Argentina - Balcarce Livestock Development Project

RESTRICTED Report No. P-553 F-ILE COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE REPUBLIC FOR A LIVESTOCK PROJECT June 29, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION A ND DEVELOPIMENT CONFIDENTIAL FOR FJ For consideration EXECUTIVE on a date to be DIRECTORS' anounced MEETING FROM: The Secretary R67-96/1 July 13, 1967 PROPOSED LOAN TO THE ARGENTINE REPUBLIC FOR A LIVESTOCK PROJECT CORRIGENDUM 1. Please make the following corrections in the Report and Recom- mendation of the President to the Executive Directors: a. In paragraph 12 the first three sentences should read as follows: "The cost of the project is estimated at $39 mil- lion equivalent of which $34 million represents on-farm investment and purchase of machinery by contractors. The ranchers and contractors would provide from their own resources, respectively, 20% and 40% of their requirements, or a total of $7 million equivalent. The balance, $27 million, wculd be provided as credits to the ranchers and contractors by the participating banks in Argentina." b. In paragraph 15 the first sentence should read as follows: "The loan will also meet the foreign exchange cost of technical services furnished through INTA and cover 50% of the total cost of the studies of drainage, soils and marketing to be carried out by INTA and CONADE." 2. Please insert the attached Table as Annex 8, Table 2 in the Appraisal Report. Distribution: Executive Directors and Alternates President President's Council Executive Vice President, IFC Vice President, IFC Department Heads, Bank and IFC  ANNEX 9 ,Tabla 2 IMPACT CF THE PROJECT CN PRODUCTICN IND EXPORTS Year of DeveloPment t 5 ii. Incremental Productiorn/ 1,000 tons: liveweight 8.7 58.6 79o8 Added in Fa.ttening Area_!/ 1,000 tons: liveweight 5.2 35.2 47.9 Gross Incre-mental 1,000 tons: Production liveweight 13.9 93.8 127.7 Percentage Exported % 50 50 50 Exportable Surplus 1,000 tons: liveweight 7.0 46.9 63.9 EXportable Surpl,us in 1,000 tons: Carcass Weight2/ carcass weight 4.2 28.1 38.3 Export3ble surplus in 1,000 tons: Carcass Weight et of carcass weight 4.0 26.7 36.4 processing LossLU Value of Export_/ In US$ million 2.3 15.2. 20.7 Debt Service to IBRD In US$ million 0.8 2,4 1.9 Net Foreign Exchange In US$ million 1.5 12.8 18.8 Earnings NOTE: 1/ Incremental gross production of 700 farms participating in the project was oonsidered. / 60% of the incremental production. 2/ 60% of the liveweight of the exportable aurplua . 4/ Processing loss is estimated at 5%, 5/ Unit price used was US$ 570 per ton.  REPORT AND RLECOI.NEDMATION OF FHE PRESThETQ\ TO TILE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGETTrINE REPUBLIC FOR A LIVESTOCK PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$15.3 million to The Argentine Republic for a livestockc project. PAR' I - HISTORICAL 2. The proposed loan would be the first to be made to Argentina in more than five years. During this period the country several times experienced serious economic and financial difficulties and while from time to time Government efforts to overcome them were made, it was not possible to obtain sufficient support to implement a comprehensive pro- gram. The Government which took office in June 1966 has now formulated, and begun to implement, a far-reaching program to stabilize the economy, restore public finances, and lay the foundation for future growth. I consider that the policies now being followed open the way to a resump- tion of Bank lending. 3. The following is a summary statement of the previous Bank loans to Argentina, as of May 31, 1967: No. Year Borrower Purpose Amount Undisbursed (U.S. Stmi1ionj 288 AR 1961 The Argentine Republic Roads 32.0 10.2 308 AR 1962 Servicios Electricos Power 93.4 del Gran Buenos Aires, S.A. (SEGBA) Total (less cancellations) 15T1I of which has been repaid 8.9 Total now outstanding 116.5 Amount sold 1.5 of which has been repaid 0.9 0.6 Total now held by Bank 115.9 Total und.isbursed 10.2 No IDA credits have been made to Argentina. IFC is presently holding for its own account about $6.4 million of loans to three Argentine industrial companies.  - 2 - 4. Execution of the road project has been slow. In July 1965, $16.5 million of the loan was cancelled. At the same time, steps were taken to improve the admirnistration of the project. Subsequently, the closing date was postponed for one year to December 15, 1966. On the basis of progress and performance, a further postponement to December 15, 1967 was approved in April 1967. 5. Other loans to Argentina are under consideration and will be presented to the Executive Directors if the projects prove acceptable, and if the progress of the Government's economic program continues to be satisfactory. One loan would be to SEGBA to help finance its expansion. The Government has also asked the Bank to examine the proposed El Chocon- Cerros Colorados hydro-electric project. 6. Preliminary discussions on a program for livestock development took place, in early 1965, in Buenos Aires between the Government and a mission of the Bank. As a result, a project preparation mission was organized under the FAO,'IBRD cooperative program. The mission completed its report in August 1965. In November, the Argentine Government applied to the Bank for a loan to help finance a livestock project in the general area of Balcarce in the southeast of Buenos Aires province. 7. The appraisal of the project was carried out in Argentina in January and February of 1966 and was followed in April by discussions in Buenos Aires on the institutional aspects of the proposed operation. Negotiations took place in Wsashington in late June and early July with an Argentine delegation, headed by lr. Pedro Camilo Lopez of the Banco Central de la Republica Argentina (the Central Bank), and consisting of representatives of the ins-titutions which are to play a part in the opera- tion. A change of government intervened during the negotiations and the presentation of the proposed loan to the Executive Directors was postponed pending the formulation of the new Government's econouic policy. A mission visited Argenti-ma in April 1967 to bring the Bank's information on the pro- ject up to date. PART II - DESCPTPTION OF TIE PROPOSED LOAN 8. 3Brrov;er: The Argentine Republic Amount-.: $15.3 million Purpose: To help finance a credit program and provide technical services for livestock development.  Terms and Amortization: 20 years, with principal re- payment beginning August 1, 1972 and ending August 1, 1987. Interest Rate: 6% per annum Commitment Charge: 3,'8 of 1% per annum Relending Terms: The Central Bank which would administer the loan on behalf of the Borrower, would relend the proceeds at 7% to Banco de la Nacion Argentina and other participating banks. The banks, in turn, would relend at 16%, this rate includ-ng a 3% payment to the Borrower for assuming the exchange risk and a 1% charge for technical services. Loans to ranchers would be for 9 years, including 4 years of grace, and to machinery contractors for up to 5 years, in- cluding 1 year of grace. Repayments to the Central Bank exceeding amorti- zation payments to the Bank would be loaned again. PART !II - THE PROJECT 9. An appraisal report entitled "Balcarce Livestock Development Project" (TO - 540a) is attached. 10. Agriculture and ranching are of foremost importance to Argen- tina. Environment and tradition have favored animal husbandry, which provides about 40% of export earnings and employs a large number of people in rural and urban areas. In the past 20 years, however, the cattle industry has experienced short-term fluctuations but no sustained expansion. With better grassland and herd management, modern processing and marketing, long- and medium-term credit, and appropriate government policy, animal husbandry could contribute significantly to an imorovement in Argentina's economy. In recent years, mounting protection in importing countries and growing competition has hindered the expansion of meat ex- ports. Nevertheless, market prospects for low-cost producers are favorable in the longer run. In view of growing demand for grains, it is more desi- rable to increase beef production by raising the carrying capacity of land through improved pasture and herd management, than by expanding acreage under pasture at the expense of wheat and corn. It is the purpose of the project to demonstrate that increased ranch productivity is technically feasible and financially rewarding.  - 4 - 11~ The project consists mainly of the provision to cattle ranchers and farm machinery contractors of long and medium-term credit and techni- cal services for the carrying out of ranch development plans approved by a Project Director appointed by the Instituto Nacional de Tecnologia Agropecuaria (INTA) and acceptable to the Bank. The project also includes drainage and soil studies to be carried out by INTA with the help of consultants and beef marketing studies to be undertaken by the Consejo Nacional de Desarrollo (CONADE) also assisted by consultants. 12. The cost of the project is estimated at $39.1 million equiva- lent of which $34 million represents on-farm investment. The ranchers and contractors would provide from their own resources, respectively, 20% and 40% of their requirements, or a total of $9.6 million equivalent. The balance, $24.4 million, would be provided as credits to the ranchers and contractors by the participating banks in Argentina. At first there would be only one participating bank, the government-owned Banco de la Nacion Argentina. However, provision is made in the loan documents for the admission of other banks as and when, in the judgment of the Central Bank and the Bank, they are equipped to handle medium- and long-term lending. The Bank loan would be disbursed to the participating banks by the Central Bank and would meet 50% of their loans to ranchers and contractors. 13. The interest rate of 16%, which the participating banks would charge the ranchers and contractors, is in line with the maximum lending rates of Argentina banks under ceilings fixed by the Central Bank. This is an artificially low rate of interest in a country in which prices have risen at an average 25-30% per annum in recent years. However, it is hoped that as progress is made in slowing inflation, the general level of interest rates will fall. Provision is made for the adjustment of interest rates charged under the project. 14. The ranchers and contractors would obtain their goods for ranch development through existing commercial channels. Since individual pur- chases would be small, and spread over a five year disbursement period, bulk procurement would not be possible. Most of the goods to be purchased by them are produced in Argentina, many of them by local subsidiaries of internationally known foreign companies, which also operate service and repair shops in the project area. Argentine industry is protected and prices for most of the equipment that will be used are somewhat higher than the landed cost of imported goods would be. The loans made by participating banks and the purchases made by the ranchers and contractors will all be in pesos. The foreign exchange component (direct and indirect) of farm development expenditures is estimated to be roughly 25%.  - 5 - 15. The loan will also meet 50% of the foreign exchange cost of technical services furnished through INTA and cover 50% of the total cost of the studies of drainage, soils and marketing to be carried out by INTA and CONADE. Purchases of vehicles and certain special equipment to be used by INITA in rendering technical services to ranchers and in carrying out its studies would be made in bulk on the basis of international bidding, with a preference of 15% in lieu of duty. 16. About 700 ranchers are expected to make use of the credit program to pay for pasture improvement on some 220,000 hectares, machi- nery, fencing and livestock watering and handling facilities. In addi- tion, contractors would avail themselves of the credit program to buy farm machinery and equipment, for contract work on ranches too small to justify their owners purchasing machinery themselves. Availability of long- and medium-term financing for competently prepared and supervised ranch development plans should result in substantial increases in calving and stocking rates and in cattle sales. On completion of the ranch development plans, the net income of the ranchers should triple or even quadruple. From the standpoint of the economy as a whole, annual foreign exchange earnings from additional meat exports should, after 10 years, amount to about $20 million on the assumption that half of the additional production would be exported. 17. Further benefits should be gained from the demonstration value of new techniques, which the Argentine ranchers should readily adopt. If successful, the project may set a pattern for livestock projects in other provinces, where the cattle industry is 'ess advanced than in the Buenos Aires Province. Consequently, the beef marketing studies included in the project would assess long-term supply prospects, the beef produc- tion potential of the various provinces, and the location, organization and operations of meat processing industries. In the light of the findings, the Government should be able to determine the scope and location of future livestock projects and any changes which might be needed in beef processing and marketing. PAR' IV - LEGAL INSTRUMENTS AND AUTHORITY 18. The draft Loan Agreement between the Argentine Republic and the Bank, the draft Project Agreement between the Bank and the Central Bank, and the report of the Committee provided for in Article III, Sec- tion 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 19. These draft Agreements contain obligations usual in livestock development projects. The Bank has reached agreement with the Borrower with respect to: the instructions to be issued by the Borrower to the Central Bank, see Loan Agreement, Section 5.01 (b) and 6.02; the opera- ting policies and procedures for carrying out the project, see Loan Agreement, Section 5.01 (c) and Project Agreement, Section 2.01 (b);  -6- thie rediscounting of loans made by Banco de la lMacion and any other participating bank, see Loan Agreement, Section 5.01 (d) and Project Agreement, Section 2.01 (c); the text of the Subsidiary Loan Agreement between the Central Bank and Banco de la Nacion, see Loan Agreement, Section 5.02 and 6.02, and the procedures with respect to the Special Account to which Loan proceeds are to be credited and which will be administered by the Central Bank, see Loan Agreement, Section 5.12 (a) and (c). 20. As is customary in Bank loans for livestock development, Section 5.12 (b) of the draft Loan Agreement provides that repayments received by the Central Bank on account of the loans extended under the project, and not yet repaid to the Bank, shall be used for the purpose of continuing the livestock development program within a period of 20 years from the date of the Loan Agreement. PART V - THE ECONOMY 21. The comprehensive economic program for 1967 introduced by the Government holds out promise of substantial progress toward internal financial stability and a major strengthening of the balance of payments, thus providing the needed basis for more rapid economic development. The main highlights of Argentina's current economic policy are a broad program for containing inflation through restraint in fiscal, monetary, incomes and price policies and, on the external side, a 40% devaluation of the peso accompanied by a substantial liberalization of trade and payments. Many pitfalls will have to be avoided if the ambitious targets of the stabilization program are to be achieved, but the firmness of the present government's commitment to it provides a basis for optimism. The deva- luation has been followed by a sizeable capital inflow, foreign exchange reserves are increasing, and if necessary, Argentina can draw on stand-by credits totalling $400 million negotiated with the II4F, the U.S. Treasury, and commercial banks. With its 1967 program now largely in operation, the Government is preparing measures to promote the basic structural re- forms and reallocation of resources necessary to put the economy on the road to more rapid and sustained growth. High on the list of priorities are an attack on managerial inefficiency and massive overstaffing in the public sector, a new law which would open the way for foreign private investment in petroleum, and tax incentives to spur investment in industry and agriculture. 22. Argentina's formidable debt service burden should prove mana- geable, given its basically strong export position, the continued main- tenance of adequate incentives for major exports, and the prudent debt management policies the Government has enunciated. The Central Bank estimates that Argentina's total foreign indebtedness was about US$ 2.7 billion at the end of 1966 and that the total debt service cost to the balance of payments in 1967 will be over $6h0 million, equivalent to nearly 35 percent of current account earnings. The cost of servicing the  - 7 - debt is scheduled to diminish relatively slowly over the next two years because of the short-term structure of the debt. After 1969, however, debt service payments Lall off sharply, the total amount of amortization and interest falling due in 1971 being about US $ 225 million, which would be under 10 percent of current account earnings, assuming the latter expand at about the rate experienced in recent years. 23. The attached memorandunm gives the main features of the present economic situation in Argentina. PART VI - COMPLIANCE WITH ARTICLES OF AGMEEME1T 24. I am satisfied that the proposed loan would comply wdth the Articles of Agreement of the Bank. PAhl' VII - RECONMENDATION 25. I recormend that the Executive Directors adopt the following resolution: RESOLUTION NO. APPROV/AL OF LOAN TO THE ARGENTINE REPUBLIC IN AN AMOUNT EQUIVALENT TO U.S. $15,300,0OO. RESOLVED: That the Bank shall grant a loan to The Argentine Republic in an amount in various currenciesequivalent to fifteen million three hun- dred thousand United States dollars (U.S. $ 15,300,000), to mature on and prior to August 1, 1987, to bear interest at the rate of six percent (6%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Balcarce Livestock Project) between the Argentine Republic and the Bank, and the Project Agreement (Balcarce Livestock Project) between the Bank and Banco Central de la Republica Argentina, which have been presented to this meeting. George D. Woods President Washington, D.C. June 29, 1967 Attachments