altiplano and Valles regions. The proposed AEDP would support the next step in this process, namely the linkage of producers with agro-processors and marketing through the newly established private self- financing autonomous foundation, the BEF, with a view to capturing market niches abroad for Bolivian products. - 12 - ExDerience with Past Lending 2.20 A total of nine agricultural projects, amounting to US$104.8 million, have been financed by the Bank/IDA to date in Bolivia, with the two most recent projects: Eastern Lowlands Development Project (Credit 2119-BO), approved in March 1990, and the Agricultural Technology Development Project (Credit 2216-BO), approved in March 1991. Of the nine operations, four of the projects were for agricultural credit, and three for rural development in the Altiplano Overall, the record of past operations in agriculture has been mixed, with some successful projects in earlier years (agricultural credit). The rural development projects approved between 1976 and 1979 have- on the other hand, faced serious implementation problems. The first two IDA operations were for agricultural credit projects for commercial beef development in the tropical lowlands. These were implemented between 1967 and 1974. The projects were administered by a specially created Livestock Project Division in the Agricultural Bank of Bolivia (BAB). Most of the projects' objectives were achieved one year earlier than expected. The Project Performance Audit Report (PPAR) concluded that the two projects had a positive impact on cattle management and beef production, and that the Livestock Division performed satisfactorily in appraising and supervising ranchers' investment programs. However, the PPAR also noted that BAB's financial situation steadily deteriorated during the projects' implementation, largely due to measures taken by the Government, i.e., imposition of unprofitable lending programs, reduction in the interest rate for onlending and devaluation of the Bolivian currency (most of BAB's borrcwings were in foreign currency). 2.21 The third and fourth IDA operations (Credits 261 and 561-BO) were also agricultural credit projects (1971-80) through BAB, with the following aspects distinguishing them from their predecessors: (a) the extension of the beneficiary groups to include small-scale farmers in the Altiplano; (b) an attempt to charge positive interest rates by indexation of the loan principal to large-scale beef farmers; and (c) several studies aimed at reorganizing BAB and rationalizing beef pricing and marketing. The achievements of the third and fourth operations were: (i) the reinforcement of BAB's Livestock Division; and (ii) the establishment of an evaluation and monitoring system. The projects were also successful in diversifying lending operations away from the lowlands with its large farms, to small-scale farmers in the Altiplano and Valles regions. The projects failed, however, in their institutional and sectoral objectives, which were and remained beyond their control. Because the indexation formula had not been agreed upon during negotiations, lengthy discussions took place between IDA, Government and ranchers, and it was not until June 1975 when agreement was reached by all three parties concerned. The agreement was not fully respected either by Government (which in 1978 unilaterally lowered interest rates) or by farmers who, after two devaluations, reaponded by increased defaults on repayments. 2.22 The three rural development projects (Ingavi Rural Development, Ulla Ulla Development and Omasuyos-Los Andes) were identified and appraised during a period of favorable economic conditions. Between 1970 and 1979, real GDP grew at an annual average of 5.4Z, bolstered by buoyant export commodity - 13 - prices, relative political stability, easy access to external financing and high investments. By contrast, their implementation fell into a period of prolonged crisis because net foreign lending ended abruptly in 1979-80 as Bolivia's foreign debt became excessive. It became apparent that past lending was not having a significant development impact, but was instead stimulating serious capital flight. The Bolivian economy steadily declined, reaching an all time low in 1985 when inflation exceeded 20,0002 in annual terms. Between 1978 and 1985, agricultural GDP declined 7S, but its share of total GDP increased to 20%, reflecting the sharp drop in mining and manufacturing. The economic policies pursued by Government between 1978 and 1985 worsened the general economic decline. Interventionist pricing policies, maintenance of an overvalued exchange rate, and excessive Government expenditures (with the accompanying drain on domestic credit, expansion of the public debt, and runaway inflation) created a macroeconomic environment hostile to growth in all sectors, particularly agriculture. 2.23 Under the above circumstances, it is not surprising that implementation of the three rural development projects was unsatisfactory. All projects utilized enclave public sector management units with complex coordination arrangements with other government institutions. The management units have ceased to exist. The agricultural credit components met with some success in their productive objectives, but failed in their institutional and sustainability objectives. The projects were affected by low staff morale and continuous changes in local staff. From the point of view of productive activities (irrigation, forestry, research, extension and institution building), achievements under all three projects fell short of their targets in virtually every area, and actual achievements are not yet proven to be sustainable. By contrast, public social investments (rural roads, health, education and training cr women) showed achievements, which while falling short of their targets, were relatively successful and appear to offer better prospects for sustainability. From the point of view of private investments (on-farm inputs and investments supported by agricultural credit), the achievements fell short of their targets, but were judged to be successful. To summarize, the main problems encountered with these earlier rural development projects, although to a large extent exacerbated by a deteriorating macroeconomic performance, were: (a) weak management; (b) chronic shortage of counterpart funds; (c) weak and unsustainable institutional arrangements; (d) overly-optimistic dependence on coordination; and (e) weak technological basis for the development envisaged. 2.24 As noted in para. 2.19 above, the Bank Group resumed lending for agriculture in March 1990, with the approval of the Eastern Lowlands Project (Credit 2119-BO), after a hiatus of over six years. By that time, GOB had taken strong measures to adjust the economy to correct the macroeconomic shortcomings encountered in the 1970s and early 1980s (para. 2.01). The Eastern Lowlands Project is managed by a special unit in CORDECRUZ. This is a strong implementing agency with a secure of source of funding from oil royalties. Therefore, implementation capability and timely availability of counterpart funds for the project is assured, avoiding the problems of past projects. Project implementation, although at an early stage, is proceeding well. The Technology Development Project approved in March 1991 (Credit 2216- - 14 - BO) is designed to restructure and strengthen the national research agency to help it develop suitable technological packages for poor farmers. This project builds on the experience of past projects in that it seeks to strengthen the existing inatitution responsible for research, albeit a weak institution, and seeks also to focus its efforts on only those crops of importance to the subsistence farmers of the Altiplano. Also, particular attention is given to the provision of counterpart funds and to the ratio of capital and operating costs in the budget, to ensure that field works can be carried out effectively. 2.25 The proposed AEDP incorporates special design features to avoid past problems and to make it possible for BEF to operate efficiently within the existing constraints dewribed in para. 2.18 above. These features are: (a) the BEF is modeled on priTate sector firms with independence of financing and for making decisions based mainly on the bottom line considerations; (b) strong representation on BEF's Board of Directors of prominent local businessmen and donors to ensure business-like orientation; (c) the appointment of an international firm to ensure that BEF would be managed efficiently from the start while Bolivian professionals are trained on the job in order to take over at the end of five years; and (d) secure financing to enable the BEF to access and purchase technology abroad and to hire experienced Bolivian and international experts at attractive private sector salaries. 2.26 IFC has been active in Bolivia every year for the last six years, after six years of inactivity. During FY91, IFC's Board approved six projects for a total value of US$22 million (US$8.0 million in loans and US$14.0 million in equity). Of these the Central Aguirre Portuaria S.A., for a total of investment of US$2.6 million (US$2.2 million in loan and US$0.4 million in equity), would complement the AEDP in that it would expand and restructure Puerto Aguirre, primarily for the export of grains. Puerto Aguirre is Bolivia's sole port facility and is located on the Tamengo Canal, which allows access to the Atlantic Ocean along the Paraguay river. Additionally, this investment complements IDA's Export Corridors and the Eastern Lowlands projects referred to in paras. 2.18 and 2.19, respectively. The IFC supports the AEDP, and it could assist BEF in setting up and possibly financing individual enterprises once these have been established, although it can not participate directly in the BEF (para. 3.07). III. THE PROJECT Introduction 3.01 AEDP was identified by an IDA/FAO-CP mission in October 1987. The feasibility studies for setting up BEF and the first five potential enterprises; as well as the environmental studies for the Amazonia region of Bolivia, including applied research for cochineal (on-going) were prepared by DHV Consultants supervised by Bank staff over more than two years, with a grant of about US$3.9 million equivalent from GON (under Trust Fund - 15 - arrangements). IDA preparation and preappraisal missions visited Bolivia in June 1990 and December 1990, and appraisal was completed in April 1991. Negotiations took place in Washington during October 30-November 1, 1991, and GOB and BEF teams were led, respectively, bv F. Torres and H. Castellanos. Rationale for IDA Participation 3.02 IDA's participation in the proposed AEDP is an integral part of a strategy to support the expansion of agricultural exports to compensate, in part, for the decline in export earnings from hydrocarbons and minerals. This effort is part of a broader strategy to help accelerate economic growth by diversifying productive activity, primarily through private sector participation. 3.03 IDA has played a leading role in conceptualizing and designing the AEDP, including the establishment of BEF. Through IDA's involvement, the proposed AEDP has been designed to include safeguards to protect and improve the environment, especially in the Bolivian Amazonia and in the Department of Cochabamba, and to strengthen the participation of rural women in the various enterprises to be financed by BEF. Moreover, the first group of potential investments, e.g., angora products, cochineal, flowers and Brazil nut (paras. 3.08 (a) through (f)) are conducive for participation of women's groups, since women traditionally handle the processing and marketing of such products at the farm level and in urban centers. Project Obiectives 3.04 The proposed AEDP would establish a mechanism to assist Bolivian farmers and entrepreneurs to take advantage of demand in international markets for high value agricultural products, for which Bolivia has a comparative advantage, but lacks the technical, managerial and financial means to exploit such opportunities. The proposed Project aims to: (a) develop the newly established BEF as a private, autonomous, self-financing organization which would form financially sound agro-based subsidiaries and joint ventures with small- r.nd medium-scale entrepreneurs and investors; (b) introduce improved production, processing, marketing and management technology to upgrade the capacity of producers and exporters to compete effectively in international markets; (c) expand agricultural production, in an environmentally sound manner; and (d) generate employment and capital accumulation in order to improve the incomes and standard of living of poor farmers, women's groups, urban and rural laborers. Detailed Prolect Description 3.05 AEDP would finance three main components: (a) the operations of the BEF, including its enterprise investment program, which initially is expected to consist of five joint ventures and subsidiaries; (b) the employment of .n internationally recruited management firm to provide four experts to help the BEE form and manage, its enterprises while concurrently training Bolivian counterpart managers and staff to take over the BEE by the end of five years; and (c) the provision by BEF of technical asaistance for - 16 - carrying out market research and feasibility studies for identifying additional investment opportunities for export of agricultural products still at the infant stage of development. Details are given below. 3.06 The Bolivia Export Foundation (BEF). The BEF is the heart of the AEDP. The BEF was established on September 20, 1991, by a Supreme Resolution as a private, self-financing, autonomous entity with its own independent Board of Directors, capital and management team. BEF is modeled on Fundacion Chile (CF), an autonomous agency established through a grant of US$50 million equivalent from the Government of Chile and an American multinational firm in 1976. It was established specifically to help overcome the constraints of infant industry development. CF has been very successful in establishing financially viable joint ventures and subsidiaries and in subsequently selling them to private investors. The result has been to greatly increase exports and employment. Like the CF, BEF was created to give Bolivia the long-term institutional capability for vertically integrating the essential activities required to sell agricultural products competitively in international markets. The CF and the BEF have similar objectives and operational arrangements but they are different in that: (a) CF was granted US$50 million (given in nine installments over nine years with 502 of the money disbursed in the first three years), a portion of which CF invested in the financial markets and sold services to generate income to pay for salaries and other overhead expenses until its enterprises, starting in Year 9 began to generate profits. The BEF, on the other hand, would get only a portion of its funds as grant and, unlike the CF, would have to start repaying GOB interest on a portion of IDA's Credit in Year 6; (b) however the BEF could start investments from Year 1 with good prospects for profits starting in Year 6 instead of Year 9 as was the case for CF; and (c) whereas the CP was managed during the first five years by ITT (USA) which has had vested interest to see that its US$25 million would be spent efficiently, the BEF on the other hand, would be managed by an international firm without comparable direct stakes. However, the AEDP provides for safeguards to protect BEF's investments which are discussed in paras. 4.02, 4.03 and 4.05. Establishment of the BEF as a Foundation instead of as a private corporation provides the most appropriate mechanism under the Bolivian circumstances for both mobilizing and channeling donor, Government and multilateral resources for supporting directly private sector investments. The BEF would serve as a development mechanism to bridge the transition from public to private sector responsibility for development of the agriculture sector, particularly agroindustries. The evolving financial sector in Bolivia is not yet in a position to provide the full range of services needed to establish and expand new agro-industrial activities. To this end, BEF would act as a one-stop equity financing and technical assistance service center forming joint ventures with private producers, investors and exporters. The BEF would prescreen carefully its potential partners, beneficiaries, as well as the products, technologies and markets before forming any joint ventures. The BEF, in keeping with its development role and in order not to compete with other private sector initiatives would seek to divest its share in any enterprise within five years of full comercial production. BEF would use revenues from the sale of enterprises, dividends, and from service fees charged for management and/or technical assistance, to cover its overhead costs, repay loans and to sustain its operations. - 17 - 3.07 As a foundation, BEF has no shareholders and under its By-Laws cannot pay dividends on equity. Therefore, while private investors would not participate with equity in BEF itself, IFC and foreign investors could participate in BEF's joint ventures with equity and be paid dividends earned by these ventures. BEF's equity share holding in the joint ventures would be decided after negotiations with potential shareholders. As broad guidelines, BEF would seek a minimum of 10% equity contribution or equivalent commercial arrangements from its beneficiaries, when these are small farmers and of 30% or more when suitable structured partners have been identified. Besides the initial capitalization by GOB (US$22.5 million from IDA, US$9.0 million from GON and US$4.1 million from its own resources), BEF's Board could approve additional borrowing in local and international markets, without GOB's guarantee, except for borrowing from bilateral donors and provided that BEF's debt to equity ratio does not exceed 70:30, unless otherwise agreed by IDA. An assurance to this effect was obtained (para. 6.01 (a)). 3.08 Enterprise Investment Program. During preparation of the AEDP feasibility studies were carried out to specify the levels of investment needed, identify markets abroad, and develop the legal structure for setting up the first five joint ventures and subsidiaries for producing and exporting four agricultural products. The four selected products (angora wool, cochineal, flowers and Brazil nuts) are already being exported by Bolivia, albeit in small quantities and BEF with its financial and technical resources could help increase exports further by targeting its programs to overcome the following constraints. For Brazil nuts and flowers, the main constraint for expanding markets has been the limited supply and the need to improve product quality. Similarly, the export potential for angora wool from Bolivia is promising because of its high quality. To make it financially viable, however, the volume of production needs to be increased. Cochineal production has started only recently in Bolivia, but the demand for this product abroad is growing rapidly. The list of feasibility studies, as well as market analysis for the four products are included in Working Papers of Appendix 1. The detailed arrangements for establishing the five enterprises and their divestments are reviewed in Annex 4, and Annex 5 spells out the tentative program for research and extension to further develop the four products. The main recommendations in respect of the first five enterprises are reviewed briefly below: (a) Angora. Angora hair is produced from the angora rabbit and the angora goat. World production of angora rabbit hair totals 9,000 m ton annually, with China accounting for 90%. Angora rabbits were introduced to Bolivia in the 1980s and presently Bolivia produces about 16 m ton annually, all of which is produced at altitudes of over 2,000 m. This gives the hair its high thermal value and accounts for its superior quality to that of angora hair from China. Angora rabbit farming requires a high level of management to coordinate complex schedules for feeding, veterinarian services, shearing and marketing. It s proposed that ANGOBOL (Bolivian Angora Ltd.) would be established initially as a 100% subsidiary of BEF for the purpose of producing and exporting high quality angora hair. BEF would provide the funds - 18 - as recomended in the detailed feasibility study for establishing ANGOBOL to finance the construction of commercial production, service and administration centers, as well as the cost of on-farm production. This is expected to be located in the Oruro Department of the Altiplano. ANGOBOL's production center would have an initial capacity of 1,500 angora rabbits, increasing to 9,000 animals in Year 3. The center would have land set aside for feed production on 35 ha. The ANGOBOL service center would be constructed to collect, claan, grade, pack and transport the final products from aallholders for export. The production would involve about 70 farms, 35 new farms and 35 existing farms, which would be expanded. This would be supported through technical assistance, involving veterinary services, in-house training and on-fam research into breeding, feeding, management and the strengthening of farmers organizations. Costs would involve financing civil works, equipment and machinery, such as rabbit cages, computers, pumps, laboratory, vehicles, breeding rabbits and working capital. Total cost for ANGOBOL, including that of the management of the enterprise, is estimated at US$5.8 million, of which US$0.8 million would be contributed by beneficiaries over five years. (b) Cochineal (DactyloDius coccus) is an insect parasite of the prickly pear cactus (Opuntia ficus indica). This cactus is a native of the Americas and grows in semi-arid tropical areas, and produces the prickly pear fruit which is sold in local and international markets as a fruit and/or juice. Adult females of the cochineal insect contain carminic acid (16X on a wet basis), which is an organic red coloring agent used in the food and cosmetic industry. It is particularly in demand for the food industry because the carmine colorant is a natural product, safe for human consumption. The cochineal insect is harvested by hand from the cactus plant. After the harvest, it is dried in the open air, and the carminic acid is extracted by crushing. A good yield is considered to be between 130 to 150 kg/ha per annum of dry cochineal. Cochineal has been introduced to Bolivia only recently. Peru is currently the major world exporter of cochineal and carmine, exporting the equivalent of about 300 tons of dry cochineal per year. The Canary Islands are the second major supplier of cochineal, exporting about 50 tons. It is proposed that EMPROCC (The Enterprise to Process Cochineal) would be established in Cochabamba, initially as a 1001 subsidiary of BEF. EMPROCC would produce cochineal in its own production sheds and it would also purchase cochineal from small farmers in Cochabamba. In order to expand production rapidly, EMPROCC would supply prickly pear planting material under contract to farmers or farmers' associations. Present analysis indicates that EMPROCC could supply sufficient raw material of cochineal to run its own extraction plant at full capacity within about two years of initiation of EMPROCC's operations. The export of the dried cochineal and carmine would be done by the Marketing Division of - 19 - BEF. The construction of the carmine processing center would involve funding civil works (office., sheds, stores, drying and classification areas), machinery and equipment (pulverizes, classification equipment, dryer), vehicles and working capital for the purchase of raw material and inputs. Total cost for establishing EMPROCC, including technical assistance, training, marketing support and management, is estimated at US$3.9 million, of vhich US$0.1 million would be contributed by the beneficiaries over five years. (c) lowes. Flower growing has developed in Bolivia as a modern agroindustry only during the last five years and it is still in its 4nfancy. The flower industry started in Cochabamba after yields and market research on flowers had proven that the Cochabamba Valley had favorable climatic conditions (temperature, humidity and light) for growing roses, carnations and chrysanthemums for export. Similar favorable conditions for flower growing exist also in the Departments of Tarija, Chuquisaca and in some small valleys of La Paz, Export of the Samantha rose from Cochabamba accounts for about 62Z of total production and is rapidly increasing. It has a particular market niche in the U.S. (Miami) in February when demand is at its peak for St. Valentine's Day. Current exF;rts amount to over US$0.5 million annually. Studies have been completed indicating further potential for exporting flowers from Bolivia to other Latin American countries. This would be financed under the AEDP. FINFLOR (Flowers Financing Ltd.) would be established in Cochabamba, initially as a 100% subsidiary of BEF. It would be a holding company which would form joint ventures with about 8 to 12 flower producers to help them expand production and export quality flowers. Marketing would be done through an already existing company in the department, the Flowers Services Ltd. (SERVIFLOR). This latter company specializes in marketing and technical assistance. SERVIFLOR would provide technical assistance, training, research and extension. Studies have also been completed on wavs to help small flower growers who sell in local markets and may be adversely affected by flower exporters who sell flowers unsuitable for export in local markets (para. 3.11). FINFLOR's share participation in these joint ventures would finance the purchase of greenhouses, nurseries, deep wells and irrigation equipment, fumigators, cold storage, and post-harvest facilities. The estimated total cost would be US$10.3 million, including the cost of the management team, of which US$1.7 million would be contributed by the flower growers over five years. (d) Brazil Nut Trees (Bertholletia excelsa) belong to a large family of nut-bearing trees comprising 325 species which are found exclusively in the Amazon Basin. Of all these species, only the Brazil nut is collected for the international market. The Brazil nut tree is usually found on high ground that is free draining. It is part of a complex ecosystem, only one kind of bee (Bombus - 20 - *pp.) can pollinate it and the bee itself needs the surrounding forest for its own survival. Attempts to monocrop Brazil nuts have not been successful. The trae grows to 50 m tall with a massive crown standing above the forest. The normal density is 1- 3 trees per ha with a maximum of five. The young tree grows rapidly but produces very little fruit until its fifteenth year. A mature Brazil nut tree can yield up to 100-200 kg of unshelled nuts per year. The data indicate that only about 10-252 of the total crop in Bolivia is collected annually. Mature Brazil nuts pods are collected when they fall to the ground. The pods are split with a machete and the kernels are brought to trading posts on the rivers via dugout conoes. From there they are transported by river boats to the processing plants in Riberalta and other centers. In the processing plants the kernels are cracked and the nuts are extracted. After cracking, the nuts are dried, graded and packed in vacuum sealed bags. This process is mostly done by women by hand. Both the whole and broken nuts are exported at different prices. It is proposed that EMCASCA (Brazil Nut Company) would be formed by BEF jointly with the Federation of Peasants (FP) in Riberalta (the Beni Department). A new Brazil nut cracking plant would be constructed together with storage facilities and narrow footpaths would be cleared for Brazil nut collectors. BEF would manage the marketing of the processed Brazil nuts for ENCASCA for a fee. EMCASCA would finance the final design studies, land acquisition for the plant, civil works, clas3ification shed, septic and water supply systems, storage rooms, nut crushers, dehydration ovens, vacuum packers and vehicles. The total cost of this investment, including training, marketing and the management team, is estimated at US$2.0 million of which US$0.1 million would be contributed by the beneficiaries over five years. (a) A second Brazil nuts enterprise is envisaged by Vaca Diaz Foundation (VDF). BEF would form a joint venture with VDF to finance the rehabilitation of a cracking plant in Riberalta, presently owned by the National Development Corporation of Beni. The cost of rehabilitating the plant would be US$0.3 million (including price contingencies), plus US$0.2 million of working capital and US$0.1 million for technical support, for a total of US$0.6 million. In addition, it is envisaged that the VDF would be responsible, as part of a cooperation agreement with 6EF, to manage an agro-forestry program which would involve establishment of about 100 ha of such species as achiote, black pepper, medicinal plants, etc. The purpose of this program would be to introduce an alternative farming system to the slash-and-burn cultivation practices in this area with a more environmentally sound system in order to stabilize production and to safeguard the environment in the Amazonia region of Bolivia. Tentatively, this program would also include planting Brazil nut seedlings (about 7,000) along existing trails, the establishment of nurseries, and long-term research and extension. VDF's agro-forestry program - 21 - would be designed on the ba-is of a detailed environmental, agro- ecological and socioeconomic assessment already underway with financing from GON (paras. 2.15 and 4.06). For the agro-forestry research and development program, US$2.6 million has been tentatively allocated and GOB has agreed to approach donors for additional funding should the assessment studies recomend initiation of a much larger program than is presently planned. (f) In the case of the two cracking plants in Riberalta referred to in (d) and (a) above, considerable progress has been made since the preparation of the AEDP started to improve consultation and sharing of information about world market prices for Brazil nuts. The modernization of plants now taking place in Riberalta would help to increase incomes and make it possible for cracking plant owners to provide more adequate social and sanitation assistance to Brazil nut collectors and workers. The setting-up at the ENCASCA plant should, over time, lead to further improved socioeconomic conditions due to greater demand for labor in the local market. Assurances were obtained that GOB and BEF would use their best endeavors to improve the socioeconomic conditions of farmers' families and laborers participating in the investment enterprises, and GOB shall ensure that BEF shall carry out environmental assessments and studies for any investments, satisfactory to IDA (para. 6.01 (b)). It would be a condition of disbursement for each enterprise investment activity of the BEF that a joint venture or subsidiary enterprise had been legally established, satisfactory to IDA, and that the BEF would submit evidence (legal opinion) for this purpose (para. 6.03). This requirement is spelled out in BEF's OH. 3.09 The Management Team. The second component of AEDP would finance hiring an international management firm which vould consist of four highly qualified professionals, who between them would bring to BEF administration and financial management experience in agricultural production and exports. The management team would report to BEF's Board. The four management experts would help BEF form and manage its enterprises while concurrently training Bolivian counterpart staff to take over the management of BEF at the end of five years. The management firm would be contracted initially for three years, renegotiable upon satisfactory performance for two additional years. The estimated total cost of the management component is US$3.8 million. 3.10 Product/Market Research and Development. The third AEDP component would involve the research and development arm of the BEF for identifying new products and export markets for agricultural goods. To this end the BEF would finance technical assistance for production, marketing research and feasibility studies for developing new product lines some of which have been tentatively identified during the preparation of the AEDP, such as leather, llama/alpaca, wool, essential oils, potpourri, silk, natural rubber, quinoa, natural sweeteners (Stevia Rebaudiana) and others. BEF would finance, testing and pilot programs prior to full scale production. It would also finance technical experts to carry out on-farm trials, conduct market test, analyze - 22 - different packaging technologies and undertake pilot investmeats under BEF's supervision. Additionally, BEF would hire experts, depending on actual demand from potential clients in Bolivia, to: (a) provide services, under management contracts, to improve performance of existing export-oriented enterprises; and (b) help farmer groups to solve production and marketing problems, and to set up and manage quality control programs to stimulate exports. BEF would render these services for a fee which would fully cover the costs and thereby contribute to the sustainability of its operations. The total estimated cost of this component would be US$5.3 million. 3.11 BEF's Board of Directors, appointed in June 1991, has started reviewing all the feasibility studies for the AEDP. They expect to completo their review in early 1992 and with the help of the management team present for IDA's approval the first year ABP for BEF'. inveetment program. Assurances were obtained that BEF's Board would submit its first ABP for IDA's approval, not later than three months from the date of effectiveness of the IDA credit, and thereafter by November 30 of each year, with the first such ABP to contain, among other things, BEF's investment plans in respect to each of the five enterprises, the training program for Bolivian managers and staff, and for the technical assistance research and product development component. (para. 6.01 (c)). Additionally, to ensure compatibility and high technical quality of investments under the AEDP and those of other export-oriented projects which may be supported by donors, assurances were obtained that: (a) the Ministry of Planning and Coordination would screen all official aid proposals related to export development to ensure that such projects would be compatible in their technical and quality aspects with those of BEF, and that the terms and conditions of loans or grants given to promote exports be no more favorable than those to be provided by BEF; and (b) the Ministry of Industry, Commerce and Tourism would permit exporters to follow expeditious export documentation procedures, satisfactory to IDA (para. 6.01 (d)). Because donor supported projects could impact negatively on small-scale growers depending exclusively on domestic sales, the Ministry of Industry, Commerce and Tourism, together with the Ministry of Planning and Coordination, would be responsible for reviewing with donors agro-export oriented projects and ensure that these would contain studies in relation to, and measures to provide technical assistance and support to affected groups to help them adjust to changing economic conditions. GOB has provided IDA with a letter spelling cit the arrangement for screening such projects in order to mitigate adverse effects on domestic producers. Proiect Costs 3.12 The total project cost is estimated at US$39.7 million with a foreign exchange component of US$28.8 million (72%). Price contingencies total US$4.6 million (13%) (Annex 6). The cost of the project was calculated using June 1991 prices. Price contingencies and foreign exchange rates were estimated on the basis of Bank projections for local and foreign inflation as follows; local price contingencies 8Z for 1992, 6% for 1993, and 5% p.a. thereafter, and foreign price contingency 6% for 1992, and 3.41 p.a. thereafter (Bank/IDA projections). - 23 - Proiect Flnancing 3.13 The proposed IDA credit of US$22.5 million would finance 57% of total project costs, equivalent to 72% of the project's incremental foreign exchange costs, and 20% of the local costs. The balance would be financed as follows: US$2.7 million equivalent from the beneficiaries of the enterprises; US$4.1 million equivalent from GOB --US$0.5 million as a loan, denominated in dollars, carrying interest at a rate equal to either 8% or LIBOR plus two percentage points, whichever is greater, and deferral of payments on the onlent IDA funds amounting to US$3.6 million representing interest during implementation of the initial investments-- US$9.0 million as grant from GON which would be administered bv IDA; and US$1.4 million equivalent from service fees to be charged by BEF for its technical assistance contracts. GON has confirmed by way of a letter of intent to BEF/GOB, satisfactory to IDA, that it will provide US$9.0 million equivalent for AEDP. Conditions of effectiveness are that the financing arrangements between GOB and GON have been entered into and that GOB has entered into a subsidiary agreement with BEF for the transfer of the proceeds of IDA credit on terms and conditions satisfactory to IDA (para. 6.02 (a)). The subsidiary agreement would, among other things, spell out the terms and conditions for GOB passing on IDA's credit to BEF as follows: (a) US$13.2 million of the IDA credit to be provided as a grant to finance those aspects of the project not directly related to the investments to be') made in the joint ventures and subsidiaries established by the BEF. Such aspects include BEF's management and administration, technical serv14ces for Product/Market Research and Development component, capital contributior for general operations, as well as the agro- forestry research program; and tb) US$9.3 million as a loan denominated in dollars over 25 years (5 years.. grace)(interest accrued in Years 1 through 5 would be repaid over Years 6 thSough 25), carrying interest at a rate equal to either eight percent (8%) or LI!rP plus two percentage points, whichever is the greater investment side of h F's operations. These terms and conditions are commensurate with the income projections and financial capacity of BEF to secure this debt and provide irves ment capital to set up new enterprises. The grant amount of US$13.2 millico, and the loan amount of US$9.3 million are indicated for planning purposes and these amounts, plus the GON participation of US$9.0 million equivalent reflect the needs of the first five proposed projects under the AEDP. Should there be more demand for financing additional enterprises and/or different enterprises requiring more money from the loan portion, BEF could request the IDA to reallocate funds within the Credit. The subsidiary agreement would contain provision that the actual interest rates at the time the actual disbursement takes place would be established and remain fixed for that portion of the loan pertaining to each of the enterprises to be financed by BEF. Thus, the loan portion of the AEDP may have different sets of terms and conditions to reflect market rates at the time of actual withdrawal of such funds by BEF. Procurement 3.14 Given that the operation would involve financing private sector investments through equity contributions from BEF, procurement would be handled in the same manner as in DFC operations. Since IDA would administer - 24 - GON funds, all procurement under the project would follow IDA's Guidelines for Procurement and IDA's Guidelines for the Use of Consultants. Goods and works should be procured following ICB procedures satisfactory to the Association. Individual contracts for goods and works estimated to cost less than US$3 million each may be awarded on the basis of established commercial practices which are acceptable to IDA requiring, whenever appropriate, comparison of at least three responsive price quotations from suppliers/contractors from at least two eligible countries. Under contracts awarded following ICB procedures, local manufacturers and contractors would be granted a margin of preference in accordance with IDA guidelines. Consultants, including the management firm, would be selected and appointed under procedures, terms of reference and conditions of contract satisfactory to IDA (para. 4.02). Prior review by IDA would be required for all ICB procurment and for the first two non-ICB contracts for goods or works. In addition, IDA would review procurement documentation during project supervision. The above procurement procedures would be contained in BEF's OH and (para. 4.03), and would form part of BEF's op2rational agreements with any joint or subsidiary ventures. Under the OM, the enterprises would procure goods, works and services following BEF's management authorization and BEF would do its own procurement for the components pertaining to its own activities, such as, consulting services, research and product development etc. Assurances were obtained that BEF and its enterprises would follow the procedures outlined above (para. 6.01 (e)). Annex 6 shows the expected procurement arrangements. Disbursements 3.15 The proposed IDA Credit of US$22.5 million would be disbursed over 7-1/2 years based on the standard disbursement profile for the Agricultural Sector in Latin America, modified to take into account the existence of a Special Account. IDA would disburse 702 against eligible expenditures for vehicles, equipment, civil works, administrative costs, rental facilities, land leasing, working capital, management fees, technical assistance and training. IDA would administer GON funds (US$9.0 million) which would be disbursed jointly at a ratio of 30:70. 3.16 Disbursements would be made against statements of expenditures (SOEs), except for contracts for goods or civil works exceeding US$0.5 million equivalent for which submission of full documentation would be required in accordance with IDA Guidelines. All supporting documentation would be maintained by BEF and would be available for review upon request by IDA. 3.17 To facilitate project execution, GOB would establish a Special Account in the Central Bank, with an initial deposit of US$2.5 million which would cover about four months of estimated expenditures. Subsequent replenishments by IDA into the Special Account would follow normal procedures. The project is expected to be completed by December 31, 1996. The Closing Date would be December 31, 1997. - 25 - Accounting and Auditing 3.18 BEF would establish and maintain separate accounts for each of its enterprises, and consolidated accounts of all of its enterprises, as well as other records that are needed to account for AEDP's public and private goods categories costs and financing. Separate accounts and records would also be maintained by the joint venture enterprises. BEF's OM would spell out the accounting and auditing procedures which the enterprises would have to follow, based on the audit requirements which include full annual audits of the accounts of each of the enterprises as well as those of BEF (Annex 7). Assurances were obtained that the GOB would establish and maintain the Special Account, and that the SOEs, BEF's consolidated accounts and the accounts of each enterprise would be audited annually by an independent auditing firm satisfactory to IDA. GOB's audit report for the Special Account and BEF's audits of the SOEs and of its consolidated project account would be submitted to IDA within six months of the close of each fiscal year (para. 6.01 (f)). IV. AEDP IMPLEMENTATION The Executing Agency - BEF 4.01 AEDP would be implemented by BEF, which as noted in para. 3.06, was established as a private, autonomous, self-financing entity by Supreme Resolution No. 209621 on September 20, 1991, together with the By-Laws of the same date, satisfactory to IDA. BEF is headed by an independent Board of Directors with final say in respect of BEF's overall policies and investment decisions. To avoid conflict of interest, BEF's By-Laws and the OM specify that Board members cannot vote on investment proposals in which directors have a personal stake. Also, the By-Laws specify that the Board would be composed of a minimum of six and a maximum of 12 members and their alternates, appointed initially for a period up to three years, and thereafter renewable once every three years by a vote of the members. Presently, the Board is composed of five Bolivians, one representing GOB, four prominent businessmen active in the private sector, one of whom is the President of the Board, and one representative from GON. All the Board members have been selected on the basis of their professional integrity and commitment to the objectives of BEF and economic development of Bolivia. They have been appointed under terms and conditions satisfactory to IDA. Assurances have been obtained that the BEF's Board of Directors Selection Committee would appoint new directors with skills, qualifications and experience specified in the By-Laws, satisfactory to IDA (para. 6.01 (g)). Each director has one vote. Board members are paid a fee for each Board meeting. Board members have been meeting at least twice a month since their appointment in early June 1991 to familiarize themselves with the AEDP and to review the feasibility studies and they would meet three to four times per annum and/or more frequently, s*. the request of at least three members. The directors would have the right to invite outside observers to the Board meetings, as is spelled out in BEF's By-Laws and regulations. IDA's Resident Representative in Bolivia has been invited to attend meetings as an observer. - 26 - 4.02 Day-to-day operations of BEF would be handled by an internationally recruited management firm comprising a core team of four expatriates, headed by the general manager and three division managers (marketing, technical, financial and administration) (Annex 8). BEF's Board of Directors had submitted the profiles of the four experts and a shortlist of six management firms, together with the selection criteria and the invitation letter. Six firms, satisfactory to IDA, have been invited to submit proposals to BEF by January 3, 1992. In order to ensure that the selected firm would perform efficiently, the BEF would contract it initially for three years with an option for renewal for two additional years, subject to satisfactory performance to be determined during the mid-term assessment (para. 4.05). A condition of effectiveness of the IDA Credit is that BEF's Board of Directors will sign a contract with a management fire for three years with an option for renewal for two years, on terms and conditions satisfactory to IDA and that the general manager has taken up his/her position in Bolivia; in the event of unsatisfactory performance the BEF would appoint a new firm satisfactory to IDA (para. 6.02 (b)). Assurances were obtained that the BEF would maintain the management firm for the duration of the contract (subject to satisfactory performance) and that each management firm would not replace its personnel for the duration of the contract without IDA's approval (para. 6.01 (h)). 4.03 The management team would be required, under the contract, to work closely with Bolivian staff with a view to transferring the responsibility for managing BEF to Bolivians by the e'nd of Year 5 of BEF's operation. The specific training programs would be reflected in the ABP each year. The operational and financial policy guidelines of BEF are spelled out in the OM and a summary of these is provided in A\nnex 4. The OM spells out BEF's financial and operational policies, as wall as the detailed rules, regulations and operational procedures in respect of the Board of Directors, the management, organizational structure, authority and responsibility, appointment of staff, criteria and financial ratios for enterprises, budgetary and fi_anc^al performance criteria for BEF's enterprises and beneficiaries, financial covenants for the various enterprises, provisions for beneficiaries to buy-back shares, procurement procedures, a brief outline of disbursement and monitoring procedures at all levels, guidelines for preparation of feasibility studies, draft standard shareholders agreement for joint ventures and the documents required to establish a subsidiary company in Bolivia, which would also include environmental aspects. A draft OM was submitted for IDA's review and after incorporating IDA's comments BEF's Board would formally adopt it as a condition of effectiveness (para. 6.02 (c)). Assurances were obtained that the BEF would follow the procedures set forth in the OM and that such procedures would not be modified without the prior approval of IDA (para. 6.01 (i)). The Functions and Responsibility of BEF'. Management 4.04 The management team would consist of the general manager; the marketing manager, the technical manager, and the controller. It is expected that the international experts would be replaced by the fifth year by Bolivians who would be trained on the job in the intervening period. BEF would have the flexibility to hire staff as required and to pay competitive - 27 - salaries to attract and retain highly qualified professionals. Each joint venture or subsidiary to be established by BEF would have its own Board of Directors and manager. BEF's small management team in La Paz would oversee the operations and management of each of these enterprises. In addition, BEF's core management team would be responsible for identification of new products, carrying out feasibility studies, providing quality control and marketing services for a fee to BEF's enterprises as well as to oversee businesses under separate management contracts. A finance comittee composed of the general manager, the three divisional managers and one Board member, would review and approve all BEF plans, budgets, financial statements, and feasibility studies, prior to their submission for final approval by the Board. BEF's operations would be carried out by three divisions with the tentative staff composition as indicated below: (a) The Marketing Division when fully staffed would be headed by one Manager who would report directly to the general manager, a market researcher, one person responsible for documentation, a traffic manager, freight forwarder and part-time specialized international consultants to be hired for specific tasks as and when needed. The marketing division would have the overall responsibility for market research, demand and supply projections, and for monitoring international prices. It would be responsible for identifying potential buyers, product quality control and transport/shipment. Bolivian exporters generally lack ready access to foreign buyers, and know little of what importers require in terms of quality, packaging, labeling, and procedures and requirements for handling Letters of Credit. The efficiency of the marketing division would be critical for the success of AEDP; (b) The Technical Division would be headed by the manager and his/her deputy on a full-time basis. The division would hire experts for carrying out feasibility studies to determine whether and under what conditions BEF should enter into joint ventures or set up its own subsidiaries. The technical division would work closely with the marketing division in order to determine the availability of buyers and quality standards prior to entering into pilot or full scale production. The technical division would be responsible for all the technical aspects of research and product development, including technical training as well as for designing and appraising product development, preparing the feasibility studies, packaging, engineering designs, carry out social and environmental assessments for each of the enterprises; and (c) The Finance and Administration Division would be headed by a controller and his/her deputy. The finance and administration division would be responsible for all the financial aspects of BEF including reporting (e.g., consolidatei inancial statements of BEE and its enterprises), budgeting, forecasts, request for reimbursements, financial controls, and management of grant and loan elements of BEF's financing. It would be responsible for managing and controlling the cost of all BEF's operations to - 28 - ensure that BEP can maintain its financial viability over the long term. This division would also be responsible for all personnel administration and purchase and maintenance of BEF's buildings, equipment and vehicles. Monitorina. Evaluation and Reiortina 4.05 The finance and administration division would, in addition to its financial management responsibility, al*o establish and manage a monitoring and evaluation system. BFP's monitoring system described in the OM would track all the critical production, marketing and financial activities of the enterprises as well as those aspects of the AEDP not directly related to enterprises such as product and market research operations. The monitoring system, which is satisfactory to IDA, is designed to provide essential decision making information for different levels: Board of Ditectors, the core management team and managers of the enterprises (Annox 9). An assurance was obtained that BEP would put the monitoring system into operation within six months from the date of effectiveness (para. 6.01 (j)). Assurances were also obtained that BEP's Board would hire consultants and prepare, not later than two years of credit effectiveness, to'rms of reference, satisfactory to IDA, to carry out, not later than 2-1/2 years after credit effectiveness, a mid-term assessment of BEF's overall performance, and that within three months of the commencement of the mid-term review, a report together with an action program of corrective measures would be submitted to IDA for review and comment (para. 6.01 (k)). The objectives of the mid-term review would be inter alia to determine if BEF's Board, management team, the enterprises and the various research and techmology development programs, are working effectively. The consultants would make specific recomendations for improvements and prepare a specific action plan and timetable for this purpose. Tho performance indicators listed in Annex 9 would serve as guidelines for the preparation of terms of reference for the mid-term assessment and to review progress of the AEDP. Until the initiation of the mid-term review, the BEF would regularly inform IDA about the status of the AEDP and an assurance wa obtained that BEF would provide IDA, by June 30 and December 31 of each year, a brief progress report, on the operations of BEF, the various ventures and the product/marketing research and development components identifying the main implementation and financial issues (para. 6.01 (1)). An assurance was also obtained that BEF would submit a Project Completion Report within six months after the closing date of the credit (para. 6.01 (i)) and that BEF shall not lend any funds or provide guarantees for third parties without IDA's and GOB's prior approval (para. 6.01 (n)). Because the key objective of the BEF would be to foster private sector development, it would be a condition of default under the credit if by the time of the mid-term review, BEF had not established at least three joint ventures and or subsidiaries, unless otherwise agreed with IDA (para. 6.01 (o)). Environmental ImDact 4.06 The Froject includes safeguards to prevent any enterprise from having an adverse impact on the environment. The O spells out that for each - 29 - of the enterprises to be supported under AEDP, detailed environmental assessment studies would be done, fcllowing the criteria laid down in the ON. Such assessments have been already completed for the three of the investment proposals identified during the preparation of the AEDP. Details are given in Annex 10. In connection with the two investments pertaining to EMCASCA and VDF, as mentioned in paras. 2.15 and 3.08 (e) and (f), the need for preparation of an environmental assessment and agro-ecological and socioeconomic studies in the Bolivian Amazonia was identified and the studies are underway. The studies consist of preparation of: (a) an environmental profile, a basic document on the environment and the environmental problems of the region. The profile would provide an in-depth analysis of the actual situation of the environment, the trends and what should be done to safeguard the environment, by whom and at what costs; and (b) a regional land use zoning map and plan and an agro-ecological and socioeconomic studies as a base for the sustained use, development and protection of the natural resources of the region, and in the settlement areas of the Riberalta region. Completion of these stvdies is one of the conditions of starting up each of the above- mentioned enterprises. V. FINANCIAL AND ECONOMIC JUSTIFICATION. PROJECT BENEFITS AND RISKS Financial Proi ections 5.01 The financial projections for the five enterprises, i.e., ANGOBOL (angora wool), FINFLOR (flowers), EHPROCC (cochineal and carmine), EHCASCA and VDF (Brazil nuts) are based on BEF receiving, beginning in Year 6, funds in the form of dividends and equity repayments from the enterprises which would allow BEF to service its debt and invest in new enterprises. It is projected that BEF, together with the management firm and beneficiaries, would have US$22.6 million to invest in the initial five enterprises although this amount could be increased depending on actual demand (para. 3.13). Another US$8.0 million would be available to invest in technology transfer, research and product development over a period of five years. BEF's overhead is projected to be US$5.5 million, i.e., management, administration and office costs, US$5.2 million, plus the Board of Directors, US$0.3 million, for the first five years. Annex 11 provides the consolidated income statement and balance sheet for BEF. The financial projections have been prepared by IDA. These are still tentative projections for the BEF and its enterprises and they would be refined and submitted as part of the feasibility studies for each of the enterprises for IDA's review. 5.02 The projections provide for BEF's investments to start generating income beginning in Year 6, mainly from dividends and fees it would receive from selling, marketing, management and technical assistance services. The overall financial rate of return for AEDP would be 20%, dropping to 13% in the event the average sales price declines by 102. 5.03 The financial rates of return (FIRR) for the five enterprises are as follows: ANGOBOL 20S, FINFLOR 252, EMPROCC 44%, EMCASCA 232, and VDF 65Z - 30 - (the higher return for VDF is because of the lower cost involvod in rehabilitating an existing nut cracking plant). It is projected, on the basis of the cash flows, that BEP's joint venture partner. in EMCASCA and VDF would be in a good position to buy-out BEP shares in these enterprises and become 1002 owners over a ten-year period, with payments starting in Year 6. Regarding FINFLOR, it is expected that the individual beneficiaries of FINFLOR would be able to buy-out the shares which PINPLOR would hold in the respective joint ventures. This would generate liquidity for PINFLOR, which could be used either for expansion or for payments to BPF. The gradual buy-out by the partners of FINFLOR could start on a modest scale as early as Year 4 of the project. It is projected that EHPROCC and ANGOBOL would be sold anywhere between Years 8 and 10. The financial projections for ANGOBOL have been based on a price of US$28.60/kg f.o.b., or US$23.80/kg for angora hair for the producing farmer. A 102 lower price would still be acceptable (FIRR 13x). Prices in the past have been fluctuating between approximately US$22 to over US$50/kg f.o.b. The enterprises are expected to be able to pay dividends starting in Year 6. Economic Benefits and Risks 5.04 The overall economic rate of return (ERR) for AEDP is estimated at 27X on the basis of benefits to be derived from the first five enterprises. The economic rate of return for each of the first five enterprises are estimated as follows: ANGOBOL 27Z, FINFLOR 36%, EMPROCC 51%, EMCASCA 32%, and VDF 78%. The ERR and the NPV for AEDP and the first five enterprises are presented in Annexes 12 and 13, respectively. Tentative projections are for the AEDP to generate about 4,000 permanent jobs of which an estimated 1,000 would be for women. The AEDP would substantially increase exports of agricultural products and foreign exchange earnings and provide a self sustaining mechanism, capable of identifying and establishing viable new agricultural enterprises to produce and export agricultural products. 5.05 One of the risks is that BEF may, because of domestic and/or external circumstances, and in spite of having the five enterprises ready for operation as soon as IDA's credit becomes effective, fail to develop the capacity to establish and manage profitably export-oriented enterprises. This could happen if macroeconomic performance and business environment in Bolivia, and in international markets were to deteriorate and undermine international trade making it difficult for BEF to export regardless of how well BEP is managed. On the Government's part, it continues to deepen its program of economic adjustment. On BEF's part its diversified export portfolio should minimize this risk. Nevertheless, there is also the risk that after it reviews the feasibility studies prepared to date, BEF's Board may decide, for sound business reasons, not to go ahead and finance some of the five enterprises, delaying the investment program component. However, the advanced state of preparation of feasibility studies for the first five enterprises and BEF's Board members active consultation to date with potential investors and beneficiaries make this latter risk unlikely. Furthermore, BEP is expected to play a central role in the development of agroindustrial technology for Bolivia which is considered to outweigh any unforeseen delays that might be encountered. The AEDP includes safeguards to reduce operational risks related - 31 - to the implementation of the project which, inter alia include: (a) consultation between IDA and the Board regarding action on the feasibility studies and BEF'a work progrom through the preparation of the ABP; (b) strong representation on BEF's Board of Directors of prominent local businessmen and donors to ensure businesslike orientation for BEF; (c) the selection of a highly experienced international management firm to ensure that BEF would be managed efficiently; (d) comprehonsive criteria agreed with IDA for appraising, evaluating and implementing investments, including prior approval by IDA of each feasibility study covering economic, financial; technical and social aspects of each enterprise as mentioned in the OM; and (e) close supervision and monitoring of BEF's operations, including a mid-term performance assessment linked to a monitoring and evaluation system. The mid- term review would identify problems and make it possible to take remedial actions at the early stages of implementation, as necessary. An event of default under the credit would occur if the BEF is unable to establish at least three enterprises by the time of the mid-term review, unless otherwise agreed with IDA. VI. AGREEMENTS REACHED AND RECOMMENDATIONS 6.01 It was agreed that: (a) BEF's debt to equity ratio would not exceed 70:30 unless otherwise agreed by IDA (para. 3.07); (b) GOB and BEF would use their best endeavors to improve the socioeconomic conditions of farmers' families and laborers associated with investment enterprises, and GOB shall ensure that BEF shall carry out environmental assessments and studies for any investments satiafactory to IDA (para. 3.08 (f)); (c) BEF Directors would submit for IDA's approval, the first ABP not later than three months from the date of effectiveness of the IDA credit, and thereafter by November 30 of each year. The first ABP would contain, among other things, BEF's investments plans in respect to each of the enterprises identified during preparation of the AEDP and the training program for Bolivian managers and staff (para. 3.11); (d) (i) the Ministry of Planning and Coordination would screen all official aid proposals related to exports to ensure that such projects would be compatible in their technical and quality aspects with those of BEF, and that the terms and conditions of the loan/grants given to promote exports be no more favorable than those to be provided by BEF; and (ii) the Ministry of Industry, Commerce, and Tourism would permit exporters participating in AEDP to follow expeditious export procedures satisfactory to IDA (para. 3.11); - 32 - (e) BEF and the enterpriles would follow the procurement procedures noted in the SAR and that the consultants would be hired in accordance with the World Bank guidelines (para. 3.14); (f) GOB would establish the Special Account and SOEs and BEF's consolidated accounts and the accounts of each enterprise would be audited annually by an independent auditing firm, satisfactory to IDA. GOB's audit report for the Special Account and BEF's audit of the SOlE and the consolidated project account would be submitted to IDA, within six months of the close of each fiscal year (para. 3.18); (g) BEF's Board of Directors Selection Comittee would appoint new directors with skills, qualifications and experience specified in the By-Laws, satisfactory to IDA (para. 4.01); (h) BEF would maintain the management firm for the duration of the contract (subject to satisfactory performance) and that each management firm (in the event that BEF replaces the first firm) would not replace its personnel for the duration of the contract without IDA's approval (para. 4.02); (i) BEF would follow the procedures set forth in the Operational Manual and would not modify the procedures without the prior approval of IDA (para. 4.03); (j) BEF would put the monitoring system into operation six months from the date of effectiveness (para. 4.05); (k) BEF would hire independent consultants and prepare not later than two years of credit effectiveness, terms of reference, satisfactory to IDA, to carry out a mid-term assessment of BEF's overall performance, not later than 2-1/2 years after the date of effectiveness, and that within three months of the comencement of the mid-term review, a report together with an action program of corrective measures would be submitted to IDA for review and comments (para. 4.05); (1) BEF would provide IDA by June 30 and December 31 of each year, a brief progress report and financial statements on the operations of BEF and the various ventures, and the product/market research and development component which would identify the main implementation and financial issues (para. 4.05); (m) BEF would submit for IDA's coments, a Project Completion Report within six months after the closing date (para. 4.05); (n) BEF shall not lend any funds or provide guaranties for third parties without IDA's and GOB's prior approval (para. 4.05); and - 33 - (o) BEF shall, by the mid-term review, BEF have established at least three joint ventures or subsidiaries, unless otherwise agreed with IDA (para. 4.05). 6.02 The following are conditions of effectiveness: (a) that financing arrangements between GOB and GON have been entered into and that GOB has entered into a subsidiary agreement with BEF for transfer of the proceeds of IDA credit on the terms and conditions, satisfactory to IDA (para. 3.13); (b) BEF's Board of Directors has signed a contract with the management firm for three years with an option for BEF's Board for renewal of two additional years, on terms and conditions satisfactory to IDA, and the General Manager has taken up his/her place in Bolivia; in the event of unsatisfactory performance, the BEF would appoint a new firm, satisfactory to IDA (para. 4.02); and (c) that the BEF's Board has officially adopted the OM (para. 4.03). 6.03 The following would be a condition of disbursement (for each subpro1ect or enterDrise): that BEF would submit evidence satisfactory to IDA, that the joint ventures or subsidiary enterprises have been legally established, satisfactory to IDA and the BEF would submit legal evidence (including a legal opinion)(para. 3.08 (f)). 6.04 Subject to the above, the project provides a suitable basis for an IDA credit to the Republic of Bolivia for SDR 16.6 million (US$22.5 million). The terms would be standard, with 40 years maturity. -34- ANNEX 1 BOLIVI AGRO-EXPORT DEVELOPMENT PROGRAM (AEDP) Exports Performance (1980-1989) (US$ million) 1980 1985 1987 1988 1989 TRADITIONAL PRODUCTS 886.2 638.3 453.3 484.1 605.9 Minerals 641.1 263.8 204.8 269.2 395.6 Hydrocarbons 245. 374.5 248.5 108.2 210.3 NONTRADITIONAL PRODUCTS 146.8 34.2 108.2 111.8 207.6 1. Grained coffee 22.6 13.9 11.5 16.9 12.0 2. Soyabean and derivates 6.9 5.3 18.0 20.8 51.6 3. Sawn wood 23.8 4.3 22.9 17.3 33.1 4. Wood Products 8.8 1.4 7.4 6.2 10.3 5. Sugar 50.2 1.8 6.3 5.5 19.0 6. Bovine leather 1.4 0.4 3.9 7.8 15.7 Subtotal 111.7 27.1 70.0 74.5 141.7 7. Bovine cattle 1.3 1.2 6.7 0.5 6.5 8. Cotton yarn 1.0 0.4 5.7 0.6 7.6 9. Cotton garments 1.0 1.1 10. Natural Rubber 0.9 0.1 1.7 2.2 1.3 11. Cacao 0.4 0.9 0.9 0.9 1.7 12. Brazil nut 2.8 1.5 6.8 5.6 10.2 13. Fresh flowers 0.2 0.6 14. Cochineal & similarities 0.2 0.2 15. Grained Quinua 0.1 0.2 0.2 16. Llama & Alpaca dirty fine hair 0.3 0.3 1.8 4.2 17. Llama & Alpaca fur prod. 0.7 1.0 2.4 18. Other 28.6 2.7 15.2 23.3 27.3 Subtotal 35.1 7.1 38.2 37.3 65.2 TOTAL EXPORTS 1033.0 672.5 561.5 595.9 813.5 X of Export Non-traditional Products to Total Exports 14.21% 5.00% 19.27% 18.76% 25.52% BOLIVIA AGRO-EXPORT DEVELOPMT PROGRAM (AIDP) PHYSICALENVIROENENTAL POTENTIAL AND CONSTRAIITS FOR PRODUCTION OF SLECTD EXPORT AND IMPORT SUBSTITUTIOIN CROPS REGIONICROP MOST SUITABLE AREA/ENVIRONMENT OF PRODUCTIOR PUYSICALIEVIROIENTAL CONSTRAITS ALTIPLAO Quinoa Northern and Central Altiplano - lack of uniform product and suitable varieties for export; desaponification technology to be developed further. Alpaca wool Northern Altiplano - limited & heterogeneous stock; limited availability of suitable grazing lands, low managment. Llama fibres Southern Altiplano & Western part Central Altiplano - new product; no management packages available. Angora wool Near urban centres - lack of reproducers and suitable locally produced food. Hides/leather Central Altiplano/Urban Centers - poor livestock management; poor quality of raw bides. goods Trout (lake) Lake Titicaca - proper production technology to be developed. Pyrethrum Borders of Lake Titicaca - lack of sufficient suitable land (competition with food and vegetable crops). VALLEYS Cochineal Lover & middle slopes between 1500-2500m. - new product; tecbnology to be developed. 400-600mm. of rainfall (middle valleys) Garlic Plains with irrigation possibilities in the upper - limited availability of suitable land; for export the valleys between 2500-3000m. - crop requires agri.research (variety selection & nematode control. Flowers Valleys between 2500-2500m. with high luminosity - management level to be improved (cultural practices; (temperate) availability of irrig. water; near urban centers. limited availability of suitable genetic & propagation material; locally problems with irrigation water. Flowers Yungas - proper technology to be developed. (tropical) Pyrethrum Upper valleys - adverse climatic conditions for good yields (erratic rainfall). Asparagus Sandy, fertile soils rich in humus, near urban - suitable land very limited; production technology to be developed. centers in middle valleys. Grapes Dry middle valleys with irrigation possibilities - adverse climatic conditions (hail damage); low yields (need for better varieties and effective phyto-sanitary control). Tea Yungas, Alto Beni, between 1200-1500m, in climatic - adverse climatic conditions for high yields (rainfall & zones with only short dry seasons. rainfall distribution); poor management (cultural practices). Coffee Yungas - low yields (need for better varieties, crop protection); soil (arabic&) degradation (erosion). Honey Yungas and middle valleys - artesanal product; technology to be improved. Tropical Yungas - poor and long access roads; need for Improved rootatock. fruits Cardamom Humid tropical mountain forests (>1200 m) - unknown product; only limited areas suitable; forest degradation. Groundnuts Chuquisaca; valleys with sandy soils and avail- - lack of suitable varietiea for export. ability of irrigation water. Ginger Alto Beni/Yapacani - unknown crop Silk Middle and lower valleys - new product, technology is being developed. 0 BOLIVIA AGRO-MEPORT DEVELOPMENT PROGRAM (AEDP) PHYSICAL/ENVIROUMENTAL POTENTIAL AND CONSTRAIJDTS FOR PRODUCTION O SELECTED EXPORT AND IMPORT SUBSTITUTION CROPS REGION/CROP MOST SUITABLE AREA/ENVIRONMENT OF PRODUCTION P!YSICAL/MVIROUIEITAL CONSTRAINTS EASTERN LOWLANDS Soybeans Santa Cruz, Prov. Chiquitos, Cordillera(N), - soil degradation (soil fertility, wind erosion). Chavez, Tarija: Chaco (wetter parts) Cotton Chaco: Sachapera-Villamontes (irrigation) - limited availability of irrigation water: risks of soil (long fibre) degradation (soil fertility). Sugar Northern part Santa Cruz - low technology: soil degradation. Jojoba Chaco (irrigated): O reque-Cochabamba (rainfed) - new product. Hides/leather Beni and Chaco cruceno - poor livestock management; poor quality raw hides. goods Coffee Northern Beni and Pando - low yields (need for Improved varieties; adverse soil conditions; (robusta) production technology to be improved). Cocoa Alto Beni - low yields (need for improved plant material; disease and pest control management; adverse soll and cllmtic conditions). Brazil nuts Pando, Prov. Vaca Diez (Beni and Iturralde, - collected from forest; access, risk of forest degradation La Paz) planted: new product; technologies to be developed. Rubber * Pando, Northern Beni - collected from forest; access, risk of forest degradation planted: new product. Cashew Beni, Prov. Iturralde (La Paz) - new product, technology to be developed. Flowers/ Chapare - technology to be developed. Ornamental Silk Area of Santa Cruz - new product: technology to be developed. IMPORT SUBSTI- TUTION CROPS Wheat Seed prod: valleys of Chuquisaca, Cochabamba and - low yields; excessive soil degradation. Potosi. Production: lowlands of Santa Cruz (winter crop) Barley Upper valleys and humid altiplano (Chuquisaca, - low yields; lack of good disease and pest control management; Potosi, La Paz, Oruro) excessive soil degradation. Dairy products Upper valleys and humid atliplano near urban - lack of suitable irrigation land for fodder production; low centers. management lack of genetic material adapted to high altitude. Temperatura Chuquisaca, Tarija, Cochabamba (valleys) - technology to be developed; suitable tarieties to be selected. fruits, apples particular. * The AEDP would not finance enterprises for the development of rubber plautations. 0 -37- ANNEX 3 Page 1 of 2 BOLIVIA AGRO-EXPORT DEVELOPMENT PROGRAM (AEDP) Donor Supported Ortanizations and Agricultural Export Oriented Proiects 1. The main donor agencies and the projects/programs they support for agricultural exports are reviewed briefly below: 2. USAID. This is one of the main donors financing development projects for agricultural exports. USAID has developed three separate projects vitich are as follows; (a) Organization of Private Producers (OAP). The objectives of the OAP is to strengthen the capacity of the organization of agricultural producers mainly through the provision of technical assistance. The project is being implemented by RONCO (consultancy firm), on behalf of USAID. It began in June 1987 and it has concentrated on flowers in Cochabamba, and beef in the Santa Cruz and the Beni area. The total investment has been estimated at US$10.2 million. (b) Formation of Capital in Marginal Areas (FOCAS). The objectives of the project are to promote investments with a potential for export by the private sector in rural and semi-urban areas. To this end, the project provides technical assistance and credit to support viable investments. The project started in 1986 and up to September 30, 1990, it has financed 310 projects with a total investment of US$18.9 million out of total financing provided under the project of US$25 million. (c) Export Promotion Project. Its main objective is to promote exports, which includee agricultural products, and to attract foreign investment to Bolivia. Its main activities are in the areas of product development, marketing, information, technical assistance, export credits and legal advice. Total project cost is US$30 million. This project is being managed by a private U.S. consultant firm CARANA. The project started in November 1989 and the closing date is July 1995. 3. Corporacion Andina dte Pomento (CAP). The CAF has a general line of credit for US$10 million for agriculture, although not specifically for exports. 4. Inter-American Development Bank (IDB). IDB has recently fully disbursed a loan for a general line of credit for agriculture for an amount of US$80 million. Most of this credit went to the Santa Cruz area where the main agricultural activities are livestock end soybeans. IDB is now in the proces of negotiating a follow-up loan for US$60 million for similar purposes. -38- ANNEX 3 Pago 2 of 2 5. Othr Ortanizations. Organization, such as FAO, UNDP, JUNAC, EEC and DANIDA (Danish Aid Agency) are promoting non-traditional ezport. However, they have mostly confined their work to studies, except for URDP's minor investments in establihbment of small proceseing plants for quinus in the Altiplano. -39- ANNEX 4 Page 1 of 8 BOLIVIA AGRO-EXPORT DEVELOPMENT PROGRAM (AEDP) Financial and ODerating Guidelines, and Definitions and Arrangements for Establishing BEF's First Five EnterRrises - Corporate Structureo and Divestment and Financial Policies Principl-s 1. BEF would have the capacity to function both as a service company and as a holdina company. It wi'l function on sound commercial principles. As a service company it would market products of its subsidiary/affiliated companies and of third parties, and provide technical and management services for a fee/payment. As a holding company, BEF would take equity and participate (hold shares) in subsidiaries and affiliated companies. Subsidiaries are those companies in which BEF would be the majority shareholder or otherwise would hold control. Affiliated companies are those companies in which BEF would be a minority shareholder. 2. BEF's investments and services will be directed to small- and medium-scale entrepreneurs and to the development of high value agricultur2 p:odacto where private sector investment is presently inadequate. BEF's Annual Business Plans (ABP) will define the products for which studies are to be undertaken and the proposed invest'-'nt plans it intends to undertake. The ABP will also detail the present and probable interest of private investors to form joint ventures with BEF. BEF is intended to function as a promoter of Paw viable private sector investments in agroindustry; as a rule, it will seek to divest itself of all profital-ie investments as soon as these ventures have been established on a sound commercial footing, and as a general rule BEF would seek to divest its share in any new enterprise within five years of full commercial production. ThJ3 would ensure that BEF would not compete with private sector initiatives. 3. BEF's subsidiaries, would be either operating companies or holding companies, or a mixture of both. Examples: (i) ANGOBOL would be an operating company, having its own productioa units, providing services to farmers/ beneficiaries, etc. Although ANGOBOL would help finance the farmers and exercise financial and technical control over their operations, it would not participate in the share capital of individual angora farms (beneficiaries) and would therefore not be a holding company; (ii) EMPROCC would be a mixture of an operating and a holding company. It would have its own operations for the production of cochineal and it would also form a joint venture with a private group to finance a -armine extraction plant. This joint venture would be a subsidiary of EMPROCC, thus integrating its production and processing operations and making it possible for EMPROCC to export its products more profitably; (iii) FINFLOR would be a service and a holding company. As a service company, it would provide technical assistance; as a holding company, it would participate in the share capital of joint ventures with flower -40- ANNEX 4 Page 2 of 8 growers. These joint ventures would be, in the first instance, subsidiaries of FINFLOR (FINFLOR exercising control of these joint ventures), and eventually they may become affiliated companies when the flower growers become the majority shareholders through buy-outs of BEF's shares; and (iv) EMCASCA and the Vaca Diez Fundacion (VDF) would be BEF'. subsidiaries (operating companies) in a joint venture arrangement with the Federation Peasant (FP) and VDF, respectively. Operational Arrangements 4. BEF's management team would be responsible for identifying investment opportunities and for proposing to the Board of Directors the establishment of subsidiaries and the formation of joint ventures as well as participation in affiliated companies. Proposals would be supported with detailed feasibility studies, which would include the recommended technical, marketing, financial organizational and management parameters for establishing and financing these enterprises. Each study would analyze the financial and technical/managerial capacity and needs of potential beneficiaries (individual producer, producers associations, investors, etc.), and propose arrangements to make it possible for beneficiaries with very limited resources to participate in joint ventures and/or in operating companies with BEF. The summary below describes the proposed operational arrangements between the BEF and the first five enterprises, and of each of the enterprises to their respective beneficiaries. 5. Regarding ANGOBOL, the BEF would work with professionals (small entrepreneurs, farmers, etc.) raising angora rabbits. The main experience of these beneficiaries has been with running underfunded small cottage establishments with few rabbits, using rudimentary technology and thus unable to sustain these operations financially. Presently, the beneficiaries are too poor to participate financially as joint venture partners with ANGOBOL. To overcome this constraint, ANGOBOL would purchase equipment and inputs and give it in consignment to beneficiaries meeting ANGOBOL's eligibility criteria. To obtain better prices, ANGOBOL would undertake to centrally purchase inputs for the beneficiaries, who in turn would commit themselves to follow the technical advice of ANGOBOL's experts on the application of such inputs. To reduce the risk that the beneficiaries would misspend resources, ANGOBOL would sign contracts spelling out the responsibility and authority of the beneficiaries, vis-a-vis consignment arrangements. A supply clause would oblige the beneficiaries to supply their angora wool to ANGOBOL. ANGOBOL's contracts with beneficiaries would stipulate its right to recover any of the consigned assets should the beneficiaries fail to meet their contractual obligations. ANGOBOL could use these assets (equipment, cages, etc.) for its own wool operation in its production and service centers. Besides the contractual obligations regarding equipment, the contract would also spell out the terms and conditions under which the farmers/beneficiaries could become the owners (out of retained income of the equipment, etc.) of ANGOBOL. The AEDP would finance the construction and equipping of production and service centers for ANGOBOL. ANGOBOL's production center would be responsible for wool production and the service center would collect the wool, clean it, exercise quality control and package the wool for exports and BEF's marketing division would -41- ANNEX 4 Page 3 of 8 sell the final products. ANGOBOL and BEF would receive commissions, to be deducted from the sales price, to cover their expenses. 6. The main beneficiaries of the cochineal enterprise would be groups of poor farmers who own small plots of land with prickly pear plantations. EMPROCC would lease and/or buy land, install its own cochineal production sheds, and buy prickly pear leaves from farmers (smallholders) and from other producers for infesti.ng the leaves with cochineal in its own sheds. EMPROCC would have its own extension team to teach farmers how to infest prickly pear leaves with the cochineal insect. Besides its own production sheds, EMPROCC, would contract local farmers' associations and provide them with prickly pear planting material and cochineal seed to expand cochineal production. The contracts would stipulate that the individual farmers/farmers' associations would be obliged to sell their prickly pear leaves and cochineal to EMPROCC. Additionally, contracts between EMPROCC and the farmers' associations would spell out how cochineal production would be managed, terms and conditions, payments for the planting materials, shed construction, and arrangements for selling cochineal. EMPROCC would also enter into agreements with (larger) irdividual farmers to expand production of prickly pear leaf and cochineal production. These arrangements would be either in the form of joint ventures or cooperation agreements. In order to maximize the valu_ added of exports, EMPROCC would enter as soon as the financial feasibility has been proven, into a joint venture with third parties to operate and finance a cochineal extraction plant to produce the carmine colorant from dried cochineal. EMPROCC, its associates as well as third parties would sell dried cochineal for processing in the carmine extraction plant. 7. EMPROCC would give its farmers (beneficiaries) in joint ventures the option to buy-out its shares, and to own EMPROCC. The buy-out price would be based or, a reasonable rate of return-l to EMPROCC. Regarding the carmine processing plant, EMPROCC and its partners would sell it only to investors, who would be willing to purchase cochineal from farmers/farmers' associations (beneficiaries), at fair market prices. 8. FINFLOR and individual flower growers would form new companies for expanding flower production and exports. FINFLOR would finance technical assistance to flower growers through ASOBOFLOR and/or SERVIFLOR, for which FINFLOR would receive compensation based on either a percentage of sales or on a rate structure for services provided. FINFLOR and the flower growers would receive shares in these companies with the flower growers bringing in their existing assets, the value of which would be evaluated and recorded in each shareholders agreement. Also, the shareholder agreements would stipulate the terms and conditions for these companies to buy-out FINFLOR's shares. The price would be based on the original investment plus a reasonable return 1/ on such investment. Additionally, these agreements would stipulate the obligations between the shareholders of the joint ventures with respect to buy-out provisions, dividend policies, board representation, the composition of the management and management team, etc. It would also include the obligation of the joint venture to sell all flowers through SERVIFLOR, which 1/ Defined in the OM. -42- ANNEX 4 Page 4 of 8 is the international marketing organization for a substantial number of flower growers in the Cochabamba area. 9. The Brazil nut development program would finance construction of a new cracking plant to be owned by EMCASCA and rehabilitate an existing one to be owned by VDF. EMCASCA, a subsidiary of BEF would enter into a joint venture with the FP for the installation and operation of a new nut cracking plant, and for the construction of storage facilities and clearing of footpaths used by Brazil nut collectors to reach collection areas. The FP or EMCASCA would be given the option to buy-out/buy-in the shares of the BEF out of earnings of the EMCASCA operations, at a price to be based on the original investment plus a reasonable rate of return to be agreed upon. A shareholders' agreement would spell out the rights and obligations of the BEF and the EMCASCA. The BEF would also provide for technical assistance through EMCASCA. The technical assistance contribution would be paid out of a "royalty" on the sales of EMCASCA's products. The BEF would market the processed Brazil nuts for a fee. 10. Regarding the VDF, the BEF would enter into a joint venture arrangement with the VDF for establishing a company to rehabilitate and operate an existing Brazil nut cracking plant which has been inactive for several years. The terms and conditions for the GOB selling the plant to VDF and all the legal aspects are still outstanding. These would need to be agreed on prior to the proposed formation of the ioint venture between BEF and VDF. The present tentative arrangements are for VDF to pay for its shares by bringing in the infrastructure of the existing plant and for BEF to finance the installations and provide the working capital for rehabilitating the plant. The VDF would manage the operations and do the marketing. A shareholders' agreement between the BEF and the VDF would stipulate the terms and conditions of the joint venture, such as buy-out provision, dividend policies, board representation, management and management remuneration, decisions regarding expansions, etc. Finally, the BEF would enter into an operational agreement with VDF for the management and operation of the proposed agroforestry component. This component would be prepared under the environmental assessment, agroecological and socioeconomic studies for which GON has agreed to finance. The studies started in October 1991 and they are expected to be completed in eight months. In the event that the agroforestry program would cost more than US$2.6 million, which is tentatively provided under the AEDP, the GOB has agreed to seek additional financing from donors for the agroforestry program after the component has been prepared and cost estimates have been finalized. See Appendix 1 for the terms of reference for the studies for preparation of the agroforestry program. EMCASCA and VDF would not undertake the construction and/or rehabilitation of the cracking plants until these studies have been completed. BEF's management would review on a monthly basis the implementation of the investments in each enterprise on the basis of detailed data to be generated by the monitoring system. This system would allow BEF to take corrective actions as soon as the monitoring system has identified the problems. -43- ANNEX 4 Page 5 of 8 Divestments Policvi' ii. One of BEF's objectives would be to form financially and technically sound joint ventures and its own subsidiaries for the purpose of expanding production and exports of agricultural products and to reinvest profits in new ventures. The divestment policy would be spelled out in the OM, along with a provision that BEF obtain after divestment, a reasonable rate of return (based on cash flow analysis of BEF's initial equity investment, inflation, depreciation and dividend payments from the enterprises and proceeds from selling its shares to beneficiaries). For planning purposes, it is expected that the "reasonable rate of return" from selling BEF's shares directly to its beneficiaries would be two percentage points above BEF's borrowing costs from GOB. The purpose in this case would be not to maximize profits but rather to give small farmers the opportunity to become owners and set up viable enterprises. However, BEF would try to get the highest price for enterprises to be sold to outside investors. As a general rule, BEF would seek to divest its share in any new enterprise within five years of full commercial production. Financial Policiesd/ 12. BEF's maximum direct and/or indirect exposure in any one subproject should not exceed US$5 million and will at the same time be limited to 20X of the sum of its total investment portfolio and funds available for investment. 13. The BE? will generally not support subprojects that exceed a total of US$25 million, regardless of BEF's potential financial participation. 14. The BEF will generally participate directly and/or indirectly with a minimum of US$25,000 in any one subproject if these subprojects have the character of studies, research, training or the purchase of knowhow. In case of share participation in any one company, the minimum participation will be US$50,000. 15. The BEF will in each subproject seek maximum financing contribution from investors and partners (in the form of equity and/or commercial loans). As a broad guideline, BEF will seek a minimum of 10% equity contribution (or equivalent commerical arrangements) from the beneficiaries, when these are small farmers, and of 30% or more when suitable structured partners have been identified. In this latter case, the shareholders' agreement will also spell out appropriate debt/equity ratios in line with expected cash flow projections and sound business practices. 16. BEF'8 excess liquidity should be invested short term with due regard to avoiding risks and maintaining the liquidity required according to 2/ Spelled out in detail in the OM. 3/ Spelled out in detail in the OM. -44- ANNEX 4 Page 6 of 8 the financial projections, preferably in US dollars. BF?'s financial structure and financial management strategy will be spelled out in the annual business plans. 17. The BEF and its subsidiary companies should aim to divest itself from share participations in subsidiary or affiliated companies as soon as these enterprises have been well established, are pzofitable and can stand alone without the further support of BEF from an organizational and financial point of view. As to divestments the following approach will apply: (a) The BEF, or its subsidiary companies, will first of all give the partners and/or the beneficiaries of the relevant company the opportunity to take over the shares that BEF or its subsidiary holds in the company. In this case the value of the shares will, in principle, be established in such a way, that BEF or its subsidiary will, upon payment of this value, have received on its total investment in the company a reasonable rate of return. For that purpose any prior dividend payments will be taken into account, and a reasonable rate of return will be calculated on the basis of the fixed interest rate payable by the BEF on that part of the IDA loan that is passed on by the Government of Bolivia to the Foundation, plus a premium of two percentage points. (b) In case none or part of the BEF shares in the company can be sold to partners and/or beneficiaries, the shares will be offered to outside invedLors. This can be done either directly to potential buyers, or through a public offer in the national and/or international media, through an intermediary, or through a public issue on national and/or foreign stock exchanges. The BOD of BEF will, upon recommendation of the General Manager, decide upon the appropriate means of selling the shares in the relevant company. (c) In case of an offer to outside investors, the General Manager will present the BOD with an appraisal of the share value and a recommendation for its sales price. This appraisal shall, in principle, take into consideration the same valuation methods as applicable in the case of a purchase of shares in an existing company, as mentioned in Chapter XIII, Art. 22 of the Investment Manual. (i) Book value; (ii) book value plus revaluations (sales value of individual asets), with special attention for inventories; (iii) present value of future cash flows of the company, taking into account outstanding loans/obligations (indicate discount factor); -45- ANNEX 4 Page 7 of 8 (iv) present value of "the earnings in for instance year 5 (from the moment of sale), times multiplier" (indicate discount factor); (v) value based on last year's earnings times a multiplier; the multiplier to be chosen from what is normal for the type of industry (evidence from known deals, stock market Price Earnings Ratios (P/Es)); and (vi) a combination of the foregoing methods. In the case of a public issue, the stock exchange agent and/or the financial advisers of the company will also adviee on the issue price of the shares. The funds received from divestments will be reinvested in new projects or used for expansion of othdr existing projects. For that purpose the procedures described in the Investment Manuals will apply. 18. The subsidiary companies of BEF should all maintain sound financial ratios. The following ratios indicate the minimum requirements: Debt/Equity Ratio: Maximum 1.50:1.00 Current Assets/Current Liabilities '/ Minimum 1 25:1.00 The BEF itself should aim at the following minimum requirements: Debt/Equity Ratio: Maximum 2.33:1.00 Current Assets/Current Liabilities: Minimum 1.25:1.00 (from Year 6 onwards) 19. The dividend policy of each of the subsidiary companies should take into account the foregoing minimum requirements after paying out the dividends declared. The following is a guideline for dividend policies of subsidiary companies in which the BEF has directly or indirectly a control position: (a) Dividend Policy, Preferred Shares. Dividends on preferred shares will be paid according to the stipulations for preferred shares and preferred dividends, taking into account that no dividends will be declared and paid as long as the cumulative retained earning, of the Company are negative. The total amount of dividends declared and paid on the preferred share capital will never exceed the amount of positive cumulative retained earnings before pay out; 4/ In current liabilities is to be included the short-term part (due within one year) of any long-term obligation. -46- ANNEX 4 Page 8 of 8 (b) Dividend Policy. Ordinary Votina Shares. The shareholders agree that, unless otherwise decided upon with a vote in favor of representatives of at least 75% of outstanding voting shares, dividends will be declared and paid according to the following rules: (i) No dividends will be declared and paid as long as the cumulative retained earnings of "Company Name" are negative; the total amount of dividends declared and paid on the preferred and ordinary share capital will never exceed the amount of positive cumulative retained earnings before pay out; (ii) As long as the current ratio (Current Assets/Current Liabilities) is and remains >1.25:1.00 after paying out the dividends on ordinary shares, and the same time the Debt/Equity ratio is <1.50:1.00, but >1.00:1.00, after paying out the dividends on ordinary shares, a dividend on ordinary shares will be declared and paid of 40% (forty percent) of previous year's net profits, less the amount of declared preferred dividends; (iii) As long as the current ratio (Current Assets/Current Liabilities) is and remains >1.25:1.00 after paying out the dividends on ordinary shares, and the same time the Debt/Equity ratio is <1.00:1.00 after paying out the dividends on the ordinary shares, a dividend on ordinary shares will be declared and paid of 60% (sixty percent) of previous year's net profits, less the amount of declared preferred dividends; (iv) In establishing the current ratio for this purpose, no excess fund will be taken into account as current assets in so far as these excess funds will be required within six months, after declaring the dividends, for the purchase of fixed assets, acquisition of shares, etc., unless the coimmitment to buy has already been expressed in the current liabilities; and (v) Ordinary dividends will be paid in three equal installments, with a minimum time lag of two months between each payment date. The first payment is not to be made within three months after year-end of the year out of which profits the dividends are to be paid. -47- ANNEX 5 Page 1 of 6 BOLIVIA AGRO-EXPOkT DEVELOPMENT PROGRAM (AEDP) Tentative Program for Research and Extension to Develop the Four Products I. INTRODUCTION 1. The major production constraints, which presently limit agricultural development in Bolivia, are the lack of relevant technological packages and the absence of good extension assistance. So far research has relied heavily on the evaluation of varieties. Research on production systems directed to different types of farming and levels of input and management is unknown. While relevant information is available from neighboring countries which could be applied in Bolivia (particularly by the commercial sector), there is a fundamental need for selective, applied research on development of extension packages for the most profitable systems of agricultural production related to the type and capacity of the farmer. 2. There has been very little basic and applied research done in Bolivia on the four products being proposed for export under the AEDP. Thus, because of lack of appropriate research, flower growers are facing problems in production techniques and maintaining international quality standards of locally produced roses. There is concern that without suitable research, expansion of cochineal production may result in problems now unknown. In the Brazil nut area of northern Bolivia (Amazonia), the shifting cultivation practices need to be replaced by permanent and sustainable agricultural production systems, including both cash and food crops. These systems need to be developed through research. 3. The following is a brief description, in general terms, of the type of research BEF is likely to finance. Essentially, the bulk of the research would involve applied research (testing and adaptation) based on proven technology developed elsewhere and to be adapted to conditions in Bolivia. The specific research needs for each product would be identified in each feasibility study and financial and expert resources would be provided to complete annual research objectives. For new products still to be identified, the BEF would develop and prepare suitable research programs and present them for IDA's comments as part of each year's Annual Business Plan. A summary of the type of research and extension activities which would be covered under the AEDP for the four products already identified is reviewed below. Angora Wool 4. The production of angora wool in Bolivia is based on trial and error and on the adoption of European technologies. Also, all of the Angora breeding stock in Bolivia is imported from Europe, mostly from Denmark and Germany. The French angora rabbit, which produces a longer wool fiber and also more meat, is practically unknown. An analysis of the behavior of this -48- ANNEX 5 Page 2 of 6 animal and cross-breeding with the German-Danish type seems to be an important line of research to improve production and to broaden the genetic base. One of the most persistent problems in Bolivia is altitude sickness which appears to contribute to the high mortality rates in young animals. Research is required on proper feeding and the use of cages in order to overcome this problem. Cochineal 5. Cochinea! production in Bolivia started only recently and cultivation of the insect is basically still in an experimental stage. Although the technology is apparently simple and suitable for small subsistence farmers, there ar- several problems which would need to be addressed before large-scale production could be implemented. During the preparation of the AEDP, applied research of cochineal production in sheds was tested on a pilot basis in Cochabamba. The results would be incorporated into the production arrangements by ENPROCC. With respect to the cochineal itself, research would be needed on proper reproduction techniques in order to obtain high quality cochineal "seed," as well as a study on the most suitable environment for the insect with respect to altitude, temperature, wind and rainfall. Flowers 6. The flower export of Bolivi practically concerns only two rose varieties: Samantha and Royalty. To remain in the market, Bolivia exporters must maintain the high quality of these two flowers. This requires sophisticated technology, including good quality plant material, a high level of appropriate crop, soil and water management practices, pest control and cutting and pruning techniques. Brazil Nut 7. The Brazil nut is part of a complex eco-system on which it depends for its production. Moreover, the Amazonian eco-system is one of the most fragile environments of Bolivia. The implementation of the two cracking plants of EMCASCA and VDF and the agroforestry program would be conditional on the completion of the Environmental Assessment and related studies satisfactory to IDA. The terms and reference for these studies are given in the Working Documents in Appendix 1. 8. A proposed agroforestry program would be based on the introduction of sustainable agroforestry production systems, including the production of both perennial cash crops and food crops. This would be an alternative to the present shifting cultivation (slash-and-burn) practices, which are so damaging for the Brazil nut and other forest resources. Such agroforestry systems would be new in this part of Bolivia and their development and introduction needs should be based on proper research. Particular attention would be paid to the selection and testing of suitable varieties of perennial tree crops and food crops, nursery techniques, the development of appropriate agroforestry systems which are suitable for small farmers and which would require only -49- ANNEX 5 Page 3 of 6 modest levels of inputs. Research on perennial crops is a long-term affair and even the testing of proven technologies developed elsewhere in the Amazon region would requir- many years. Although relatively costly, the program would gonerate basic information useful for the entire humid forest region of northern Bolivia. For this reason US$2.6 million have been tentatively earmarked under the AEDP for this program, and GOB has agreed to approach donors for additional funding should the environmental assessment studies recom-nd initiation of a much larger program than is presently planned. II. AN OVERVIEW OF THE PROPOSED RESEARCH PROGRAM Antora Wool 8. Animal husbandry practices. (i) Comparison of behavior and wool production of a small group of angora rabbits in different types of cages. The experiments would be aimed at developing the most suitable cages for the Altiplano environment at the lowest costs; (ii) the effect of regular combing; it is known that regular combing of the animal improves wool production, but the practice requires additional labor; the economics of this practice will be studied as well; (iii) the effect of appropriate feeding on mortality. Mortality rates are relatively high in the 6-12 weeks age group of angora rabbit; this as a result of altitude sickness affecting the respiratory organs of the animal. Through appropriate feeding this problem can be alleviated. 9. Feeding Dractices. The aim of this component would be to develop the best balanced feed and fresh forage mixtures at the lowest cost. The component would include: (i) comparison of various mixtures of fresh forage and balanced feed in the various climatic (temperatures) zones; (ii) development of appropriate feeding practices for young rabbits after they have been weaned; and (iii) analysis of the effects of various vitamin and mineral ratios on wool production and breeding results. 10. Cross-breeding. The aim of this research would be to improve production and to broaden the genetic base. The component would include: (i) behavior and wool/meat production characteristics of the French type of angora; and (ii) cross-breeding of the French type angora with the Danish- German type. Cochineal 11. Husbandry and cultivation of the cactus (Opuntia ficus indica). (i) Based on experience and research carried out in Peru, Mexico and locally, research would be done to develop the most appropriate field cultivation practices with respect to planting, spacing, pruning and intercropping with suitable tree species for firewood (algarrobo: Prosopis alba and molle: Schinus molle); (ii) identification and control of the major pests and diseases of the Cactus (Cercospora in particular); and (iii) development of appropriate soil management practices on steep and stony lands, such as -50- ANNEX 5 Page 4 of 6 planting on the contour and on small bench terraces and the use of prunings as mulch. 12. Reproduction and Manaaement of the Cochineal (Dactylooius coccus). (i) Development of proper reproduction techniques under field and under protected conditions (in sheds, protected from wind, rain and excessive sunshine); (ii) identification and control of the major pests of the cochineal, i.e., the "larva de la mosca"; (iii) harvest methods and season; and (iv) postharvest management of the cochineal (drying and classification). 13. Ecoloxical Aspects. (i) Evaluation of the optimum areas for cochineal production with respect to altitude (temperaturre), rainfall and wind; and (ii) analysis of the relation between the carminic acid content of cochineal and altitude of production. Flowers 14. Crop Management Techniques. The objective would be to improve quality and increase production per unit area, through: (i) introduction and local reproductiori of good quality plant material; (ii) developmerLt of appropriate crop management practices; particular attention would be paid to plant density, pruning and cutting practices; (iii) proper pest and disease control, this would include research into the possibility to replace the use of very tcxic agrochemicals (Folidol in particular) by other less toxic chemical compounds and the introduction c. Integrated Pest Management practices; and (iv) the development of proper postharvest handling and storage practices. 15. Crop Diversification. Since present flower export concerns only two rose varieties, there is an urgent need to diversify in order to :duce the risk should anything occur to change the demand for these two products in the U.S. Thus, research would be carried out on wh
Группа Всемирного банка · Staff Appraisal Report
Bolivia - Agro-export Development Program (AEDP) Project
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Группа Всемирного банка
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Staff Appraisal Report
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Боливия
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Всемирный банк