Ecuador - Second Livestock Development Project

RETURNs TO cvw RETURN TO ~~~~~~RESTRICTED REPORTS DESK R E S - R 7T W lTFu 1 o1 FILE C0PY Report No. PAY-178 ONE VJ-EE;< 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION INTERIM SECOND LIVESTOCK DEVELOPMENT PROJECT ECUADOR July 18, 1969 Agriculture Projects Department  CURRENCY EQUIVALENTS US $ 1 = Sucres . 18.18 Sucre f I = US $ 0.05 Sucres 44. 1,000,000 - US $ 55,055.5D WEGHTS AND MEASURES Metric System 1 Kilogram (kg) = 2.20 Pounds 1 Metric Ton (t) = 0.98 Long Tons 1 Kilometer (km) = 0.62 Miles 1 Hectare (ha) = 2.47 Acres 1 Square Kilometer (km2) = 0.39 Square Miles GLOSSARY OF ABBREVIATIONS BNF = National Development Bank COFIEC = Ecuadorian Development Finance Company  ECUADOR INTERIM SECOND LIVESTOCK DFVEIPMT PROJECT TABLE OF CONTTEITS Page No. SUI1A1 AUND Ui **@**,* i I. INTRODUCTION .*..... ............ ........ 1 II. JUSTIFICATION OF INTRMII SECOND REQUEST ............ 1 III. ANAIYSIS OF PERFORMANCE OF LOAN 501-EC ............. 3 A. The Project Under Loan 501-EC .................. 3 B. Comparison of Forecast with Actual Performance.. 3 C. Project Progress .. 04........................... D. Organization and Management .................... 6 Z. Impact of the Loan ........*.. *..0.. *0*..******* 7 IV. THE INTERIM SECOND LIVESTOCK DEVELOP-ImT PROJECT ... 8 V.i CONCLUSIONS .9 ................. e, 9 This appraisal report was prepared by I4essrs. J. Fransen and F. Thomas. 1. Background to Project 501-EC 2. Loan Progress Data 3. Development of a Typical Ranch under 501-EC 4. Project Loan Accounts as at March 31, 1969 Table 1 - Central Bank Table 2 - National Development Bank Table 3 - Ecuadorian Development Finance Company 5. The Composition of the Project Commission MAPS 1. General Location of Approved Loans Under 501-EC  ECUADOR INTERI14 SECOND LIVESTOCK DEVELOPIEIT PROJECT SUMMARY AIM CONCLUSIOIIS i. In June, 1967, the Bank made a loan (501-EC) of US$ 4 million to the Republic of Ecuador for a first stage Livestock Development Project. The Government of Ecuador has requested additional funds to assist in the financing of a Second Project in the amount of US$ 1.5 million, to supplement Loan 501-EC, as an interim operation confined to the same project purposes and areas. There is a continuing need and demand for long-term development credit to realize the potential for increased productivity and for the expansion of the total area devoted to beef cattle production. There is also a growing domestic and export demand for beef. The basis of the Ecuadorian request for assistance in the financing of a Second Project is to cover the forecast financial gap of about 12 months between full commitment of the First Loan (501-EC, estimated for June 30, 1969) and Bank consideration of a more compre- hensive Third Livestock Project (estimated for June, 1970) which is now being prepared. ii. The proposed IDA Credit wiould be used entirely for ranch development. No additional funds for technical services would be needed. The foreign exchange component amounts to about 22% of total Project cost, the same as under Loan 501-EC. The proposed local currency financing is justified on country economic grounds. The Credit would cover 60% of the total Project cost of US$ 2.5 million. The balance would be provided by participating financial institutions (20%) and ranchers (20%). Based upon the average size of ranch loans, it is expected that the development of an additional 50 to 60 beef cattle ranches would be financed under the proposed Project. As under Loan 501-EC, investment on each ranch would be phased over a period of up to three years. iii. Administrative arrangements would be the same as under the First Loan and these would be adequate. Expected additional benefits to participating ranchers and the economy are substantial and comparable to those under Project 501-BC. The livestock industry can justifiably support a Credit of US$ 1.5 million. The same term and grace period as under Loan 501-EC (18 years including six years of grace), would be an appropriate period for making the Credit available to participating credit institutions for ranch development sub-loans. The Borrowrer would be the Government of Ecuador and the Credit would be channelod through the Central Bank to the National Development Bank and to the Ecuadorian Development Finance Companyx, the same participants as under Loan 501-EC.  INTERIM SECOND LIVESTOCK DEVELORIPT PROJECT I. fl'DIRODCTION 1.01 The Government of Ecuador has requested additional funds to assist in financing an Interim Second Livestock Development Project wThich would be confined to the same project purposes and areas as the First Livestock Development Project 1/(Loan 501-EC). This would be an interim operation, pending completion of preparation and appraisal of a Third, more comprehensive Livestock Development Project which would be ready for IDA consideration about June, 1970. Loan 501-EC was a pilot beef cattle operation for the Coastal Region, designed to yield experience in the development of the livestock sub-sector, and also to provide a sample census of the livestock industry to serve as the basis for further loans. It was to be committed over a two-year period, but forecasts indicate full commitment in only 18 months, ending June 30, 1969, six months ahead of schedule. The Interim Credit would cover the forecast gap of about 12 months between total commitment of Loan 501-EC and IDA consideration of the Third Livestock Project. This appraisal report is based on the results of a visit to Ecuador by J. Fransen in march/April 1969. II. JUSTIFICATIOI OF INTERIM SECOND REQUEST 2.01 The justification for an Interim IDA Credit to supplement Project 501-BC is to avoid a halt in lending to the livestock industry of Ecuador. A Third, more comprehensive and broader scope livestock loan is being prepared, but because of the relative complexity of the proposed Third Project (it will provide funds for both beef and dairy cattle development in several regions), it cannot be completed and presented for consideration by the IDA until about 12 months after all funds under 501-EC would be committed. Therefore, in order to meet the continuing basic demand for development financing, and to maintain both the current momentum of lending and the project administration network which has been developed, a simple, interim Second Project, which would be a continuation of the First Project, is proposed. 2.02 There is a continuing need to invest in the beef cattle industry of Ecuador to fulfill the objectives of the Ilational Development Plan and to assist the Republic in its aims of agricultural diversifica- tions Continued livestock development is a logical use of existing and potential resources of the Coastal Region of Ecuador, especially in the light of uncertain markets for some tropical agricultural products. (See Annex 1 for further details of the background to the First Project, Ecuador's beef cattle sub-sector and a description of Loan 501-EC.) 1/ See Appraisal Report Number TO-582a, dated April 24., 1967. Loan 501-EC became effective December 4, 1967.  - 2 - 2.03 Project 501-EC has helped to finance the long-term investment needs of ranchers ovning only about 7.5% of the total cattle population of about 800,000 head in the Coastal Region, at a total on-ranch cost of about U1$ 5.3 million as at March 31, 1969. If the standard of productivity of unfinanced ranches in the Coastal Region is to be raised to the levels of existing loan beneficiaries, the industry would need further long-term credit amounting to about US$ 70 million and vastly expanded technical and marketing services. There is a continuing strong demand for long-term credit and an unused capacity to absorb it on commercial lending terms. 2.04 173vidence of the past and projected future demand for the type of credit supplied under Loan 5Ol-EC and the proposed Second Project is shown in the following table. The appraisal report forecast that it would require two years to commit the initial funds available for ranch development under the First Project. The more rapid rate of past and expected commitment of funds is also shown in the table belowi: Balance of IBRD Funds and Commitment Performance (US$ Millions) 12/h/67 Cormmitments Cnategories Initial Cammitments Funds 3/31/69 6/30/69 6/30/70 Available (Actual) (Estimated)l/ (Estimated)2/ 1) Ranch Development IBRD 3.700 3.015 3.700 5.200 Participating Banks 1.233 1.005 1.233 1.733 Total Ranch Loans 4.933 4.020 4.933 6.933 Ranchersl Contribution 1.233 1.273 1.478 1.978 Total Ranch Devpt. Costs 6.166 5.293 6.411 8.911 Balance IBED Funds 3.700 o.685 -- (1.500) (Ranch Development) 2) Technical Services 3/ 0.150 0.217 0.217 0.300 Balance IBRD Funds 0.150 0.083 0.083 __ (Technical Services) 3) Unallocated 0.150 4/ -- -- -- TOTAL PROJECT COST 6.h66 3/ 5.510 6.628 9.211 1/ Estimates based on volume of new requests on hand. 7/ Based on anticipated reduction in average quarterly lending from approxi- mately US$ 600,000 of I RD funds to about US$ 400,000 because of the increasing lending to smaller ranchers. 3/ Does not include Technical Services provided by Participating Banks which would raise the Initial Total Project Cost to US$ 6.8 million. 4/ Estimated to be required for Technical Services, providing a contingency of US$ 83,000 for unforeseen Technical Services expenditures.  2.05 Annex 2 shows the characteristics of the movement of ranch development funds provided by the Bank under Project 501-EfC. While there has been a fairly constant rate of commitment of funds, the longer term trend indicates a reduced rate both in numbers of new loans and rate of commitment as the more advanced ranchers are served and smaller and more marginal ranchers seek loans. 2.06 The estimated quarterly commitment rate of the Bank component for ranch development loans would be about US$ 400,000 under the Interim IDA Credit for continuation beyond June 30, 1969. This compares with an average of about us$ 600,000 over the first five quarters of Loan 501-EC, This would indicate the need for a Second Project of about US$ 1.5 million to fill the gap between June 30, 1969, when all funds under 501-EC wrill be committed, and June 30, 1970, the target date set for a broader based livestock project. There are no constraints to the effective utilization of an Interim IDA Credit. There is an adequate supply of locally bred females, continuing rancher damand, and no shortage of local currency contributions. III. A1MZLYSIS OF PERFORNANCE OF LOAN 501-W A. The Project Under Loan 501-EC 3.01 Project 501-EC was designed as a first stage project, confined to the Coastal Region of Ecuador (see Map), and the Loan was intended to be utilized principally in the Guayas Area concentrating on established commercial ranchers (200) but also in the Santo Domingo/Esmeraldas Area (40 ranchers) where diversification away from bananas was an additional objective. (See Annex 3 for details of the development of a typical ranch under Loan 501-Sc.) Loan. funds for long-term ranch development are provided, 75% by Loan 501-EC and 25% by two local financial institutions, which also provide short-term working capital. Technical services are also supplied to participating ranchers. The Project includes a modest tropical pasture research program and seed multiplication scheme and a countrywide livestock survey to provide information for a later, more comprehensive project. B. Cormparison of Forecast with Actual Performance 3.02 At larch 31, 1969, the comparison of percentages forecast and the actual composition of total on-ranch investments was satisfactory. However, there was an appreciable difference in unit cost, between forecast and actual, for pasture improvement and cattle purchase. The difference in unit cost for pasture improvement is basically due to a shift of emphasis from the relatively cleared but drought affected areas of the Guayas zone, to the Santo Domingo zone which had normal rainfall but where forest clearing, with resulting higher unit cost, is required for pasture establishment. NIew pasture establishment in the Santo Domingo zone currently costs about 1,500 sucres per ha compared with a forecast of 900, and pasture renovation costs about 300 sucres per ha instead of 200.  However, once pastures are established in the Santo Domingo zone, even at a higher unit cost, the carrying capacity is much greater than that obtained in the main Guayas zone. As regards livestock purchases, current bull prices are double those forecast and cows are about 30% higher. However, better beef prices and physical responses should make it possible to meet estimated returns. The overall comparison is as foliows: Total On-Ranch Investments Actual as of Forecast March 31, 1969 Investment Item Physical Amount % of Phsical Amount $ of Inputs (US$000) Total Inputs (U$ ) Total Pasture Improvement, ha 108,000 2,000.0 31.3 40,844 1,805.1 34.1 Cattle Purchase, no. 18,240 2,466.7 38.5 5,678 1,667.5 31.5 Water Facilities, no. 1,200 333.3 5.2 890 492.3 9.3 Fencing, km. 2,6h0 440