report no. 1499-ec appraisal of agricultural c credit project...

Report No. 1499-EC

Appraisal of Agricultural CCredit Project EcuadorMay 25, 1977

Projects DepartmentLatin America and Caribbean Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Sucre = S/US$1 = S/ 25S/ I = US$0.40S/ 1,000 = US$40S/ 1,000,000 = US$40,000

WEIGHTS AND MEASURES

1 quintal (qq) 45.5 kg = 100 lb.1 ton = 22 qq = 1,000 kg2= 2,200 lb.1 hectare (ha) = 10,000 m = 2.47 ac.I liter (1) = 0.2642 gal.

GLOSSARY OF ABBREVIATIONS

MAG - Ministry of Agriculture and LivestockBNF - National Development BankINIAP - National Agricultural Research InstituteCENAPIA - National Center for the Promotion of Small and

Artisan Industry

GOVERNMENT FISCAL YEAR

January 1 to December 31

FOR OFFICIAL USE ONLY

ECUADOR

AGRICULTURAL CREDIT PROJECT

TABLE OF CONTENTSPage No.

SUMMARY AND CONCLUSIONS .............................. i-v

I. INTRODUCTION ..................................... ................. I

II. BACKGROUND ....................................................... 1

A. General ........ ... .. *.... ................................ IB. The Agricultural Sector .... ct ..................... 2C. Small Industries ..# . ....... .... .* ............. . 4D. Banking and Credit ....................... ...... 5E. Government Objectives and Policies ....... 7F. Performance Under Previous Livestock Credit

Projects ................................ ..*. 8

III. THE PROJECT ........................................................ 9

A. Brief Description ... ................. . .......... . 9B. Detailed Features o .........* ....... ........... 11C. Cost Estimates ............ 17D. Financing . ........ .. ..................... ...... 18E. Procurement . ................................. ... 19F. Disbursements ................... ..... . 19G. Organization and Management ...................... 19H. Lending Operations ... * ........ . ............. o... . 22I. Accounts, Auditing and Monitoring ................ 24

IV. PRODUCTION, MARKETS AND MARKETING, PRICES AND PRODUCERBENEFITS ........................... .. ............. 24

A. Production ...... ....................... ......... 24B. Markets and Marketing . ....................... ... 25C. Prices ...... ............. ................................... 25D. Producer Benefits ................................ 26

V. ECONOMIC BENEFITS AND JUSTIFICATION .................. 27

VI. AGREEMENTS REACHED AND RECOMMENDATION ................ 27

This appraisal report is based on the findings of a mission which visitedEcuador in September/October 1976, composed of Messrs. F. Michael Crowe,Delbert Fitchett, Renato Rossi and Thakoor Persaud (Bank) and C. Percival(Consultant).

This document has a retricted distribution and may be usd by recipients only in the performanceof their offial dutie. Its contents may not otherwise be disclosed without World Bank authorization.

Table of Contents (continued)

ANNEXES

1. Performance Under Previous Agricultural Projects

2. The Agricultural Sector

Table 1 - Gross Domestic Product by Economic Sectors 1970-1975

Table 2 - Crop Areas, Yields and Production

3. The Banking System and Agricultural Credit

Table 1 - Interest and Rediscount Rates

4. Livestock and Crop Models

(a) Beef Ranch (50 ha)

Tables 1 - 4: Investment Costs, Herd Development Projection,Sales and Operating Costs and Cash Flow Pro-jection

(b) Sierra Dairy Farm (50 ha)


(c) Small Dairy Farm (10 ha)


(d) Sheep Farm (40 ha)

Tables I - 4: Investment Costs, Flock Development Projection,Sales and Operating Costs and Cash Flow Pro-jection

(e) Small Cropping Farm (4 ha)

Tables 1 - 3: Investment Costs, Production Costs andIncremental Net Production Value, CashFlow Projection

Table of Contents (continued)

ANNEXES

5. Applied Research - Terms of Reference

Table 1: Technical Assistance and Training Costs

6. Farm Investment Costs by Category

7. Project Cash Flow: Central Bank

8. Project Cash Flow: Participating Banks

9. Estimated Schedule of Disbursements

10. Economic Rate of Return

Table 1: Incremental Project OutputTable 2: Producers' Prices Used in the Economic

and Financial AnalysisTable 3: Economic Rate of Return Calculation

BAP

IBRD No. 12618

ECUADOR


SUMMSARY AND CONCLUSIONS

i. This report appraises an agricultural credit project in Ecuador,for which a Bank loan of US$15.5 million is proposed. The project wouldhelp continue a successful program of livestock development initiated underearlier projects; in addition it would help to increase crop production bysmall farmers and to develop small industries in rural areas.

ii. Since 1972, petroleum production and exports have had a dramaticeffect on Ecuador's finances and rate of economic growth. The country,however, continues to be one of the poorest in Latin America, with a 1975 percapita income equivalent to about US$550. At the same time, its population--of 7.1 million in 1975--has been rising rapidly at an annual rate of 3.4% inrecent years. Only by expanding, diversifying and raising the productivity ofthe non-petroleum sector can Ecuador create employment for its rapidly growinglabor force and raise the living standards of the broad mass of the population.

iii. The Government's objectives in the agricultural sector are toincrease output and improve economic and social conditions in rural areas.Some of its policies, however, have been inadequate: price controls of agri-cultural products have rarely been effective, but usually costly; high supportprices for rice have led to over-production and exports at heavy losses;Government involvement in the marketing of agricultural products and farminputs has been generally unsuccessful and inefficient--particularly heavylosses were incurred on the import and distribution of fertilizer. Moreover,there is at present no effective planning, programming and control of sectorialactivities.

iv. Government is generally aware of the inadequacies described above;it is equally aware of the difficulty of removing many of them. Some actionshave already been taken or are in process. The supply of credit to the sectorhas increased from about US$60 million in 1971 to US$186 million in 1975.Official milk (and some other) prices have been brought more in line withmarket conditions. There are plans for the reorganization of the extensionservices.

v. The strategy for the future development of agriculture and the ruralareas should now be directed to: (a) formulating clear priorities for ruraldevelopment and strengthening project preparation capabilities, as alreadyinitiated under the Technical Assistance Project (Loan 1230-EC); (b) improvingmarketing systems, including standardization and enforcement of weights andmeasures, credit for small traders to increase competition, and the expansionof storage and marketing facilities; (c) improving government price policiesto reflect market forces; (d) reorganizing the extension services to providean integrated approach to the farm as an enterprise and improve the diffusion

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and adoption of agricultural research results; and (e) creating additionalemployment opportunities in rural areas through investment in small localindustries. The proposed project, taken together with on-going and likelyfuture projects financed by the Bank Group, would contribute to achievingthese goals, and to striking a reasonable balance in meeting the needs forincreased production and for improved income distribution.

vi. The project would be carried out over a five year investmentperiod. It would provide credit for:

(a) livestock development, including pasture improvement andrenewal, fencing and other infrastructure, machinery andequipment and breeding stock, for beef cattle principallyin the Costa and Oriente and for dairy and sheep principallyin the Sierra;

(b) the development of crop farms in selected areas coveringa variety of on-farm investments, such as: irrigationcanals and pumps; land clearing and development; building(including home) improvements; storage facilities; rehabil-itation of permanent crops, such as cocoa and fruit trees;incremental inputs for annual crops;

(c) small local industries, involving for example, processingof meat, poultry, vegetables and vegetable oil, balancedfeeds and wood products; and

(d) the development of consulting services to commercialagriculture.

The loans for sheep farms, crop farms and some dairies are expected to benefita significant number of small farmers; those for beef cattle, and some of thosefor dairies, would help raise the output and productivity of larger farmers.

vii. In addition to credit, other components of the project would be:applied research, with particular emphasis on farm development in the Orienteand Paramo region of the Sierra and on pasture development; technical assis-tance to improve the administration and accounts of the Cooperative Bank andof selected cooperatives; and equipment and technical assistance for theProject Executive Unit, CENAPIA and participating MAG extension services.

viii. The existing Project Executive Unit would be responsible for themanagement of the project, under arrangements similar to those that haveproved successful for earlier projects. The staffing of the Unit wouldbe diversified and strengthened, in line with the expansion of activities.

ix. As under previous projects, credit would be channelled throughparticipating banks. The minimum interest rates for medium- and long-termcredit under this project would be 11% for small farmers and 14% for otherborrowers. These rates would be adequate and represent substantial improve-ments over the arrangement under Credit 222 (9% for subloans up to US$25,000;

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12% for other subloans). Individual livestock and agricultural subloans wouldbe made only to those whose principal source of income was the property to beimproved by the subloan. Moreover, 30% of the livestock and agriculturalcredit would be earmarked for small farmers.

x. The total project cost is estimated at US$36.0 million, includingprice contingencies of US$9.8 million, with a foreign exchange component ofUS$15.5 million. The financing would be provided as follows: Bank, US$15.5million; Government, US$8.7 million; the participating banks, US$5.7 million;and subborrowers US$6.1 million.

xi. The Bank loan would be at 8.2% for a term of 14 years, includingfive years of grace on principal repayments and would cover the estimatedforeign exchange cost, or 43% of total project costs. It would cover 41% ofthe investment costs of subprojects and 90% of the costs of the applied researchand technical assistance components. Government and the participating bankswould meet 40% of project costs; this would cover 41% of the cost of sub-projects and 10% of the cost of technical assistance and applied research.Sub-borrowers would contribute the balance of the cost of subprojects.

xii. In view of the fact that the credit program would be implemented overa five-year period, be widely distributed geographically, and cover a varietyof investment plans (and thus items to be procured), bulk purchasing would notbe feasible. Capital items would therefore be purchased locally from commercialsuppliers, who maintain adequate stocks and whose margins are in an acceptablerange. Vehicles and equipment (US$125,000) for project administration would beprocured through local competitive bidding, according to procedures acceptableto the Bank. The services of expatriate personnel and consultants would bearranged according to procedures acceptable to the Bank.

xiii. The Bank would disburse, over a five-year period, 50% of the amountof the subloans disbursed by participating banks and 90% of the total cost ofthe technical services, research and training component.

xiv. At full development, annual incremental output of crops and live-stock products farms is expected to be as follows: 1,300 m tons of maize;2,000 m tons of oilseeds; 8,000 m tons of vegetables; 2,000 m tons of rice;about 31 million liters of milk and 7,800 m tons of beef; about 140 m tons ofmutton and 35,000 kg of wool. It is not possible at this stage to estimateincremental production from the small industries component, since this isessentially a line of credit. Detailed projections would be included in thefeasibility studies that would be prepared for each individual subproject.

xv. Project-induced production of milk and beef are not anticipated toencounter marketing difficulties. In the past year and a half, there have

been substantial imports of powdered milk to meet the rapidly expandingdomestic demand. More than adequate processing capacity exists in the localpasteurizing industry to absorb the projected expansion of output. There

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exists a similarly strong and expanding demand for beef. Although there ismuch room for improvement in the marketing of other agricultural products,the incremental volumes of crop production are modest relative to overallnational totals and are not expected to encounter marketing difficulties. Themarketing prospects for production from the small industries component wouldbe individually assessed in the feasibility studies for each subproject.

xvi. Milk prices are now highly attractive to producers. The officialprices on beef are not vigorously policed and appear adequate and relativelystable at the producer level. The government's policy with respect to theother crops to be financed under the project is restrained to merely settingguidelines or referential prices and is not expected to act as a disincentiveto producers.

xvii. The financial rates of return on the models range from 18% to 26%.Net operating incomes are expected to increase as follows: 50-ha beef ranchesfrom about US$800 equivalent to about US$3,500; 50-ha dairies from aboutUS$6,800 to about $18,000; small dairies (taking only the income from 6 ha ofpasture on a 10-ha farm) from US$80 to US$700; small 40-ha sheep farms fromUS$260 to US$2,100; and small crop farms from US$400 to US$1,300. Except inthe case of the crop farm, the net income is after charging incremental labor,some or all of which may be previously unemployed family labor, so that theincrease in family income could be substantially more than the increase in thefarm operating income. Producer benefits cannot be quantified at this stagefor the small industries components, although preliminary estimates showfinancial rates of return in the neighborhood of 20% for typical small indus-tries.

xviii. While the project would be basically production oriented, it wouldalso raise the living standards of a significant number of small farmers andpave the way for future increases in the volume of lending to this group.At full development, the project would generate some 4,000 man-years of em-ployment annually. The total value of incremental output would be US$12million a year, plus herd increments valued at US$16 million.

xix. The economic rate of return of the agricultural and livestockcomponents of the project is estimated at 20%. The results of sensitivityanalysis may be summarized as follows:

Investment Operating Shadow WageCosts Costs Output Rate 80%

+10% +15% +10% +15% -10% -15%

Rate of Return 19% 18% 17% 15% 15% 13% 21%

xx. Because the small industries component is in the nature of a lineof credit, no calculation of the economic rate of return has been possible.Tentative estimates of the financial results indicate rates of return of theorder of 20%.

xxi. The experience of previous projects and the known demand for creditsuggest a relatively low level of risk for the livestock components of theproject. The more limited experience in Ecuador of lending to small farmersand small industries indicates an acceptable level of risk, given the insti-tutional strengthening and safeguards incorporated in the project.

xxii. The proposed project is suitable for a Bank loan of US$15.,5 millionfor 14 years, including a five-year grace period.

May 25, 1977

ECUADOR


I. INTRODUCTION

1.01 The Government of Ecuador has requested a Bank loan of US$15.5million for a credit project to help continue a successful program of live-stock development, to strengthen crop production by small farmers and coopera-tives, to develop small industries in rural areas, and to encourage localconsulting services.

1.02 Bank Group lending for agricultural credit in Ecuador has so farbeen limited to three livestock development projects. Other Bank Groupactivities in the agricultural sector are the Fisheries, Milagro Irrigation,Seeds, and Technical Assistance Projects. The performance of the creditprojects is discussed in paragraphs 2.28 to 2.33; all are reviewed in Annex 1.

1.03 The proposed Agricultural Credit Project was prepared by techni-cians of the Ministry of Agriculture and Livestock, with support fromprofessional staff of the Third Livestock Development Project and three Bankpreparation missions.

II. BACKGROUND

A. General

2.01 Since 1972, petroleum production and exports have had a dramaticeffect on Ecuador's finances and rate of economic growth. In real terms,the Gross Domestic Product (GDP) increased by about 5% annually from 1969to 1971, by 6% in 1972, 18% in 1973, 12% in 1974 and 5% in 1975. Thisrapid growth has been accompanied by price inflation, particularly in 1974(23%), although the rate of inflation declined from 14.5% in 1975 to 10.6%in 1976.

2.02 Ecuador continues, however, to be one of the poorest countriesin Latin America, with a 1975 per capita income equivalent to about US$550,and with many of its people living in poverty. At the same time, its popula-tion - 7.1 million in 1975 - has been rising at an annual rate of 3.4% inrecent years. The question now is how fully the country will be able toutilize its new financial resources to strengthen its economic structure,particularly in view of present uncertainties about oil exploitation and, inconsequence, the level of future output and revenues. Only by expanding,diversifying and raising the productivity of the non-petroleum sector canEcuador create employment for its rapidly growing labor force and raise theliving standards of the broad mass of the population. Particular attention

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needs to be given to the rural areas, where 58% of the people (and most of thepoorest) live, and where agricultural production has lagged behind the generalrate of growth and the needs of the population.

B. The Agricultural Sector (Annex 2)

Agriculture in the Economy

2.03 Although its contribution to GDP declined from 29% in 1965 to 21% in1975, agriculture remains a most important sector of the economy. It employsover 54% of the labor force and, even with the sharp expansion in petroleumexports in recent years, still accounts for about 30% of merchandise exports.The sector has, however, been unable to expand its production fast enoughto meet rising demand, especially for livestock and dairy products, feedgrains and edible oils. In 1975, imports of wheat were valued at US$33.5million, edible oils at US$12.3 million, and dairy products at US$3.0 million.There is a substantial, but unrecorded, border trade in live cattle.

2.04 According to the 1968 agricultural survey, there were 633,200 farmholdings in the country, some 74% being less than 5 ha in size and occupyingno more than 10% of the total farm land. Since most farmers produce only forfamily subsistence, they remain outside the market economy. By Bank defini-tion, 1/ between 50% and 66% of the rural population in 1974 were "absolutelypoor" and 75%, "relatively poor." Nutritional surveys indicate that 47% ofthe rural population suffer from calorie and protein deficiencies. Accordingto the 1974 census, about 90% of rural dwellings have no electricity orplumbing. A special program of land tenure reform and settlement was startedin 1964 and continues under the provision of the 1973 Agrarian Reform Law, butso far only some 55,000 recipients have benefitted, mostly through settlementon new land.

2.05 The rural population is divided almost equally between the Pacificcoastal region--Costa--and the central Andean highlands--Sierra--with veryfew people living in the lowlands of the Amazon basin--Oriente. Temperateclimate crops and dairy production are concentrated in the Sierra where thereare both medium and small sized farms. Tropical crops, including the mainexport items--bananas, cocoa, coffee and sugar--are raised mainly in theCosta, and, to a limited extent, in the Oriente. The Costa has the mostpotential for increasing the cropped area as well as pastures and it isprobable that large areas of the Oriente, close to the Andes, could be devel-oped as grassland; there is only limited additional land in the Sierra forcrops and livestock production.

1/ Report No. 588, Rural Development and Bank Policies: A Progress Report,dated December 2, 1974.

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2.06 Of the total cropped area of about 1.6 million ha, some 175,000 haare irrigated, but many of these are served by systems which are incompleteor in a poor state of repair, so that their output falls appreciably short of

potential. The potentially irrigable area is estimated at some 900,000ha and an additional substantial area, largely in the lower Guayas Basin,

is suitable for large-scale drainage.

2.07 Yields are generally low and although improved seed varieties and

management systems have been developed for the main crops, their adoption hasby and large so far been restricted to a small number of larger commercialproducers. Shortages and poor distribution of improved seeds and fertilizer

supplies, poor pest control, improper land and water management practices,inadequate credit and technical assistance, deficient pricing policies andinadequate storage and marketing facilities have delayed improvements inproductivity.

Ministry of Agriculture and Livestock

2.08 The Ministry of Agriculture and Livestock (MAG) comprises planningand administrative bureaus and five operating bureaus: Crops, Livestock,Rural Development, Forestry, and Marketing. The Ministry's budget rose amodest 9% in 1976, from S/ 640 million to S| 690 million. In 1976, thetotal budgeted staff, unchanged from 1975, was 1,840 of whom 1,021 were pro-fessional and technical. There are a number of autonomous agencies attachedto MAG dealing with: agricultural research (paragraph 2.10), land reform,irrigation, storage and marketing, and retail marketing, and several regionaldevelopment agencies.

2.09 Extension services in MAG have hitherto been organized along specificcrop lines, for example, bananas, rice, cotton and so forth; similarly, thepractical training of extension personnel is generally limited to a single"technological package" which they promote. This narrow focus is at odds withthe diversity typical of farming in Ecuador. In view of this, MAG is planninga reorganization, under which extension personnel would focus on the farm asan integral operation. This reorganization is to be accompanied by the reloca-tion of MAG professional and technical staff in rural areas (rather thanlargely in provincial capitals as at present) and the establishment of localservice centers, including badly needed marketing and storage facilities. Afirst-phase trial program is being implemented in the Provinces of Imbaburaand Carchi. The reorganization of the extension services would be coordi-nated with the provision under the project of credit to small farmers.

Agricultural Research

2.10 Official agricultural research in Ecuador is the responsibility ofthe National Agricultural Research Institute (INIAP), which started operationsin 1962. INIAP has evolved as an institution of major importance in Ecuadorand has attracted the support of the Rockefeller Foundation and bilateral andinternational aid agencies. Bank Group credits and loans for agriculture have

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supported it and an extensive agricultural research loan has recently beenprovided by the Inter-American Development Bank. INIAP's professional staff,totalling some 300, engage in research into plant breeding, agronomic and plantprotection, pastures and livestock nutrition and farm management.

2.11 Fourteen years of research have provided a sound technical basis forincreasing agricultural productivity. INIAP has developed and tested improvedvarieties of most of the major crops in Ecuador, although research should beintensified to produce improved varieties of soft corn, beans, and pasture andexpanded to include grain sorghum, pulses, fruits, vegetables and poultry.There is also a need to improve the dissemination of research results and todevelop cheaper technical packages for low-income farmers.

C. Small Industries

2.12 Total employment in industry amounts to less than 12% of the eco-nomically active population. Small enterprises account for about 75% ofemployment in the sector but for only about 30% of value added. Nonetheless,small enterprises should have a useful role in Ecuador's future development,particularly outside the main cities. The size of local markets and theirfragmentation due to transport problems favor such enterprises, which inaddition tend to be labor intensive and provide a good training ground formanagers and entrepreneurs.

2.13 Government is concerned to promote and assist these small or artisanindustries. In the 1963-73 Development Plan, emphasis was put on buildingindustrial estates, particularly in areas other than Quito and Guayaquil.Implementation of these proposals, however, has been notably slow. Othermeasures have included the creation of numerous training centers and tech-nical assistance programs, partly financed by Bank Loan 1157-EC of 1975.

2.14 A major step was taken in 1973 with the promulgation of a speciallaw for the promotion of small and artisan industries, which provides forextensive tax exemptions. These incentives and the general improvement ineconomic perspectives have led to a rapid expansion in the number of enter-prises applying for these benefits. In 1973, 131 new enterprises were classi-fied to receive benefits under the law, involving investment estimated atS/ 128, million (about US$5 million equivalent); in 1974 there were 217 enter-prises with investment of S/ 289 million (about US$12 million equivalent).The revision in August 1975, raising the size limit to S/ 5 million (US$200,000)invested in machinery and equipment, has brought a further increase in appli-cations. In addition, special funds and credit facilities have been providedfor small and medium industry (paragraph 2.23).

2.15 In November 1975 the Minister of Industry announced the creation ofthe National Center for the Promotion of Small and Artisan Industry (CENAPIA)to succeed an AID-financed program. CENAPIA carries out prefeasibility

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studies for small industrial undertakings, assists in seeking out financeand supervises the progress of projects. It also provides training in theareas of finance, accounting, production and marketing. CENAPIA has a headoffice in Quito and branches in Guayaquil, Cuenca, Portoviejo and Tulcan withconsiderable administrative decentralization. A Board of Directors decideson policy isues; administration is in the hands of an Executive Director. InOctober 1976 CENAPIA's professional staff numbered 32 and included economists,an agronomist, industrial and chemical engineers, lawyers, and financialanalysts. Present plans call for the recruitment over the next three years of30 more well-qualified professionals. CENAPIA's policies and managementappear to be sound.

2.16 During 1976 CENAPIA prepared feasibility studies for small-scaleenterprises calling for fixed investments of almost US$5 million equivalent;during the same year it supervised credit totalling about US$1 million equiva-lent. The volume of investment by small industries and their requirementsfor credit are expected to grow rapidly in coming years.

D. Banking and Credit (Annex 3)

General

2.17 Ecuador has a well developed banking system, consisting of theMonetary Board, the Central Bank, the Government-owned National DevelopmentBank (BNF), 25 private commercial banks, several development finance companies(DFC) (one government-owned and the others private) and a Cooperative Bank.The Monetary Board fixes monetary policy and regulates the volume and distri-bution of money and credit. The Central Bank performs the traditional func-tions of such an institution and provides re-discounting facilities within arelatively conservative policy fraaework. The commercial banks are on thewhole soundly run, but the BNF has encountered serious financial and organi-zational problems (para 2.32).

2.18 The most striking change in the financing of gross domestic invest-ment between 1970 and 1974 is the increase in the participation of the CentralGovernment in net savings from less than 1% to 9%, due largely to oil revenues.In addition, BNF's share rose from 1% in 1970 to 10% in 1974, with nearly allof the increase channelled to the agricultural sector. The share provided bycommercial banks and DFCs increased from 9% to 16% in the same period (aseven-fold increase in absolute terms).

2.19 More recently the petroleum boom has created severe inflationarypressures, but by early 1976 these had been brought under control, mainlyby changes in legal reserve requirements, rediscount facilities and importdeposit requirements.

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2.20 The Central Bank operates a rediscounting mechanism for short- andlong-term loans made by the BNF, commercial banks and DFCs. The great majorityof loans made by commercial banks and over half those of the BNF are for lessthan two years. Banks pay 6% to 7% on passbook savings accounts and 7% to 10%on term deposits. Mortgage certificates and government bonds yield up to 12%(tax free for the latter). Until recently, the maximum lending rates permittedby law encouraged short-term lending at the expense of medium and long-termoperations.

2.21 Ecuadorian monetary authorities have recognized the need forchanges in the interest rate structure which would make medium- and long-termlending at least as attractive as short-term lending. In November 1976 theMonetary Board introduced a graduated structure of allowable commissioncharges on medium and long-term lending. According to new regulations,both the banking system and DFCs are allowed to charge, in addition to theunchanged maximum interest rates (9% for agriculture--except under Credit222-EC for subloans over US$25,000 at 12%--and 12% for other sectors), the followingmaximum commissions on new loans:

On Balances Outstanding: Commission

for more than three years and less than five years 2%for more than five years and less than eight years 3%for more than eight years 4%

The new interest and commission structure provides both the public and privatebanks with a reasonable interest rate spread and introduces an interest ratedifferential between short- and long-term lending; it should help mobilizedomestic resources for investment and stimulate the interest of privatebanks in agricultural credit.

Credit for Agriculture and Small Industries

2.22 In 1973 Government created the "Fondos Financieros" (Financial Funds)to channel petroleum and some aid money to development and particularly intoagriculture. These funds are used to finance credits extended by both privateand public banks. In addition, the monetary authorities require that privatebanks maintain 20% of their portfolio as loans to the agricultural sector (25%in the case of foreign-owned private banks) or else hold 4% interest-bearingnational bonds. Loans to agriculture in 1975, amounting to US$186 million,represented about 17% of total bank credit, well above the 13% average for1971-73. This 1975 figure represents a tripling from the US$60 millionreported in 1971. During this period, credit for livestock approximatelyquintupled while crop lending slightly more than doubled; by 1975, lending wasalmost evenly split between crops and livestock. However, only a minority offarmers have access to (and as few as 7% actually use) institutional credit.Many others utilize a considerable but unquantified volume of non-institutionalcredit from suppliers or money-lenders, at interest rates which range upwardsof 20% p.a. to as high as 100% p.a.--and usually for relatively short periods.

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In this way farmers can avoid mortgaging land or having to submit to theformalities generally required by banks.

2.23 Special finance and credit facilities have also been provided forsmall and medium industry. Two of the eight Financial Funds have aimed atassisting small-scale and artisan industries, namely, the Industrial FinancialFund and the USAID Technical and Credit Assistance to Small Industry Program.In 1975, the Government increased the resources of the former to US$16 millionequivalent; the latter program closed toward the end of that year.

E. Government Objectives and Policies

2.24 The Government's objectives, as outlined in the National DevelopmentPlan for 1973-77, are to increase output by expansion into new areas, by irri-gation, and by increases in productivity, and to improve economic and socialconditions in rural areas. With the exception of the relatively small increaseof 3.8% in sectorial output in 1973, Plan targets for both 1974 and 1975 havebeen exceeded, although, since the Plan was formulated before the increasein financial resources made available by petroleum exports, it is difficult toassess performance against it.

2.25 Other actions taken or planned by Government, and already notedabove, include: the reorganization of the extension services; the increasedsupply of credit for agriculture; the increase of some producer prices (parti-cularly for milk) to better reflect market conditions; and, financial andother incentives for small industries.

2.26 Although much has been and is being done, some of the policiesfollowed by Government in the pursuit of its objectives have been inadequate.Price controls on agricultural products have rarely been effective, butusually costly. On the other hand, high support prices for rice have led toover-production and exports at heavy Government losses. Government involve-ment in the marketing of agricultural products and farm inputs, through itsmarketing agencies and the BNF has been generally unsuccessful and inefficient--particularly heavy losses were incurred on the import and distribution offertilizer. Moreover, there is at present no effective planning, programmingand control of sectorial activities in either the National Planning Office orin MAG's planning bureau.

2.27 The strategy for the future development of agriculture and the ruralareas should now be directed to:

(a) formulating clear priorities for rural development andstrengthening project preparation capabilities, as alreadyinitiated under the Bank loan for Agricultural and RuralDevelopment Technical Assistance (Loan 1230-EC). For thispurpose, clear lines of authority and responsibility mustbe established within the public sector agencies concerned;

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(b) improving marketing systems, including standardization andenforcement of weights and measures, credit for small tradersto increase competition, and expansion of storage and marketingfacilities;

(c) continuing improvement of government price control and supportpolicies to reflect market forces;

(d) further expansion of the availability of credit for agriculture;

(e) reorganizing the extension services to provide an integratedapproach to farm enterprise management and to improve thediffusion and adoption of agricultural research results; and

(f) creating additional employment opportunities in rural areasthrough investment in small local industries.

F. Performance Under Previous Livestock Credit Projects

2.28 The First Livestock Development Project financed on-farm investmentsfor beef production in the coastal region. Loan 501-EC, for US$4.0 million,became effective in December 1967 and was fully committed by June 30, 1969,some six months ahead of schedule. The program was administered by a ProjectExecutive Unit, under an expatriate Director and a specially created auton-omous Project Committee. One hundred thirty-two subloans were made, averagingUS$37,000 each.

2.29 The Second Livestock Development Project was of an interim natureand designed, in view of the rapid advance of the first project, to continuefinancing coastal livestock activities until a third, more comprehensiveproject could be prepared and approved. Under Credit 173-EC for US$1.5million, 90 subloans, averaging about US$25,000 each, were made.

2.30 The Third Livestock Development Project (Credit 222-EC for US$10million) continued to finance beef cattle development in the Costa and wasexpanded to include dairy farm development in the Sierra highlands and asmaller volume of lending for beef cattle in the Oriente. It also coveredresearch, technical assistance, and a seed improvement program. Under theProject, 356 subloans have been approved by the Project Unit, averagingUS$31,000 each. The livestock credit funds are nearly fully committed,and it is likely that the credit will be fully disbursed by end-1977.

2.31 The performance of the first two projects (Loan 501-EC and Credit173-EC) was assessed in the Project Performance Audit Report dated October 21,1975. The Report found that the projects had been well managed, had improved

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productivity and output on participating ranches and had jointly resulted inan increase of roughly 10% (worth about US$4 million a year) in national beefproduction. The economic rate of return, however, was estimated to havefallen sharply (to about 12%, compared with 27% at appraisal) because ofhigher investment costs and lower beef prices relative to input costs.The financial rates of return to ranchers, on the other hand, were estimatedto have been about equal to the 27% forecast at appraisal, because rapidinflation eroded the real value of subloan repayments, offsetting the unfavor-able price movements. The Report also noted: the low sanitary standards ofslaughterhouses processing project output; the regressive impact on incomedistribution resulting from subsidized interest rates to medium-sized and largeproducers (granting that commercial production was the project's main objec-tive); the capital intensive nature of the developments financed; and the lackof a monitoring system.

2.32 The performance of the third project has been basically similar tothat of the first two. Two issues have arisen, however: first, the account-ing and audit arrangements have been inadequate and, second, there have beenserious deficiencies in the accounts and internal controls of BNF, the princi-pal participating bank.

2.33 The proposed project would continue the livestock program estab-lished under the first three projects. Producer prices for milk have justbeen substantially increased. At the same time, the investment models havebeen designed to reduce capital costs in the light of the experience alreadygained. Assurances on health standards in slaughterhouses were obtained(paragraph 4.04). A substantial share of the benefits would accrue to smallfarmers and the new interest rate structure would not favor the larger pro-ducers. Following a recent supervision mission, work has already begun on thecollection of actual operating results from participating farms and ranches;this would be continued. Agreement has been reached on the actions being, andto be, taken to remedy the accounting and auditing deficiencies noted above.Summary project accounts for 1975, certified by the Superintendent of Banks,were submitted to the Bank in February 1977, and similar statements for 1976are expected to be received in June 1977. Moreover, the Central Bank and theSuperintendent of Banks are now proceeding with a review of Credit 222 accountsof BNF and other participating banks during the final stage of execution ofthat project. For the proposed project, the auditing and accounting safeguardshave been strengthened (paragraphs 3.55 and 3.56).

III. THE PROJECT

A. Brief Description

3.01 While continuing the type of successful livestock lending estab-lished under earlier projects financed by the Bank Group, the new projectwould place greater emphasis on lending to small producers and cooperatives,and would diversify by providing credit for crops and for the development ofsmall industries in rural areas. It would be carried out over a five-yearinvestment period, as follows:

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AverageInvestment

Project Year: 1 2 3 Total per Subproject(Estimated Number of Loans) (US$)

Beef Ranches 100 150 150 400 15,600Dairies 50 75 75 200 39,000Small Dairies 50 100 150 300 6,000Sheep Ranches 10 15 25 50 5,500Crop Farms 150 300 550 1,000 2,200Small Industries 10 15 25 50 128,000Professional Loans 5 5 - 10 20,000

Total 375 660 975 2,010

3.02 The project would provide credit for:

(a) livestock development, including pasture improvementand renewal, fencing and other infrastructure, machineryand equipment and breeding stock, for beef cattle ranchesprimarily in the Costa and Oriente and dairy and sheepfarms and ranches primarily in the Sierra;

(b) the development of crop farms in selected areas coveringa variety of on-farm investments, depending on the area,such as: irrigation canals and pumps; land clearing anddevelopment; building (including home) improvements;storage facilities; rehabilitation of permanent crops,incremental inputs for annual crops;

(c) small local industries, principally in the areas coveredby (b) above, involving, for example, processing of meat,poultry, vegetables and vegetable oil, balanced feeds andwood products; and

(d) the development of agricultural consulting services tocommercial agriculture.

3.03 In addition to credit, other components of the project would be:applied research, with particular emphasis on farm development in the Orienteand paramo and on pasture development; technical assistance to improve theadministration and accounts of the Cooperative Bank and of selected coopera-tives; equipment and technical assistance for the Project Executive Unit,CENAPIA and participating MAG extension services.

3.04 The existing Project Executive Unit would be responsible for themanagement of the project, under arrangements similar to those that haveproved successful for earlier projects. The staffing of the Unit would bediversified and strengthened, in line with the expansion of activities.

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3.05 As under previous projects, credit would be channelled through par-ticipating banks. The minimum interest rates for medium- and long-term creditunder this project would be 11% for small farmers and 14% for others. Theserates would represent substantial improvements over the arrangement underCredit 222 (9% for low-income farmers; 12% for higher-income farmers). Indi-vidual livestock and agricultural subloans would be made only to those whoseprincipal source of income was from the property to be improved by the sub-loan. Moreover, 30% of such credit would be earmarked for small farmers.

B. Detailed Features

Location and Phasing

3.06 The project would be countrywide. The dairy and sheep ranches wouldbe concentrated in the Sierra; the beef ranches would be mostly in the Costa,with a few in the Oriente. The small cropping and mixed farms would be inselected pilot areas in order to enable the credit operation to be coordinatedwith the reorganization of the extension services (paragraphs 2.09 and 3.42).The small industries subprojects would be mainly in the Costa and Sierra, butaway from Quito and Guayaquil. Some 2,000 loans are expected to be committedover a three-year period, and to be fully disbursed over five years.

3.07 The credit program reflects the experience gained from earlierprojects and the assessment of local banks and other institutions of thedemand for the different types of credit. The farm and ranch models describedin the following paragraphs also reflect the experience of previous projectsand have been designed to illustrate the financial and economic viability ofthe types of investment proposed. In practice, however, there would likelybe considerable variation, not only in the size of the subloans, but also inthe investments financed in individual cases. For example, the small dairyand beef ranch models represent units of minimum economic size; averageinvestments are likely to be about double. Also, it is possible (and desir-able) that farmers with mixed operations would borrow to increase their cropproduction and also to improve or introduce beef or dairy operations. Again,the small crop farm model includes provision for irrigation improvements thatwould be unnecessary in rainfed conditions. The numbers of subloans shownagainst each model are, therefore, only intended to give a broad indicationof the volume of lending. The small industries component is essentially aline of credit although detailed profiles have been prepared of representativeenterprises. For the purposes of the financial projections, it has beenassumed that the recipients of loans for small dairies, sheep farms and smallcrop farms--and these only--would qualify for the reduced interest rates andborrowers' contributions applicable to small farmers, as defined in para 3.47.

Ranches, Dairies and Farms

3.08 Beef Ranch. For ranches specializing in beef production, a minimumeconomic unit is between 50 and 100 ha; smaller units would include a crop-ping component. The model ranch of 50 ha represents a breeding and fattening

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operation based on grazing unfertilized improved or renovated pastures. Itprovides a guide to the level of investment per hectare which would be eco-nomical for beef production over a considerable range of ranch size, produc-tion systems and environments. Total beef output (liveweight) is estimated toincrease from around 70 kg per ha before development to about 220 kg per ha inthe ninth year under a program of renovating pasture and developing new pastureareas, increasing weaning rates from 55% up to 70%, reducing fattening timefrom over three years to about two years, and reducing herd mortality. Thetotal investment of about US$15,600 equivalent (US$156 per ha) would includepasture improvement, 28%; fencing, 12%; watering, 3%; and breeding stock, 37%.The detailed model appears in Annex 4(a).

3.09 Sierra Dairy Farm. This model of 50 ha is representative of com-mercial dairy farms which are usually specialized enterprises with around 75%of sales from milk and the remainder from surplus and cull animals. Malecalves are sold at one week of age and heifer calves usually as weaners or twoyear heifers. Under a five-year pasture renewal and annual pasture fertiliza-tion program, carrying capacity is expected to increase from 1.2 to over 2.0 AUper ha, daily milk production to increase from a level of 7.5 up to 10.5 litersper cow and from 1,600 liters per ha to 3,800 liters per ha in seven years.The total investment of around US$39,000 represents US$780 per ha, and com-prises pasture development, 21%; fencing, 5%; stock watering facilities, 3%;farm structures, 24%; machinery and equipment, 9%; and breeding stock, 37%.The detailed model appears in Annex 4(b).

3.10 Small Dairy Farm. These farms are typically family enterprises inthe Sierra. In the model, 6 ha of pasture is renewed over a five-year croppingprogram, in conjunction with subdivisional fencing, the purchase of betterquality cows and improved management. Carrying capacity rises from 1.0 to1.8 AU per ha while milk production per cow increases from 5 up to 8 liters andannual milk production from 600 to 2,400 liters per ha. Surplus calves aresold at about one year of age--steers at about 160 kg liveweight for slaughteror fattening. Total investment costs are estimated at about US$3,000, compris-ing pasture renewal, 36%; subdivisional fencing, 6%; stock watering facilities,4%; building improvements, 12%; and purchase of breeding cattle, 41%. Thetotal investment equals about US$500 per ha of pasture land. The detailedmodel appears in Annex 4(c).

3.11 Sheep Farm. The 40 ha sheep model is designed to promote the devel-opment of more accessible areas of the paramo and to change the present lowoutput, free range farming system to a higher yielding enclosed system by theuse of improved legume-based pastures. Local crossbred sheep would be up-

graded through the purchase of proven rams from MAG. Increases in productivityover a five-year period would result from the weaning rate rising from 50% to80% and the carrying capacity from 2 sheep units up to 5.5 sheep units perha with an increase in wool production from 1.0 kg to 3.5 kg per sheep unit.Male progeny would be sold for slaughter at over one year of age and surplusewes at about the same age for breeding purposes. The investment cost would beabout US$5,300 equivalent (US$130 per ha), comprising new pastures, 27%;

fencing, 17%; stock watering facilities, 8%; construction, 26%; and breedingstock, 19%. The detailed model appears in Annex 4(d).

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3.12 Small Cropping Farm. Participants would be small farmers cultivatingirrigated or rainfed crops. The 5 ha model includes investments estimatedto cost about US$2,200 equivalent for: on-farm irrigation works, 22%; incre-mental production inputs, 36%; building improvements, 19%; and land clearingand preparation, 13%. Farm output and income would increase as a result ofmore intensive land use (double cropping), expanded cropped area, changes incropping patterns and the use of improved techniques and inputs. The detailedfarm plan appears in Annex 4(e).

Small Industries

3.13 This component of the project would finance small industries inrural areas, utilizing local products and providing local employment. Most ofthese enterprises would fall into the following main groups: (a) livestockproducts - slaughterhouses and cold storage facilities; sausage manufacture;hides and skins processing; spinning and weaving; and chicken packing plants;(b) vegetable products - canneries; peanut packaging plants; oil mills forpeanuts, cottonseed, sesame seed and oil palm; flour mills; and the produc-tion of balanced animal feed stuffs; and (c) wood products - factories forthe production of parquet flooring and furniture.

3.14 Preliminary subsector studies, covering market prospects and theavailability of raw materials in different localities, have already beenprepared or are in course of preparation by CENAPIA (para 2.15). CENAPIAhas also prepared profiles of 15 small enterprises typical of those referredto in the preceding paragraph. These profiles cover: building, machineryand equipment requirements and layout; raw materials, labor and staffing; out-put; sales; and operating and investment costs and working capital requirements.Total investments for each enterprise range from about US$50,000 equivalent toabout US$200,000 and average about US$125,000; the number of persons employedin each enterprise ranges from about 10 to 30 and averages about 20; the invest-ment cost per job created averages about US$6,000.

3.15 This component of the project would be in the nature of a line ofcredit since, although the main types of enterprise have been identified,assistance to individual enterprise would be based on specific and detailedfeasibility studies prepared in the course of the project and submitted to theBank (paragraphs 3.40 and 3.50). Over the period of the project, it is expectedthat some 50 enterprises, providing employment for about 1,000 people, wouldbe financed. There is ample demand for this type of credit and the number ofoperations is considered to be within CENAPIA's capacity to handle.

Professional Loans

3.16 This small component is designed, as a pilot scheme involving about10 subloans, to assist the development of local consulting services for com-mercial agriculture, and to complement Government's policy of attractinggraduates in the agricultural sciences into the rural areas. Under the project,

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suitably qualified agricultural graduates operating their own farms, or infull-time professional practice would be eligible for finance for the purchaseof professional equipment. Subloans would not exceed US$15,000 equivalent toany single beneficiary, and would be presented to the Bank for approval.Investments to be financed by such subloans would generally be restricted to(a) topographical, soil laboratory, and veterinary equipment; (b) four-wheeldrive motor vehicles; and (c) office equipment. Assurances on these matterswere obtained.

3.17 This development of local consulting services would be furtherencouraged under the project by the provision of finance to the larger ranchesand farms to help meet the cost of professional fees for the preparation ofthe farm plans supporting credit applications. In addition, the largerborrowers would, at the discretion of the participating banks, be requiredto engage professional services (costing around US$500 equivalent a year)to review regularly the implementation of their ranch or farm plans duringthe investment period.

3.18 These arrangements would enable Government extension services toconcentrate on smaller farmers, oblige those who could afford it to pay fortechnical advice, reduce the burden of work on the Project Executive Unitand reduce the costs of the participating banks.

Applied Research

3.19 The project would support applied research programs of INIAP in thetropical and temperate regions of the Oriente and Sierra respectively.

3.20 A demonstration research unit would be established in the Oriente,based on Limonoche. The program would be production oriented to assist thefarm holdings presently being established by IERAC in this tropical forestarea. The area has been traditionally farmed under a slash, burn, shiftingcultivation system, but, with increasing colonization, the resting phase underregenerated bush is so shortened that soil fertility rapidly deteriorates andseriously reduces crop yields.

3.21 An agronomist with at least five years of experience under similarconditions, including livestock production, would be internationally recruitedfor about three years. He would conduct applied research toward developing amixed farming system giving sustained yields through the better integration ofcrops, animals and forestry. He would train local staff to continue the pro-gram, and provide extension to local farmers. He would also spend up to one-third of his time in assisting the pasture/animal production research andtraining programs at the Pichilingue Experimental Station in the Costa, in-cluding the development of the dual purpose system of beef and milk productionin the coastal region.

3.22 The program for the Sierra region would be essentially a broadeningand strengthening of the pasture research begun under Credit EC-222. This hasshown that, in the phosphate deficient inter-Andean zones, the low ability of

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indigenous white clover to fix nitrogen is due to a deficiency of sulphur inthe soil. Formerly the main phosphate fertilizer imports into the countryhave been in the form of triple superphosphate which is devoid of sulphurwhereas single superphosphate contains 10% sulphur. With adequate sulphur andphosphate, white clover can supply about 100 kg of nitrogen per hectare peryear, and thereby significantly reduce nitrogenous fertilizer costs. In addi-tion, there are still major problems with improved pastures which have to bereplaced at high cost after five years, and, in the Paramo region, satisfac-tory pasture improvement methods have yet to be developed.

3.23 A plant nutrition specialist would be internationally recruited andbe employed for about three years to cover this pasture improvement research.He would train two teams in trial techniques for the two different zones as itis essential that field trials continue for at least five years. He would bebased on the Santa Catalina Experiment Station.

3.24 For all project-oriented research, INIAP would continue with thepresent Research Planning Committee, with the Project Director as one of themembers. INIAP would also provide local costs and facilities for the programs.The two specialists to be financed by the project would have appropriate qualif-ications and experience and would be recruited by February 1, 1978 on termsand conditions acceptable to the Bank; draft terms of reference are in Annex5. Assurances on the above matters were obtained.

Technical Assistance and Training

3.25 An internationally recruited financial specialist would be appointedto the Project Executive Unit to assist the Unit as Financial Advisor and, inthe case of small industries, CENAPIA. This specialist would review existingprocedures and, in the light of experience, establish new procedures for thepreparation of financial projections and actual results for the farms, ranchesand other enterprises financed under the project. In addition, an interna-tionally recruited Agricultural Advisor would be appointed to supervise,under the Project Director, the credit program to small farmers and to coordi-nate with MAG the organization and provision of extension services to thesefarmers.

3.26 The project would help finance consulting services for theCooperative Bank and up to 10 selected cooperatives. The consultants wouldreview the accounting and credit procedures of the bank and the management,administrative and accounting procedures of the cooperatives. In addition torecommending and helping to implement improvements in the proceduresgenerally, the consultants would particularly concern themselves with devisingmechanisms to enable the cooperatives to act, not only as retailers of creditto members from the Bank (to try to reduce the cost of such credit), but alsoas mobilizers of savings and sources of deposits for the bank. The coop-eratives would be selected on the basis of the soundness of their managementand financial position and their willingness to participate in the project.

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Selection would be on the recommendation of the Cooperative Bank, subject tothe final approval of the Project Director; in addition, the information onwhich the selection was based, including recent accounts of the cooperativesselected, would be submitted to the Bank for comment before any final decisionwas made. Assurances were obtained that the consultants employed, the termsand conditions of their employment, and the cooperatives selected for suchassistance would be acceptable to the Bank.

3.27 In addition, the project would finance a small discretionary fundwhich would enable the Project Director to engage consultants for special short-term assignments - for example to advise on particular crops or on the market-ing or engineering problems of particular small industries. The appointmentof such consultants would, in each case, be made with the prior approval of theBank; appropriate assurances were obtained.

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C. Cost Estimates

3.28 The total cost of the project is estimated to be US$36.0 million,of which US$15.5 million, or 43%, represents foreign exchange requirements.Baseline costs were estimated at early 1977 prices. The amount of taxes andduties in project costs would be negligible. Price contingencies were appliedon estimated expenditures during the years 1978 through 1982 on the basis of8% per annum, which reflects the expected rate of inflation in Ecuador. Costestimates are summarized below:

Total Project Costs

ForeignLocal Foreign Total Local Foreign Total Exchange----- S/ million ------ --- (US$ million) ---- (%)

Beef Ranches 114.3 40.1 154.4 4.6 1.6 6.2 26Dairies 115.9 77.3 193.2 4.6 3.1 7.7 40Small Dairies 28.1 16.5 44.6 1.1 0.7 1.8 37Sheep Farms 3.9 2.7 6.6 0.2 0.1 0.3 41Small Crop Farms 34.1 20.9 55.0 1.4 0.8 2.2 38Small Industries 72.0 88.0 160.0 2.9 3.5 6.4 55Professional Loans 2.5 2.5 5.0 0.1 0.1 0.2 50Total Credit 370.8 248.0 618.8 14.9 9.9 24.8 40Applied Research 1.1 10.3 11.4 - 0.5 0.5 90Technical Ass't'ceProject Unit 1.8 16.6 18.4 0.1 0.6 0.7 90Cooperatives 0.6 5.7 6.3 - 0.2 0.2 90

Baseline Costs 374.3 280.6 654.9 15.0 11.2 26.2 42Price Contingencies 138.2 106.9 245.1 5.5 4.3 9.8 44Total Project

Cost 512.5 387.5 900.0 20.5 15.5 36.0 43

A summary of investment costs by category is shown in Annex 6, in respect ofthe ranches, dairies and farms.

3.29 The costs of the Project Executive Unit cover the additional seniorstaff, and associated equipment, and consulting services required for theproject. Other costs of the Unit (estimated at about US$200,000 equivalent ayear initially and rising to about US$250,000) would be covered by transfersfrom a special account maintained by the Central Bank from which MAG is entitledto withdraw funds for the purpose of financing technical services. Cost ofstaff of the participating banks working on the subprojects would be coveredby the interest charges from subloans.

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D. Financing

3.30 Financing would be shared in the following amounts and proportions:

Participat- Sub-IBRD Government ing Banks borrowers TotalUS$ US$ US$ US$ US$

million % million % million % million % million

Beef Ranchesand Dairies 5.2 40 2.7 20 2.6 20 2.6 20 13.1

Small Dairies,Sheep Ranches andCrop Farms 2.3 45 1.8 36 0.5 9 0.5 10 5.1

Small Industries 2.6 40 1.5 24 1.0 16 1.3 20 6.4Professional Loans 0.1 40 * 24 * 16 * 20 0.2

Total Credit 10.2 41 6.0 24 4.1 17 4.4 18 24.8

Technical Assist-ance, Trainingand AppliedResearch 1.3 90 0.1 10 - - - - 1.4

Price Contingencies 4.0 2.5 _ 1.6 _ 1.7 9.8

Total Project Cost 15.5 43 8.7 24 5.7 16 6.1 17 36.0

* Less than US$0.05 million equivalent. Columns do not total because of rounding.

3.31 The project would be financed by a Bank loan of US$15.5 million, or43% of total project cost, which would cover the estimated foreign exchangecost. The Government of Ecuador and the participating banks would finance,respectively, US$8.7 million and US$5.7 million (24% and 16% of total cost);the balance of US$6.1 million (or 18% of project cost) would be contributed bythe sub-borrowers. Small farmers would contribute not less than 10% of theinvestment costs in their subprojects, and other sub-borrowers would contri-bute not less than 20% of the investment cost. The technical assistance tothe Cooperative Bank and selected cooperatives (US$200,000) would be passed onunder terms and conditions acceptable to the Bank. Assurances were obtainedthat the participating banks would provide adequate short-term loans andworking capital to cover the needs of beneficiaries. Government would bearthe foreign exchange risk. The Bank loan would be at 8.2% for a term of 14years, including five years grace on principal repayments. Government fundswould be provided through the Central Bank; in addition, the Central Bankwould charge 1/2% for its services. This charge would be covered by therediscounting rate (paragraph 3.52). Project cash flows for the Central Bankand the participating banks are shown in Annexes 7 and 8. Conclusion of acontractual arrangement between Government and the Central Bank, to thesatisfaction of the Bank, is a condition of effectiveness.

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E. Procurement

3.32 Bulk purchasing would not be feasible in view of the fact that thefarm and ranch development sublending program would be implemented over a fiveyear period, be widely distributed geographically, and cover a variety of invest-ment plans. Capital items would therefore be purchased locally from commercialsuppliers, who maintain adequate stocks and whose margins are in an acceptablerange. Vehicles and equipment for project administration (US$125,000) wouldbe procured through local competitive bidding, according to procedures accep-table to the Bank. The services of expatriate personnel and consultants wouldbe arranged according to procedures also acceptable to the Bank.

F. Disbursements

3.33 The Bank would disburse over five years: (a) 50% of amounts dis-bursed by participating banks for small farmer subloans; (b) 50% of the amountsdisbursed for agricultural, livestock, small industries, and professionalsubloans; and (c) 90% of technical services, research and training costs.

3.34 Disbursements for technical services, research, training, thepurchase of vehicles and for other project-related equipment would be madeagainst normal documentation. Disbursements for subloans would be based oncertificates of expenditure submitted by the participating banks and by theProject Executive Unit to the Central Bank after approval by the ProjectDirector. The supporting documentation for such expenditures, which wouldnot be submitted for review, would be retained by the borrower and madeavailable for inspection by Bank supervision missions. Investments financedby the project would be subject to regular physical inspection by staff, bothof the participating banks and of the Project Executive Unit. These arrange-ments, together with the audit requirements set out in paragraph 3.57, wouldprovide reasonable safeguards for the proper use of project funds. An esti-mated schedule of disbursements is set out in Annex 9.

G. Organization and Management

3.35 The Government of Ecuador would be the borrower. Responsibility forthe execution of the project would be with the Technical Executive Committeeand its Project Executive Unit, which were established under earlier livestockcredit projects and which continue to function satisfactorily. Other organiza-tions involved in the implementation of the project would be CENAPIA, theparticipating banks, and the extension services of MAG.

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Technica'l Executive Committee and Project Executive Unit

3.36 The Technical Executive Committee, under the chairmanship of theundersecretary of MAC, would comprise its present membership 1/ and, inaddition, a representative of the Ministry of Industries. The Committee wouldcontinue to formulate general policies and be responsible for the appointmentof the Project Director.

3.37 The Project Director, who would continue to act as secretary to theCommittee, would be the chief executive of the project. He would be assistedby two Regional Technical Directors, as at present, and in addition by anAgricultural Advisor and a Financial Advisor (para 3.25). The other staffingarrangements of the Project Executive Unit would continue as at present. TheProject Director, or his delegate, would approve development plans supportingrequests for credit under the project and disbursement requests before thelatter were forwarded to the Central Bank. He would lay down the technicalguidelines and standards to be followed by the staff of the Unit and by otherorganizations and consultants in the preparation of investment proposals, thesupervision of sub-borrowers and the collection and analysis of the results ofsubprojects. He would also be responsible for supervising the application ofsuch guidelines by the participating banks. During the execution of theproject, the delegation to participating banks of the authority to approvesubloans would be reviewed in consultation with the Bank. The Project Directorwould submit quarterly reports to the Bank, prepared according to guidelinesmutually agreed with the Bank, not later than three months after the end ofeach quarter. Suitable assurances were obtained.

3.38 The Project and Regional Directors, and the Financial and AgriculturalAdvisors would have appropriate qualifications and experience and, in the caseof expatriates, be appointed on terms and conditions acceptable to the Bank;all the above positions would be filled by December 31, 1977, or, in the caseof the Financial Advisor, by such later date as may be agreed. Suitableassurances were obtained.

3.39 The Project Executive Unit was originally attached to the CentralBank and subsequently transferred to MAC. Any future change, if made, wouldbe after consultation with the Bank and on conditions acceptable to the Bank.The operational autonomy of the Unit would be adequate and acceptable to theBank. Suitable assurances were obtained.

1/ Presently, the Technical Executive Committee comprises, under the chair-

manship of the Undersecretary of MAG, the General Coordinator of MAG, theGeneral Director for Livestock of MAG, the Deputy Manager of Credit fromthe Central Bank, and the Project Director as Secretary of the Committee(with voice but without voting power).

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CENAPIA

3.40 CENAPIA would be responsible, under the general supervision of theProject Director, for the execution of the small industries component of theproject. It would identify suitable subprojects and sub-borrowers and assistthe sub-borrowers in the preparation of feasibility studies, investment plans

and requests for finance; these would include cash flows and other financialprojections, output and productivity estimates, management and personnelbudgets and accounting and audit arrangements. CENAPIA would approve subloansbased on the investment plans. It would also supervise the maintenance ofstatistical and accounting records by sub-borrowers, and it would collect and

analyze information on the results of subprojects as compared with projections.The present management and staffing of CENAPIA are satisfactory. Prior to

making any change in the position of the Executive Director of CENAPIA, theBorrower would notify the Bank concerning the qualifications and experience ofthe person to be appointed to such position and would allow the Bank a reason-able opportunity to comment thereon; suitable assurances were obtained.

Participating Banks

3.41 The arrangements for participating banks would be similar to thoseunder the previous and on-going project. Any legally established bank orfinancial institution carrying on business in Ecuador, and acceptable tothe Bank, would be eligible to participate. Each participating bank wouldconclude a subsidiary loan agreement with the Central Bank under terms andconditions acceptable to the Bank. Conclusion of a subsidiary loan agreementwith at least one participating bank, to the satisfaction of the Bank, is acondition of effectiveness. Suitable assurances were obtained. The technicalstandards and procedures employed by the participating banks for preparationand supervision of subloans financed under the project, would be acceptable tothe Project Director.

Extension Services

3.42 Implementation of the small farm component of the project would becoordinated with the reorganization of the extension services in selectedzones and the establishment of local service centers (paragraph 2.09). Thework of the extension agents would be limited to extension work, to theexclusion of other matters such as marketing, input distribution and statis-tical and administrative work, for which specialized staff would be employedas required. Extension agents would concentrate on (a) the development ofsmall farms as integrated operations; (b) the most important crops in thelocality; (c) the basic improvements in husbandry practices and application ofresearch findings likely to yield quick and substantial economic returns; and,(d) selected demonstration farmers, who would also be likely to be the earliestrecipients of credit under the project. Assurances were obtained on thesematters.

3.43 The new extension arrangements would be gradually introduced inthe areas covered by the nine general delegations or offices of MAG. TheAgricultural Advisor of the Project Executive Unit would collaborate withthe MAG Directors handling extension matters and the heads of zonal officesin identifying main crops and key husbandry practices, in preparing and

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carrying out training programs and timetables, in selecting demonstrationfarmers and in preparing simple development plans for small farms.

3.44 Assurances were obtained that: the zones selected for the reorgan-ization of the extension services and the implementation of the small farmscredit component would be coordinated; and the extension services wouldcollaborate fully with the Agricultural Advisor of the Project ExecutiveUnit.

H. Lending Operations

3.45 Credit would be made available through the participating banks,who would employ their normal criteria of creditworthiness in approving pros-pective sub-borrowers. The eligibility of subloans for rediscounting through theCentral Bank and drawing down project funds would be determined by the ProjectDirector on the basis of the technical, financial and economic soundness of theinvestment plans and projection.

3.46 The minimum annual interest rates on subloans, including commissionsallowed to be charged by Regulation 927-76 of the Monetary Board of the Borrower,would be 11% for small farmers (paragraph 3.47) and 14% for others. Terms ofsubloans are expected to vary between eight and 12 years, with three to fiveyears of grace on the repayment of principal. The proposed interest chargesare considered adequate. Inflation rates in Ecuador have fallen substantiallyfrom the levels of 23% and 15% registered in 1974 and 1975, respectively, toabout 10.6% in 1976, responding to the Government's vigorous control policy.The rate projected for future years is about 8%. On this basis, all catego-ries of sub-borrowers would be paying positive real interest rates. Theserates represent a significant improvement over those applied in previousprojects. In these circumstances, the project would retain the differentialin the rates for small and larger farmers, which reflects Government policyand the arrangements under the on-going project. Assurances were obtainedthat any changes in the terms and conditions of subloans would only be madewith the concurrence of the Bank.

3.47 For the purpose of determining the rate of interest, a small farmerwould be defined as one with net assets of less than S/ 500,000 (US$20,000),including land but excluding housing. Cooperatives composed entirely of smallfarmers would qualify for the same terms and conditions as individual smallfarmers.

3.48 Subloans to small farmers would be to eligible individuals whoseprincipal source of income was the farm for which the subloan was sought.These subloans would cover up to 90% of investment costs, with the remaining10% contributed by the beneficiary. The maximum subloan to any beneficiarywould be US$12,000 equivalent. Of the total lending for livestock and agri-cultural operations, 30% would be earmarked for small farmers.

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3.49 Other subloans for livestock and agricultural operations would beto (a) individuals whose principal source of income was the ranch or farm tobe improved; and (b) cooperatives, whose soundness of management, operationsand financial position were judged suitable by the participating bank andby the Project Director. Subloans would cover up to 80% of investment costs.The free limit of US$100,000 equivalent, cumulative, to any sub-borrower,established under Credit 222-EC, would continue to apply; subloans above thefree limit would continue to be submitted to the Bank for approval and wouldnot together exceed 20% of the total lending under this category.

3.50 Subloans to small industries would cover up to 80% of investmentcosts. The maximum subloan amount (cumulative) to any single enterprise wouldbe US$200,000 equivalent. The first three subloans to small industries, andall subsequent subloans to small industries of more than US$150,000 equivalent(cumulative to the same beneficiary), would be presented to the Bank forapproval, together with supporting studies, investment plans and financialprojections. Suitable assurances were obtained.

3.51 The very small number of professional subloans would be made toagricultural science graduates, with qualifications acceptable to the ProjectDirector, to assist them in establishing or expanding consulting practices inrural areas. Residence in the area of the practice would be a condition oflending; the practice could be carried on full time or in conjunction withfarming or livestock or dairy production. The maximum subloan amount would beUS$15,000 equivalent. The subloan would finance up to 80% of the totalinvestment costs; the participating bank would be able to rediscount up to 80%of the subloan.

3.52 Participating banks would be able to rediscount with the CentralBank up to 90% of the subloans made to small farmers. Other subloans madeand disbursed by the participating banks could be rediscounted as follows:

80% for small agro-industry subloans and other subloansof up to US$50,000 equivalent;

75% for other subloans of between US$50,000 and US$100,000equivalent; and

70% for other subloans of over US$100,000 equivalent.

Rediscounting requests to the Central Bank would be made within three monthsof the date of disbursements of the participating banks.

3.53 Interest rates charged to participating banks under subsidiaryloans (including the administrative services charge of 0.5% of the CentralBank) would yield a minimum spread of 3%, and a maximum spread of 6%, belowthe interest rates charged by participating banks for subloans. In the caseof subloans to beneficiaries other than small farmers, the rediscount ratecharged participating banks would be no less than the sum of the interestrate on the Bank loan plus the administrative services charge of the CentralBank. Repayment schedules to the Central Bank would be in line with those ofthe sub-borrowers.

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3.54 The above arrangements are considered to provide adequate incentivesto the participating banks and, in addition, to encourage both lending tosmall farmers and also the use of the participating banks' own funds foragricultural lending. Projected cash flows for the Central Bank and for theparticipating banks are in Annex 7 and 8, respectively.

I. Accounts, Auditing and Monitoring

3.55 The Central Bank and the participating banks would maintain separateproject accounts in accordance with generally accepted accounting principles.The project account in the Central Bank would be audited by the InterventorGeneral (the representative of the Superintendency of Banks), whose reportthereon would be of such scope and in such detail as the Bank may reasonablyrequest. The project accounts in the participating banks would be audited byindependent professional auditors acceptable to the Bank. In the case ofthose participating banks which had requested, or to which authority had beendelegated for the approval of subloans, their annual accounts would be auditedby independent auditors acceptable to the Bank, whose reports would be of suchscope and in such detail as the Bank may reasonably request. The project accountof the Central Bank and the accounts of the participating banks referred to above,together with the relevant audit reports, would be submitted to the Bank notlater than three months after the end of each financial year. Assurances onthe above were obtained.

3.56 The results of the agricultural and small industries lending wouldbe monitored by the Project Executive Unit and CENAPIA, which would arrange forthe collection of financial and statistical information in a form directlycomparable with the original development plans and projections of the enter-prises financed. These results would be collected: (a) for all small industryloans and for those agricultural and livestock loans above the free limit (para-graph 3.49); (b) for 10% of the number of small farmer loans; and (c) for 20%of the number of other agricultural and livestock loans. The detailed informa-tion would be retained by the Project Director and available for inspection byBank supervision missions; summaries and analyses of the information would beincluded in the Project Director's quarterly reports, as the information becameavailable. Suitable assurances were obtained.

IV. PRODUCTION, MARKETS AND MARKETING, PRICES,AND PRODUCER BENEFITS

A. Production

4.01 At full development, annual incremental output from 1,000 small cropfarms is expected to be as follows: 1,300 m tons maize (less than 1% of 1974national output); 2,000 m tons oilseeds (6%); 8,000 m tons vegetables (4%) and2,000 m tons rice (1%). Incremental annual output from 600 small dairy farms(6-ha) is expected to be about 9 million liters of milk (0.8%) and 500 m tons

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of beef (0.5%), while for the 200 commercial dairying operations annual incre-mental output is expected to be 22 million liters of milk (3%) and 800 m tonsof beef (1%). For the 800 beef farms (50-ha modules), annual incrementaloutput of beef at full development is expected to be 6,500 m tons (6%). Incre-mental output from 50 sheep farms (40-ha modules) is expected to be 139 m tons

mutton (2%) and 35,000 kg wool (2%).

4.02 It is not possible at this stage to estimate incremental productionfrom the small industries component. Detailed projections would be included inthe feasibility studies that would be prepared for each individual subproject.

B. Markets and Marketing

4.03 Agricultural marketing is largely in the hands of the private sector,with some Government intervention. Inadequate roads and storage facilitiestend to create thin markets with wide handling and distribution margins.

4.04 Nonetheless, project-induced production of milk and beef is notanticipated to encounter marketing difficulties. In the past year and a halfthere have been substantial imports of powdered milk to meet the rapidlyexpanding domestic demand. More than adequate processing capacity exists inthe local pasturizing industry to absorb the projected expansion of output.There exists a similarly strong and expanding demand for beef. Ranchers areto some extent at a disadvantage in selling beef on the hoof (S/15/kg orUS$0.60 per kg liveweight) to local traders, although implementation ofproposals for regional auction yards could improve their bargaining position.In several of the main producing areas, slaughter facilities are poorlyorganized and unhygienic, and assurances were obtained that the health andhygiene standards required by Ecuadorian law would be strictly enforcedin project areas. Although there is much room for improvement in the market-ing of other agricultural products, the incremental volumes of crop productionare modest relative to overall national totals and are not expected to encoun-ter marketing difficulties. Moreover, the service centers to be establishedin conjunction with the reorganization of the extension services (para 2.09)should improve marketing and storage facilities in the project areas.

4.05 The marketing prospects for production from the small industriescomponent would be individually assessed in the feasibility studies foreach subproject.

C. Prices

4.06 The Government has frequently intervened in the establishment ofprices for basic food consumption items in Ecuador, setting them at relativelylow levels. However, a willingness recently to implement price policies whichpromote production expansion is evident. The recent (September, 1976) 50%increase in the cash price to producers for fluid milk delivered to processors(US$0.17 per liter) is a case in point. Milk prices are now highly attractiveto producers. The official prices on beef are not vigorously policed and

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appear adequate and relatively stable at the producer level. The Government'spolicy with respect to the other crops to be financed under the project isrestrained to merely setting guidelines or referential prices and is notexpected to act as a disincentive to producers.

D. Producer Benefits

4.07 The following table summarizes the producer benefits from the live-

stock and agricultural lending, as shown by the models in Annex 4:

Beef Dairy Small Sheep CropModel Models Farm Dairy Farm Farm

50 ha 50 ha 10 ha total 40 ha 4 ha6 ha pasture

Financial rate of return:

overall 19% 22% 20% 18% 26%on owner's investment 26% 40% >50% 41% 47%

Net operating income ------------------ US$ --------------------

with project 3,520 18,220 708 2,088 1,334without project 836 6,796 76 264 428

Debt service 1,440 6,248 572 1,008 536

The figures for net operating income with project shown above are at fulldevelopment before charging debt service. Except in the case of the cropfarm, the net income is after charging incremental labor, some or all ofwhich may be previously unemployed family labor, so that the increase infamily income could be substantially more than the increase in the farm

operating income--for example, about US$1,300 equivalent in the case of thesmall dairy. It is expected that the project would reach some 1,500 ruralfamilies classified as small farmers, most of whom have income levels wellbelow the national average.

4.08 Producer benefits cannot be quantified at this stage for the smallindustries component, although preliminary estimates show financial rates ofreturn in the neighborhood of 20% for typical enterprises.

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V. ECONOMIC BENEFITS AND JUSTIFICATION

5.01 The project would lead to substantial increases in the outputof agricultural products and derivatives, improve the country's food supplyand reduce the need to utilize foreign exchange for food imports. Whilstthe project would be basically production oriented, it would also raisethe living standards of a significant number of small farmers and pave theway for future increases in the volume of lending to this group. At fulldevelopment, the project would generate some 4,000 man-years of employmentannually. The value of incremental output would be US$12 million a year;the value of incremental herds would total US$16 million.

5.02 The economic rate of return of the agricultural and livestockcomponents of the project is estimated at 20% (Annex 10). This estimate isbased on current financial wages, with fertilizer and project output pricedaccording to the Bank's projections and an allocation of technical and admin-istrative costs. The results of sensitivity analysis may be summarized asfollows:

Investment Operating Shadow WageCosts Costs Output Rate 80%

+10% +15% +10% +15% -10% -15%

Rate of Return 19% 18% 17% 15% 15% 13% 21%

5.03 Because the small industries component is in the nature of a line ofcredit, no calculation of the economic rate of return has been possible.Tentative estimates of the financial results of enterprises of the type to befinanced indicate rates of return of the order of 20%.

5.04 The experience of previous projects, and the known demand forcredit suggest a relatively low level of risk for the livestock componentsof the project. The more limited experience in Ecuador of lending to smallfarmers and small industries indicates an acceptable level of risk, giventhe institutional strengthening and safeguards incorporated in the project.

VI. AGREEMENTS REACHED AND RECOMMENDATION

6.01 During loan negotiations, agreement was reached on the followingprincipal points:

(a) participating banks would provide adequate short-term subloans and working capital to project benefi-ciaries and the Central Bank would provide therediscount facilities outlined in paragraphs3.52 and 3.53 (paragraph 3.31);

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(b) During the second year of the project, the delegationto the participating banks of the authority to approvesubloans would be reviewed in consultation with the Bank(paragraplh 3.37);

(c) the Project Executive Unit would have adequateoperational autonomy and any change in its loca-tion within the public service would be made afterconsultation withi the Bank and on terms and conditionsacceptable to the Bank (paragraph 3.39);

(d) the terms and conditions of the subsidiary loan agreementsbetween the Central Bank and participating banks wouldbe acceptable to the Bank (paragraph 3.41); and

(e) the arrangements for the provision of MAG extensionservices would be as specified in paragraphs 3.42-3.44.

6.02 Conditions of effectiveness are that:

(a) a contractual arrangement has been executed and deliveredby the Government and the Central Bank (paragraph 3.31); and

(b) a subsidiary loan agreement with at least one participatingbank has been made to the satisfaction of the Bank(paragraph 3.41).

6.03 The proposed project is suitable for a Bank loan of US$15.5 millionfor a terni of 14 years, including a 5-year grace period.

May 25, 977

ANNEX 1Page 1

ECUADOR

Agricultural Credit Project

Performance Under Previous Agricultural Projects

1. Previous Bank Group lending for the agricultural sector in Ecuadorhas comprised three livestock development projects and four other projects forfisheries, irrigation, seed production and technical assistance. The threelivestock development projects are treated separately below because of theirspecial relevance to the proposed project.

The Livestock Development Projects

2. The First Livestock Development Project financed on-farm investmentsfor beef production in the coastal region. Loan 501-EC for US$4.0 millionbecame effective in December 1967 and was fully committed by June 30, 1969,some six months ahead of schedule. The program was administered by the Proj-ect Executive Unit, under an expatriate Director and a specially createdautonomous Project Commission. One hundred thirty-two subloans were made,averaging US$37,000 each, larger than had been anticipated during appraisal.

3. The Second Livestock Development Project was of an interim nature anddesigned, in view of the rapid advance of the first project, to continue fi-nancing coastal livestock activities until a third, more comprehensive projectcould be prepared and approved. Credit 173-EC for US$1.5 million became effec-tive in June, 1970 and was closed in February, 1974. Under the project, 90subloans, averaging about US$25,000 each, were made.

4. The Third Livestock Development Project has continued to finance beefcattle development in the tropical coastal region and also expanded to includedairy farm development in the temperate Sierra highlands (plus a smallervolume of lending for beef cattle in the tropical Oriente). The project alsocovered: (a) pasture and beef cattle research; (b) technical assistance; and(c) a pasture seed certification and multiplication service. Credit 222-ECfor US$10 million became effective in September 1971. The project has pro-ceeded smoothly except for a hiatus from late 1973 to late 1974 during whichthe goverment renegotiated the credit conditions regarding project organiza-tion and the interest rates on subloans. Under the project, some 356 subloanshave been approved by the Project Unit, averaging US$31,000 each. The live-stock credit funds are nearly fully committed, and it is likely that the creditwill be fully disbursed by end-1977.end-1977.

5. The performance of the first two projects (Loan 501-EC and Credit173-EC) was assessed in the Project Performance Audit Report dated October 21,1975. The Report found that the projects had been well managed and smoothly

ANNEX 1Page 2

implemented; they had improved productivity and output on participating ranchesand jointly resulted in an increase of roughly 10% (worth about US$4 million ayear) in national beef production. The economic rate of return, however, wasestimated to have fallen sharply (to about 12%, compared with 27% at appraisal)because of higher investment costs and lower cattle and beef prices relative toinput costs. The financial rates of return to ranchers on the other hand, wereestimated to have been about equal to the 27% forecast at appraisal, becauserapid inflation eroded the real value of loan repayments, offsetting theunfavorable price movements. The Report also noted: the low standards ofslaughterhouses processing project output; the regressive impact on incomedistribution resulting from subsidized interest rates to medium-sized and largeproducers (granting that commercial production was the project's main objective);the capital-intensive nature of the developments financed; and the lack of amonitoring system.

6. The performance of the third project has been basically similarto that of the first two. Since the Audit Report was written, however, twoissues have arisen: first, the accounting and audit arrangements have beeninadequate and, second, there have been serious deficiencies in the accountsand internal controls of BNF, the principal participating bank.

7. The proposed project would continue the successful livestock lend-ing program established under the first three projects. Producer prices formilk have just been substantially increased. At the same time, the investmentmodels have been designed to reduce capital costs in the light of the experiencealready gained. Assurances on health standards in slaughterhouses were obtained.Any regressive impact on income distribution would be countered by the newinterest rate structure and by the introduction of credit for small crop andmixed farms. Following a recent supervision mission, work has already begun onthe collection of actual results from participating farms and ranches; thiswould be continued. The Bank and BNF have agreed on the accounting and auditingarrangements which need to be made to enable BNF to participate in the proposedproject.

Other Agricultural Projects

8. The Fisheries Project Loan of US$4.6 million was approved on 3September 1968 and became effective on 4 September, 1969. Its components are:(a) provision of physical facilities and implementation of a training programfor fishing crews; (b) design and construction of tuna purse seiners; and,(c) feasibility and detailed engineering studies for improved fishing harborfacilities. The training facilities are completed and training operationscommenced in September 1976. As the demand for tuna purse seiners was lessthan originally anticipated, only four have been constructed and the remainingloan funds reallocated. After prolonged conversations with the Government onthe scope of the port studies (owing to differing interpretations of the

ANNEX 1Page 3

preliminary feasibility studies), it has been agreed to proceed with detailedengineering studies for a phased upgrading of the Manta fishing port facil-ities. The loan's closing date, originally October 1974, is May 1977, butmay very likely be further extended.

9. The Milagro Irrigation Credit for US$5.5 million was approved onJuly 5, 1973 and became effective on January 17, 1974. The project willprovide irrigation and drainage systems, roads and on-farm development onabout 7,000 ha. It includes establishment of an agricultural productionunit, a seed multiplication program, and applied research, as well as studiesto extend a second-stage project over an additional 12,000 to 15,000 ha. Con-struction is progressing well but the on-farm development phase is about oneyear behind schedule, owing to the delay in procuring equipment and extremelyslow progress in preparing land titles through the land reform agency (IERAC).

10. The Seed Production Loan (US$3 million) was approved on May 24,1976 and became effective on October 20, 1976. Under it a National SeedsCouncil will be established as a policy formulation body, improved seed pro-duction increased, three large-scale seed processing and storage plants setup, the Agricultural Ministry's Seed Certification Department strengthenedand some 25 seed distribution centers upgraded or constructed.

11. The Agricultural and Rural Development Technical Assistance Loanfor US$4 million was approved on March 30, 1976 and became effective on Octo-ber 20, 1976. It provides technical assistance and associated equipment for(a) setting up a national rural development planning group (UNDER) in thePlanning Ministry (JUNAPLA), (b) preparation of a rural development projectin the Sierra (Tungurahua), (c) preparation of rural and agricultural devel-opment projects in the lower Guayas Basin and a framework plan for watercontrol and agricultural development in this region, and (d) pre-investmentstudies of rural development possibilities in the Esmeraldas River Basin.There has been little progress made until recently in contracting theexpatriate experts provided for under the various loan components.

ANNEX 2Page 1

ECUADOR


The Agricultural Sector

Introduction

1. Since 1972 the development of petroleum production and exports hashad a dramatic effect on Ecuador's internal and external financial positionand has accelerated the rate of economic growth. In constant terms, theGross Domestic Product (GDP) increased on average by about 5% annually from1969 to 1971, 6% in 1972, 18% in 1973, 12% in 1974 and 5% in 1975. This rapidgrowth has been accompanied by price inflation, particularly in 1974 (23%);however, the rate of inflation declined from 14.5% in 1975 to 10.6% in 1976.

2. A basic question now is how fully will the country be able to uti-lize its considerably increased financial resources to strengthen its economicstructure, particularly in view of uncertainties about oil exploration and thelevel of output and revenues in the 1980s. Only by expanding, diversifyingand raising the productivity of the non-petroleum sector can Ecuador createemployment for its rapidly growing labor force and raise the living standardsof the broad mass of the population.

Agriculture in the Economy

3. Agriculture is a major source of output, income and employment(Table 1). In 1975, it accounted for 21% of GDP. The rural populationis about 58% of the national total and some 54% of the working populationis in agriculture. Until 1972, the sector accounted for more than 85% oftotal export earnings; its share has dropped to about 33% since then as aresult of the rapid expansion of petroleum exports. Still, the sectoraccounted for 10% of the increase in GDP between 1970 and 1975, compared tothe petroleum sector's 9%.

Natural Resources

4. There are three broad natural resource regions in Ecuador: Costa,Sierra and Oriente. The Coastal Zone, typically humid tropical, havingmostly medium-sized and large farms, specializes in the production of rice,hard corn, yuca, bananas and plantains, citrus, oilseeds (annual and peren-nial), fibers, coffee, cacao, sugarcane and beef. The Sierra highland val-leys, with most of the country's small to medium-sized farms and considerableamount of subsistence farming, produce temperate climate foodgrains, pulses,potatoes, vegetables, and deciduous fruits and contain most of the dairy ranches.Sheep herds are maintained on the paramo pastures at altitudes of 3,000 m and

ANNEX 2Page 2

above. The Oriente still suffers from limited access, though this is improv-ing, especially in the Northeast where most of the oil fields are located. Asyet it contributes relatively little to sectorial output; it may have consid-erable potential for such products as oilseeds, beef and rice, but much moreinvestigation is needed. Substantial investment in infrastructure would berequired to open the area to settlement.

5. Most of the farming areas receive annually between 1,000 and 2,000mm of rain, which is generally concentrated in the early part of the year.The northern part of the Costa and the piedmont section of the Oriente arehigh rainfall areas, receiving over 5,000 mm a year. In the Costa and partsof the Sierra, second crops are occasionally grown with irrigation duringthe 2nd semester. The wide range of altitudes and broken terrain--espe-cially in the Sierra--produce a multitude of climatic conditions. Soilsalso vary widely, from young volcanic ash to deep well-developed soils ofhigh potential. The Ministry of Agriculture is undertaking a comprehensiveresource and environment study of the various regions. Except in the Oriente,the area of arable land per rural inhabitant is low in Ecuador, averagingabout 0.4 ha per capita (1974). This is particularly the case in the Sierra,where the ratio is 0.34 ha per capita; physical constraints limit furtherexpansion of the cropped area, although there is considerable room for in-creasing yields and cropping intensity. The situation is less severe on thecoast, where the present figure is 0.5 ha per capita.

Rural Standards of Living

6. The average rural income per capita was estimated to be US$132 in1973 (IBRD, Report of a Rural Development Mission,, May 30, 1975). Of the1974 rural population of 3.8 million persons, 1.5 million have been classi-fied as "absolutely poor," i.e., per capita income less than US$50; 2.5 mil-lion had income less than the cost of basic nutritional needs and 2.8 millionwere classified as "relatively poor" as their per capita income was less thanone-third the national average. While rural poverty is nation-wide, it isgenerally more serious in the Sierra than on the Costa. Although few if anyreliable data are available on such questions as the number of landlesslaborers, rural wages, seasonal/migratory farm labor, and off-farm work byfarmer operators, rural unemployment and underemployment are thought to behigh. A study of rural employment estimated an unemployment rate (comparinging man-day requirements to the total available labor force) of 41% in 1968,projected to rise to 49% in 1973. While the methodology applied in the studyprobably overstates the severity of the problem, it suggests its magnitude.

7. Nutritional information is incomplete, but surveys indicate that47% of the rural population suffers from calory and protein deficiencies.Estimates for 1968 indicate that the national daily average intake was 2,100calories per capita, while the protein availability was 48 grams per capita(20 grams from animal sources); these averages compare unfavorably with FAO-suggested daily norms of 2,600 calories and 75 grams of protein. There can

ANNEX 2Page 3

be no doubt that such averages mask more severe nutritional deficiencies forlower income groups in both rural and urban areas. Also illustrative of ruralliving conditions is the fact that (according to the 1974 census) almost 90% ofrural dwellings have no indoor plumbing or electrical service.

Land Distribution and Use

8. The basic resource of the agricultural sector--land--is distributedin a very skewed fashion. Of the 633,200 farm holdings estimated by the 1968Agricultural Survey, 32.6% were less than 1-ha and 41.7% were in the I to 5-harange. These two strata accounted for 10.2% of the area in farms. Of thetotal number of farms, 76% were owner-operated (accounting for 83% of thearea in farms). While the first land reform law dates from the mid-1960s,less than vigorous enforcement of it and the successor law of 1973 has re-sulted in little effective change in the situation in presently settled areas.

9. Ecuador's farms cover some 8 million ha, or about one-third ofits geographic area (27.1 million ha). About 3.5 million ha, are devotedto crops (annuals, perrenials, fallow and artificial pastures): 3.3 millionha are rainfed and about 0.2 million ha irrigated. The remaining 4.2 millionha are devoted mainly to livestock. Some natural and man-made forest coverspart of the total land in farms. Average farm size is about 11 ha; however,three-quarters of total number of farms account for only about 26% of thecropped area and about 17% of the total value of crop production. Only about7% of the farms are served by institutional credit.

Crops for Domestic Consumption

10. Production figures for crops are set out in Table 2. The majordomestically produced grains for human consumption are soft corn and rice.Corn production has fallen drastically since 1972; rice output, however, ex-panded vigorously in 1974 and 1975, covering domestic demand and providing asmall surplus (25,000 m tons) for export in 1976. Another major domestic food-grain is wheat, whose output in the 1970s has stagnated and given rise toconsiderable imports (US$33.5 million in 1975). Among root crops, potatoes,and, to lesser extent, cassava, and sweetpotatoes are basic consumption items.During 1971-75 production of potatoes was about 20% above that for the precedingfive years. Regarding pulses (mainly beans, lima beans, peas and lentils),production during the 1971-75 period averaged below that for the preceding fiveyears. Production of oilseeds has expanded rapidly in the last five years,especially for soybeans and African palm. Nevertheless, vegetable oil importsamounted to over US$12 million in 1975. Cotton production has recovered fromthe decline in the early 1970s to about double the 1966-70 average.

Forestry

11. There are some 15 million ha of forest, but the vast majority arein the Oriente and remain largely inexploitable because of their inaccessi-bility. In the Costa most of the forest resources are in the high rainfall

ANNEX 2Page 4

areas of the north, where government efforts to promote private or mixed-enterprise exploitation have had little success. In the Sierra, there are

about 2 million ha suitable for forestry. The area in eucalyptus may beexpanded in the proposed rural development programs for the region. FAO/CPalso prepared (in mid-1976) a prefeasibility report for a forestry projectincluding a eucalyptus planting program (25,000 ha), establishing a pinusradiata plantation in Cotopaxi Province, growth trials for long-fiber pulp-wood species, and institutional reinforcement of the Forestry Bureau in theMinistry of Agriculture and Livestock.

Export Crops

12. Banana continues to be the sector's most important export crop,earning US$156.9 million from about 1,300,000 tons exported during 1975.The main production area has moved progressively from the northern and centralparts of the Costa to the eastern parts of the Provinces of Guayas and LosRios as the Gros Michel variety has been replaced by the Panama disease-resistant Cavendish variety. Cocoa exports in 1975 amounted to US$38 million,down from the record US$102.9 million in 1974 when an unusually large crop ofabout 70,000 tons coincided with exceptionally high world market prices. Moreattention is required to rehabilitate and replant cocoa trees in suitableareas of the Costa and to improve on-farm processing and the internal market-ing system. Coffee export value in 1975 was US$64.6 million (US$67.4 millionin 1974). This crop is grown in parts of most provinces, but principally inthe Costa. As in the case of cocoa, attention is required to improve theproductivity of coffee, which also is a crop of importance to many small-scalefarmers.

13. Sugarcane production is estimated to total 5 to 6 million tons ayear, but much of this is used for the production of unrefined sugar andalcohol. For the May 1974 to April 1975 season, refined sugar productionfrom the seven main mills totalled about 305,000 tons (270,000 tons in1973/74). The value of exports during 1974 was US$42.6 million but thisdeclined to US$15.7 million in 1975. In 1974, Ecuador was able to fill onlyabout two-thirds of the sugar-import quota assigned by the United States(about 60,000 tons out of 96,754 tons). Castor beans are produced almostexclusively in Manabi Province of the Costa in association with corn, pea-nuts, cotton, cassava and coffee. In 1974, exports totalled 19,331 tonsvalued at US$5.8 million, while production was 45,000 tons. Abaca (Manilahemp) production rose from 9,500 tons in 1974 to 10,000 tons in 1975. Ex-ports of vegetable fibers, principally 7,000 tons of abaca, brought in US$5.7million in 1974. Pyrethrum production in the Sierra has declined from 612tons of dry flowers in 1973 to only 338 tons in 1974 and 183 tons in 1975.Production in 1968 amounted to about 3,000 tons of dry flowers, but sincethen production has fallen rapidly, although world demand for pyrethrins hasrecently recovered. Other export items from the agricultural sector in 1974brought in an additional US$4.3 million.

Livestock

14. About 230,000 farmers, representing about 40% of all farmers, owncattle, but over 60% of livestock owners have less than five animals and own

ANNEX 2Page 5

about 13% of the national herd. Nearly 80% of the livestock farmers arelocated in the Sierra and are predominantly dairy farmers. Beef ranching islocated predominantly in the tropical zones with nearly 90% of ranches lo-cated in the Costa region.

15. Beef cattle are predominantly criollo (native) Brahman crosseswith about a 55% weaning rate and slaughtered at three to four years. Thetotal herd is estimated at 2.5 million animals. About 320,000 head areslaughtered annually, representing a low offtake of around 13%. With improvedhusbandry practices and basic capital investments, producers could readilyattain offtake rates of over 20%, as well as doubling carrying capacity.Annual beef output can range from 50 kg to 500 kg liveweight per hectare.Based on an average carcass weight, including offal of 175 kg, annual beefproduction is about 64,000 tons, representing a per capita consumption around9 kg (there is, however, a substantial border trade in live animals which goesunreported and is not reflected in these figures.)

Milk Production

Milk ProductionAnnual

Cattle Cow Cows in Per cow TotalPopulation Population milk per day (million

m '000 '000 (liters) liters)

Sierra 1.2 509 280 6 613

Costa 1.1 398 159 2.2 128

Total 2.3 907 439 4.6 741

Over 80% of the milk is produced in the temperate Sierra zone. Commercialdairy farms (these with more than 30 animals) are generally confined to theinterandean valleys. Cattle are predominantly Holstein or Holstein crillocrosses with a high production potential. Milk cattle predominantly feed onpastures, with low levels of concentrate feeding. Milk production per cowand carrying capacity in the Sierra vary widely with the quality of herdmanagement and pasture. Daily production per cow in milk can vary from 5 to13 liters and ranges from 500 to 7,000 liters of milk per ha per year. In theCosta region, up to 40% of the beef cows mothering calves are milked once dailyfor about 120 days and produce around two liters of milk per day; althoughimproved management with Brown Swiss Brahman crossbreds can produce 4 liters ofmilk per day. Total annual milk production, which is around 740 millionliters, or about 0.3 liters per capita per day, is increasing, but less thanthe growth in fluid milk consumption and industrial utilization. As a result,there has been an increasing volume of imports of whole milk powder.

ANNEX 2Page 6

16. Poor management associated with poor nutrition are the main factorsresponsible for the low weaning rates and retarded slaughter age on coastalbeef ranches and the high calf mortality and low milk production on Sierradairy farms. Animal health is not a major problem provided preventive mea-sures are taken to control foot and mouth disease (FMD), tick infestationand internal parasites. Tick infestation, particularly in the Coastal re-gion, can cause serious losses unless frequent dipping is practiced. Im-proved grazing management and adoption of prophylactic measures to controlinternal parasites could contribute significantly to reducing the calfmortality rate. There is testing for eradication of tuberculosis in dairycows, and heifers are vaccinated against brucellosis, using vaccine producedlocally.

17. The national sheep flock has remained around 1.1 million head forthe last decade. The majority of flocks are of less than 100 sheep and aregenerally located in the Sierra region at an altitude between 3,000 and 4,000meters known as the paramos. This area of about half a million hectares ispredominantly in stipa pastures currently carrying around two sheep per hectareunder extensive grazing conditions. Improved pastures, based on legumes anduse of phosphatic fertilizer, are capable of trebling carrying capacity. Thesheep breed is a mixture of criollo, rambouillet and corriedale crosses, withabout a 60% weaning rate. Productivity is low mainly because of poor qualitypastures. Mlale lambs are sold for slaughter at about one year of age andwool production averages less than 2 kg per head. Most of the wool is uti-lized by the local cottage industry for the manufacture of clothing (ponchos)and carpets.

Marketing, Distribution and Prices

18. The present system for collecting, storing, distributing and market-ing most agricultural products exhibits serious deficiencies. Rural roads(where they exist) typically become impassible during heavy rainfalls. Pro-ducer organization is generally lacking in the marketing field. Access tolocal market facilities is restricted and is typically controlled by munici-pal authorities; the license fees represent an important local revenue source.Losses in perishable products appear very high. Shortages of storage facili-ties are particularly acute in producing areas (especially on farms) and atcommodity assembly points. Products for which the greatest inadequacies instorage exist, in both the public and private sectors, include rice, pota-toes, corn, wheat, oilseeds and cotton. In these conditions, markets tendto be thin and the marketing and distribution system inhibits the transmis-sion of price signals between final consumers and producers.

19. The Government's response to this situation, in addition to itsprice regulation and price support activities (which have generally tendedto further complicate rather than resolve product marketing problems, aspointed out in paragraph 27) has been the creation of the Empresa Nacional deAlmacenamiento y Comercializacion (ENAC) to stabilize the prices of prin-cipal agricultural products by intervening in the market. Thus far, its lack

ANNEX 2Page 7

of storage facilities and operating experience has hampered its effective-ness. Moreover, its operational capacity have been increasingly strained asit has taken over from the Banco Nacional de Fomento the latter's activitiesin purchasing and processing the rice crop (which has expanded substantiallyin recent years). A serious effort should be made for strengthening the pri-vate sector in storage and distribution activities, rather than relying pre-dominantly on an increasing public sector involvement in this area.

20. In the case of livestock, a small number of traders exercises con-siderable control over the marketing of live animals, operation of abattoirsand sale of carcass meat to retail outlets and processors. In practice, theyhave opposed changes to improve the meat marketing system such as improvedslaughtering facilities, introduction of beef grading and the establishmentof local saleyards. Apart from three modern abattoirs, two of which areexpanding their activities, most livestock are still processed in municipallyowned and country slaughterhouses. There are some 53 milk plants nearby alllocated in the Sierra, of which only 10 receive more than 10,000 liters daily.In the Sierra about 70% of the milk is sold as raw milk, about 20% pasteur-ized and 10% manufactured into cheese, butter and milk powder. On average,milk plants are operating at only about 40% of capacity. In the Costa,nearly all milk is sold as raw milk or cheese.

21. Government fixes prices for such key food items as meat, sugar,rice and wheat flour in some cases at both producer and consumer levels.More numerous are the products (largely perishable) covered by indicativeprices which are intended to serve as guidelines, as they are not policedas closely as fixed prices. The indicative list includes fruits, vegetables,pulses, potatoes, and eggs. Official milk prices to producers were increasedin September 1976 to S/ 4.2 liter. There have been increases in the priceof milk each year since 1972 which have increased 220% since that year. Overthe same period 1972-76 meat prices peaked in 1975 (S/ 15.4 kg on the hoof)and have receded only slightly although representing a 50% increase over thefive year period. The Government only sets meat prices at the consumer levelfor certain low quality cuts. To some extent, consumer prices (and prices toproducers) are regulated by the extent to which the Government tolerates thevolume of live cattle crossing the borders (from Colombia and into Peru). Ingeneral, current milk and beef prices provide sufficient incentives to farmersto invest in milk and beef production.

Ministry of Agriculture and Livestock

22. MAG comprises a Planning Bureau (Direccion), several administrativebureaus and five operating bureaus: Crops, Livestock, Rural Development,Forestry, and Marketing. The Ministry's budget rose a modest 9% in 1976, fromS/ 638.9 million to S/ 693.4 million. In 1976, the total budgeted staff of theMinistry was 1,840 of whom 1,021 were professional and technical, 25 management,469 administrative and 325 service personnel. These numbers were unchanged from1975. There are a number of autonomous agencies attached to MAG: agricultural

ANNEX 2Page 8

research (INIAP) (para 24), land reform (IERAC), irrigation (INERHI), storageand marketing (ENAC), retail market (EMPROVIT) and several regional develop-ment agencies (PREDESUR, CEDEGE, CRM, CREA).

23. Extension services in MAG have hitherto been organized along spe-cific crop lines, e.g., banana and tropical fruits, rice and (hard) corn,cotton and other fibers, temperate-climate grains and pastures, sugar andderivatives, and coffee. The practical training of extension personnel isgenerally limited to one "technological package" which they promote. Thisnarrow focus is at odds with the diversity typical of farming in Ecuador.In view of this, a reorganization plan is presently being prepared in MAG.Rather than the narrow commodity orientation, it is proposed that extensionpersonnel focus on the farm as an integral operation, providing adviceon the various activities taking place thereon. This organization will beaccompanied by the relocation of MAG professional and technical staff torural areas (rather than largely in provincial capitals as at present) andthe establishment of local service centers, including badly needed market-ing and storage facilities. As a first-phase trial, the 4th Agrarian Zone(Provinces of Imbabura and Carchi) is designing a program which will be im-plemented in CY 1977. This re-organization of the extension services wouldbe coordinated with the provision under the proposed project of credit tosmall farmers.

Agricultural Research

24. Official agricultural research in Ecuador is the responsibilityof the Instituto Nacional de Investigaciones Agropecuarias (INIAP), whichstarted operations in 1962. INIAP has evolved as an institution of majorimportance in Ecuador and has attracted the support of the Rockefeller Foun-dation and bilateral and international aid agencies. Bank Group creditsand loans for agriculture have supported its activity, and an extensive agri-cultural research loan has been provided by the Inter-American DevelopmentBank (IDB). In 1974, INIAP's professional staff, totalling 299, was engagedin research into plant breeding, agronomic and plant protection, pasturesand livestock nutrition and farm management.

25. Fourteen years of research have provided a technical basis forpractical advice on increasing agricultural productivity. During thisperiod, INIAP has developed and tested improved varieties of most of themajor crops in Ecuador, although research should be intensified to produceimproved varieties of soft corn, beans, and pasture and expanded to include

grain sorghum, pulses, fruits, vegetables and poultry. However, the dis-semination of research results to farmers through the extension service isinadequate. Another factor inhibiting the application of the research re-sults has been the tendency to concentrate on relatively sophisticated, high-cost production techniques rather than developing cheaper packages more ap-propriate to low-income farmers.

ANNEX 2Page 9

Government Objectives and Policies

26. Very broadly, the Government's objectives in the agriculture sec-tor, as outlined in the National Development Plan for 1973-77, are to in-crease output and improve economic and social conditions in rural areas. Inthat plan, investment in the sector was projected to total US$554 million.Agricultural output would grow 5.3% p.a. and exports 3.9% p.a. Labor produc-tivity would increase 3.3% p.a. and employment by 2% p.a. However, the Planwas formulated prior to the significant increase in the volume and value ofpetroleum exports. In this new context, it is difficult to assess perform-ance in the light of the proposals of the original plan. Still, with the ex-ception of the relatively low increase of 3.8% in sectorial output in 1973,both 1974 and 1975 have exceeded the plan target.

27. Many of the policies followed by Government in the pursuit of itsobjectives have, however, been inadequate. Price controls of agriculturalproducts have rarely been effective, but usually costly. Producer price sup-ports for wheat have not brought about national self-sufficiency, which isin any case a dubious goal since conditions in Ecuador are not particularlyfavorable; at the same time, subsidies on imported wheat have stimulateddemand and increased the cost to Government (about US$8.7 million in 1975).Price controls on fluid milk have diverted output into other dairy productsand resulted in shortages of fluid milk and imports of powdered milk. Highsupport prices for rice have led to over-production and exports at heavylosses by the Government's marketing organization. Heavy Government involve-ment in the marketing of agricultural products and farm inputs, through itsmarketing agencies and the Banco Nacional de Fomento, have been generallyunsuccessful and inefficient - particularly heavy losses were incurred on theimport and distribution of fertilizer.

28. At present, there is no effective planning, programming and controlof sectorial activities in either the National Planning Office (JUNAPLA) or inMAG's planning office. The disarticulated administrative structure, with theproliferation of public agencies, lack of overall effective control and re-sponsibility lodged in a given office, plus the absence of a comprehensivepublic sector budget (preferably on a multiannual basis, which could be a verypowerful tool for both resource allocation and program monitoring) impedeefforts to prepare and execute projects of economic priority within theframework of sound national plans and policies.

29. Government is generally aware of the inadequacies described above;it is equally aware of the political difficulties of removing many of them.Some actions have already been taken or are in process. The supply of creditto the sector has increased from about US$60 million in 1971 to US$186 mil-lion in 1975. Official milk (and some other) prices have been brought morein line with market conditions. Plans are being prepared for the re-organization of the extension services.

ANNEX 2Page 10

30. The strategy for the future development of agriculture and therural areas should now be directed to:

(a) reorganizing the extension services to provide an integrated ap-proach to farm enterprise management and improved diffusion andadoption of agricultural research results;

(b) improving marketing systems, including standardization and en-forcement of weights and measures, credit for small traders toincrease competition, and the expansion of storage and marketingfacilities;

(c) improving Government price policies to reflect market forces;

(d) creating additional employment opportunities in rural areas throughinvestment in small local industries; and

(e) formulating clear priorities for rural development and strengthen-ing project preparation capabilities, as already initiated underthe Bank loan for Agricultural and Rural Development TechnicalAssistance (Loan 1230-EC). For this purpose clear lines of au-thority and responsibility must be established within the publicsector agencies concerned.

The proposed project, taken together with on-going and likely future projectsfinanced by the Bank Group, will contribute to achieving these goals and tostriking a reasonable balance in meeting the needs for increased productionand improved income distribution.

ANNEX 2Table 1

ECUADOR


GROSS DOMESTIC PRODUCT BY ECONOMIC SECTORS,

1970 THROUGH 1975

(S/ million at constant 1970 prices)

Economic Sector 1970 1971 1972 1973 1974 1975

Agriculture, forestry, fisheries 9,087 9,252 9,052 9,394 10,388 11,088

Mining 268 315 275 332 416 533

Petroleum 33 30 671 2,179 1,923 1,732

Manufacturing 5,671 6,125 6,546 7,058 7,910 9,017

Electricity, gas, water 396 413 449 478 599 670

Construction 1,440 2,152 1,642 1,942 2,240 2,862

Trace 4,763 5,207 5,817 8,335 11,985 11,191

Transport and communications 2,158 2,427 2,628 2,810 2,386 2,487

Financial institutions 1,356 1,380 1,549 1,577 1,627 1 880

Housing 1,948 2,047 2,224 2,536 2,947 3,321

Public administration 3,275 3,133 3,461 3,646 4,166 4,365

Other services 3,575 3,445 3,672 4,657 4,449 4,573

Totals 33,970 35,926 37,986 44,944 51,036 53, 719

Source: Banco Central del Ecuador.

January, 1977

ECUADOR


Crop_Areas, Yields and Production

Ave rage Average

PRODUCTS UNITS _ 1966 1967 1968 1969 1970 1966-70 1971 1972 1973 1974 1975 1971-75

CFREALS

1. Barley Area/'000 ha 143 144 135 126 134 136 120 119 93 61 72 93Yield kg/ha - - - - - 618 - - - - - 708

Production '000 t. 77 81 76 73 110 84 69 73 79 56 63 68

2a. Corn (soft) Area/'000 ha - - - 215 211 213 241 250 124 90 109 163Yield kg/ha - - - - - 728 - - - - - 690

Production '000 t. - - - 141 168 155 140 171 100 61 90 112

2b. Corn (lhard) Area/'000 ha - - - 77 80 79 111 102 141 120 166 128Yield kg/ha - - - - - 1,165 - - - - - 1,108

Production '000 t. - - - 81 102 92 121 101 153 131 203 142

2. Corn (total) Area/'000 ha 267 364 255 292 291 294 352 352 265 210 -

Yield kg/ha - - - - - 697 -

Production '000 t. 175 228 129 222 270 205 261 272 253 192 -

3. Rice (milled) Area/'000 ha 111 114 112 92 87 103 57 91 85 93 122 90Yield kg/ha - - - - - 942 - - - - - 1,522

Production '000 t. 111 111 65 83 117 97 82 105 134 157 207 137

4. Wheat Area/'000 ha 65 80 79 100 76 80 76 56 47 56 70 61Yield kg/ha - - - - - 1,000 - - - - - 931

Productiolns '000 t. 63 79 83 94 81 80 68 51 45 55 65 57

FIBRES

5. Abaca Area/'OOO ha - - - 2 2 2 2 3 7 7 8 5

Yield kg/ha - - - - - 2,000 - - - - - 1,260

Production '000 t. - - - 4 4 4 5 4 7 8 10 7

6. Cotton (seed Area/'000 ha 24 24 21 22 9 20 8 14 23 43 37 25

cotton) Yield kg/ha - - - - - 800 - - - - - 848

Production '000 t. 18 16 14 24 8 16 11 12 20 33 30 21

SOURCE: Ministry of Agricultute and Livestock, Quito.

January, 1977 m >c

0-h,

ECUADOR


Crop Areas, Yields and Production

Average AveragePRODUCTS UNITS 1966 1967 1968 1969 1970 1966-70 1971 1972 1973 1974 1975 1971-75

TUBERS AND ROOTS

7. Cassava Area/'000 ha 28 27 27 35 35 30 37 41 54 54 43 46Yield kg/ha - - - - - 10,633 - - - - - 11,910Production '000 t. 276 323 234 390 371 319 383 277 741 741 597 548

8. Potatos Area/'OOO ha 44 48 49 41 47 '46 53 38 44 48 39 44Yield kg/ha - - - - - 9,804 - - - - - 11,955Production '000 t. 347 399 511 457 542 451 681 473 539 438 499 526

9. Sweet Potatoes Area/'OOO ha 3 2 2 3 3 3 2 3 2 2 3 2Yield kg/ha - - - - - 3,000 - - - - - 5,000Production '000 t. 8 8 7 11 10 9 7 9 8 8 14 10

PULSES

10. Beans Area/'OOO ha 82 79 86 85 82 83 67 62 66 50 63 62Yield kg/ha - - - - - 458 - - - - - 445

Production '000 t. 36 38 35 38 41 38 30 26 32 24 26 28

11. Broad Beans Area/'000 ha 35 34 34 21 24 29 23 13 17 17 19 18Yield kg/ha - - - - - 586 - - - - - 771

Production '000 t. 21 20 20 11 15 17 15 -9 12 12 16 13

12. Lentils Area/'OOO ha 3 3 2 2 2 2 3 2 4 4 4 3Yield kg/ha - - - - - 383 - - - - - 480

Production '000 t. 1 1 1 1 1 1 1 1 2 2 2 2

13. Iupins (edible) Area/'000 ba 3 3 3 3 4 3 3 3 2 2 1 2Yield - - - - - 845 - - - - - 700

Production '000 t. 3 2 3 1 3 3 2 2 1 1 1 1

14. Peas Area/'000 ha 31 31 41 23 30 31 23 17 16 13 17 17Yield kg/ha - - - - - 581 - - - - - 588Production 18 18 22 11 21 18 14 9 9 7 10 10

SOURCE: Hinistry of Agriculture and Livestock, Quito.

January, 1977 M

0

ECUADOR




OIL SEEDS

15. African Palm Area/'OOO ha - - - - - - 7 8 9 9 11 9

Yield kg/ha - - - - - - - - - - 1,489Production '000 t. - - - - - - 12 15 13 13 14 13

16. Castor Beans Area/'000 ha 24 22 16 23 16 20 31 26 46 40 3 29Yield kg/ha - - - - - 1,000 - - - - - 1,090

Production '000 t. 25 23 9 24 17 20 35 23 52 45 3 32

17. Peanuts Area/'000 ha 15 12 14 6 6 11 10 12 15 15 16 14Yield kg/ha - - - - - 711 - - - - - 776Production '000 t. 12 9 6 5 5 7 10 11 13 13 11 12

18. Sesame Area/'OOO ha 2 2 3 2 3 2 2 3 1 1 3 2Yield kg/ha - - - - - 771 - - - - - 900

Production '000 t. 2 1 2 2 2 2 2 2 1 1 3 2

19. Soybeauis Area/'OOO ha - - I I I 1 1 1 1 2 9 3Yield kg/ha - - - - - 948 - - - - - 1,333Production '000 t. - - 1 1 1 1 1 1 2 3 12 4

OTIIER

20. Pyrethrum Area/'OOO ha 8 9 9 4 3 7 3 2 1 1 1 2Yield kg/ha - - - - - 394 - - - - - 500Production '000 t. 3 4 4 2 1 3 1 1 1 1 1 1

21. Tea Area/'OOO ha - - - 1 1 1 2 2 2 2 1 2Yield kg/ha - - - - - 684 - - - - - 4,300Production '000 t. - - - 1 1 1 4 8 9 14 8 9

22. Tobacco Area/'OOO ha 1 2 3 2 2 2 2 1 1 2 1 1Yield kg/ha - - - - - 818 - - - - - 1,000Production '000 t. 2 1 1 1 2 2 2 1 1 2 1 1

SOURCE: Ministry of Agriculture and Livestock, Quito. 0 b

January, 1977 0 >c

0

ECUADOR




RAIN EXPORT CROPS

23a. Banana (Total)Area/'O0O ha 187 203 195 190 190 194 181 171 162 160 125 160Yield kg/ha - - - - - 17,691 - - - - - 19,225

Production '000 t. 2,744 2,937 3,920 3,870 3,688 3,432 3,512 3,296 3,203 2,800 2,569 3,076

23b. Banana(Export type)'/ Area/'OO0 ha 164 160 157 148 124 151 I1I 101 93 92 23 84

Yield kg/ha - - - - - 13,517 - - - - -

Production '000 t. 1,965 1,812 2,068 2,260 2,098 2,041 2,093 2,088 2,070 2,315 -

24. Cacao Area/'O0O n.a. n.a. n.a. 228 228 228 21.9 218 213 213 230 217Yield kg/ha - - - - - 224 - - - - - 297Production '000 t. n.a. n.a. n.a. 48 54 51 49 67 62 70 74 64

25. Coffee Area/'OOO ha 218 208 191 215 215 209 215 221 227 212 231 221Yield kg/ha - - - - - 306 - - - - -Production '000 t. 74 66 63 56 60 64 59 58 52 61 76 61

26. Cania de Azucar Area/'000 ha 113 108 122 n.a. n.a. 114 n.a. 88 89 94 115 97Yield kg/ha - - - - - 76,202 - - - - - 63,30'

Production '000 t. 9,004 7,528 9,529 n.a. n.a. 8,687 - 5,576 5,477 5,786 7,723 6,141

I/ National Banana Program, Cuayaquil.

SOURCE: Ministry of Agriculture and Livestock, Quito. m

January, 1977 m iX0

ANNEX 3Page 1

ECUADOR


The Banking System and Agricultural Credit

The Monetary Board

1. The Monetary Board is the highest monetary policy body in Ecuadorand, in this capacity, it regulates the volume and distribution of credit inthe supervised market. The President of the Monetary Board is a representativeof the President of the Republic; members are the Ministers of Finance; ofIndustry, Commerce and Integration; and of Agriculture. The President ofthe National Planning Board, the Bank Superintendent and the Manager of theCentral Bank act as advisors, and three representatives of the private sectorparticipate in discussions, but have no vote in the decisions of the Board.

The Central Bank

2. The Central Bank is principally responsible for the issue of moneyand the exercise of some of the measures of monetary control. As ofDecember 31, 1974, its total assets amounted S/ 21,595 million, includingS/ 6,986 million of claims on the public sector (Central Government and offi-cial financial institutions). The volume of credit extended by the CentralBank in the period 1970-74 is estimated below. The figures do not includerediscount operations; the "other" category includes the public sector.

Central Bank-Volume of Credit(in S/ million)

Year Commerce Agriculture Industry Other Total

1970 797 215 905 661 2,5781971 728 159 970 507 2,3631972 1159 109 789 489 2,5461973 1111 124 627 367 2,2291974 1492 89 1,090 642 3,313

Source: Banco Central del Ecuador.

3. The Central Bank administers the Fondos Financieros, which consistof six funds with local resources and two with foreign resources from USAIDand IBRD loans. The resources of these funds are used by the Central Bankto rediscount loans made by commercial and development banks to eligible

ANNEX 3Page 2

borrowers under the provisions of each fund. Normally, the intermediary lendsup to 90% of the cost of the project at 9% and rediscounts 80% of the value ofthe loan at 3%; exceptionally, under IDA Credit 222-EC, the intermediarylends at 12% for loans above SI 625,000 and rediscounts at 7% the equivalentof 70% and 75% of the value of the loan for milk cattle and meat cattleprojects, respectively. To bridge the period between the full commitment ofCredit 222-EC resources and the availability of resources under the proposedproject, the Government provided up to US$4 million (equivalent) to be avail-able for sublending under the same terms and conditions as Credit 222-EC.

4. Two of the eight funds of the Fondos Financieros are aimed at assist-ing small-scale and artisan industries, namely the Fondo Financiero Industrialand the USAID Technical and Credit Assistance to Small Industry Program. Theformer has worked relatively well; during 1975, the Ecuadorian Governmentincreased its resources from SI 200 million to St 400 million. The latterhas not worked too well because of administrative complexities and at theend of December 1975 was terminated. In November 1975 the Minister of Industryannounced the creation of the National Center for the Promotion of Small andArtisan Industry (CENAPIA) which, among other things, will supervise the use ofthe resources of the Fondos Financieros and provide technical assistance in theareas of accounting, industrial engineering, and product design and marketing.

The Commercial Banks

5. There are 20 national and four foreign commercial banks operatingin Ecuador (May 1976). As of December 31, 1974, their combined liabilitiesstood at S/ 22,904 million, classified as follows: 1/

Amount(in S/ million) % of Total

Deposits 12,239 54Bonds 2,738 12Letters of Credit 3,469 15Other Obligations 3,039 13Equity 1,419 6

Source: Banco Central del Ecuador, 1974-No. XLVIII-560.

6. The percentage distribution of credit extended by the commercialbanks in the period 1970-74 according to main sectors is given below. Recentmeasures of commercial portfolio ceiling and directed investment are expectedto change the traditional mix of beneficiaries.

1/ The data refer to the 18 national and four foreign commercial banksoperating at that date.

ANNEX 3Page 3

Percentage of Distribution of Credit Supplied by BankingSystem by Economic Activity, 1970 through 1975 /1

Activity 1970 1971 1972 1973 1974 1975

Commerce 56.6 59.7 59.9 59.4 52.4 50.4

Industry 18.9 19.4 18.5 18.4 19.9 19.5

Agriculture 14.1 12.3 12.5 14.2 17.6 16.6

Other 10.4 8.6 9.1 8.0 10.1 13.5

Total 100.0 100.0 100.0 100.0 100.0 100.0

/1 Exclusive of credit supplied by the Central Bank of Ecuador to otherbanks. The source does not indicate the content of the "other" category,which has shown considerable growth; this may include, however, construc-tion activities.

Source: Central Bank of Ecuador.

7. The total volume of credit (defined as the value of credit ope-rations in each year) extended by the banking system and by CV-CFN and COFIECin the period 1970-74 is shown in the following table. Except for CV-CFN,available statistics make no distinction between short and long-term credit,although it may be reasonably assumed that Banco Nacional de Fomento (BNF),CV-CFN and COFIEC are the major sources of the long-term financing. It isestimated that during 1974, only about 15% of total credit extended by thebanking system, CV-CFN and COFIEC had terms over one year. This no doubtreflects the predominantly commercial orientation of the business sector inEcuador. Overall, the commercial banks dominated the scene. Their share oftotal credit went from about 68% in 1970 to 72% in 1973. However, during 1974it dropped to about 62%, due partly to the restrictions placed on overallportfolio growth and partly to the emerging importance of Banco Nacional deFomento and CV-CFN. The unfreezing during 1975 of certain portions of theportfolio of the commercial banks combined with incentives under the FondoFinancieros mechanism may again change their relative position in the future.

ANNEX 3Page 4

Volume of Credit Extended by Source(in S/ million)

Non-BankBanking System Intermediaries Total

Central Commercial Banco NacionalYear Bank /1 Banks de Fomento CV-CFN COFIEC

1970 2,578 8,054 678 145 359 11,8141971 2,363 9,079 763 410 444 13,0591972 2,546 10,542 808 302 633 14,8311973 2,229 12,888 1,508 363 831 17,8191974 3,313 15,668 3,640 1,266 1,306 25,193

/1 Credit to commercial banks and BNF excluded.

Source: Memoria del Gerente General del Banco Central del Ecuador, 1973-1974;operating reports of CV-CFN and COFIEC.

8. As shown in paragraph 6, the volume of bank credit which flowed tothe agricultural sector between 1970 and 1975 has expanded relatively rapidly.The channels of institutional credit to the sector are the Government'sBNF and the commercial banks. Loans to the agricultural sector in 1975,amounting to US$186 million, represented about 17% of total bank credit, wellabove the 13% average for 1971-73. This 1975 figure represents a tripling fromthe US$60 million reported in 1971 (an expansion rate of over 30% p.a.).During this period, credit for livestock approximately quintupled while croplending slightly more than doubled; by 1975, lending was almost evenly splitbetween the crop and livestock sectors. As institutional credit is availableto only about 7% of the farms, in addition to or in lieu of tapping suchsources, many farmers utilize a considerable but unquantified volume of non-institutional credit available from suppliers or money-lenders. While con-siderably more expensive than institutional credit--rates charged range upwardsof 18 to 20% p.a. and usually for relatively short periods--farmers can avoidmortgaging land or having to submit to the procedures generally adopted bybanks for the granting of credit.

9. The monetary authorities require that private banks maintain 20% oftheir portfolio as loans to the agricultural sector (25% in the case offoreign-owned private banks) or else the banks must hold 4% interest-bearingnational bonds (paragraph 26 below). In view of the legal maximum interestrate for lending in the sector (9%), compared to 12% for industrial andcommercial loans, low profitability of such operations has given rise to sucha sectorial portfolio requirement. The recently approved regulation assigningprogressive commissions for medium- and long-term lending, raising the maximumeffective rate to as high as 13.5%, is a salutory move (see para 27 for amore detailed discussion).

ANNEX 3Page 5

Banco Nacional de Fomento (BNF)

10. The leading supplier of agricultural credit is the BNF. As of theend of 1975, the BNF had a net worth of S/ 1,990 million (US$79.6 million).Its total assets amounted to S/ 9,730 million (US$389.2 million), includinga loan portfolio of S/ 5,990 million (US$239.6 million) and an investmentportfolio of S/ 535 million (US$21.4 million). The Bank has its head officein Quito and 53 agencies throughout the country. It has a staff of 2,051of whom 20% work at the head office, 9% in the Guayaquil branch and 6% inthe Quito branch office. Inspectors (credit technicians) number 248, ofwhich 122 have university level training. The excessive ratio of loans pertechnician hampers providing adequate farm planning, credit analysis andtechnical assistance. In 1975, loans made by the BNF represented nearly 69%of the total institutional credit extended to the agricultural sector. Thisrepresents a considerable increase over the average of 36% during the 1970-72 period. In 1975, crop loans - largely in rice and cotton - represented 58%of the total; livestock loans, 33%; and the remainder was for machinery and in-frastructure.

11. Major problems for BNF agricultural lending operations derive fromthe inadequate preparation of farm loan requests. This failing has becomeespecially severe with the large expansion in the number of loan requests pro-cessed in recent years. Furthermore, the BNF has been seriously debilitated,both financially and administratively, by its involvement in recent years insuch activities as purchasing (and milling) of rice, fertilizer and tractors.It is now in the process of divesting itself of these activities and of reor-ganizing and reforming its procedures.

12. These reforms are all the more urgent, since BNF's accountingand internal control procedures have been inadequate. BNF is presentlyrestructuring its organization and improving its procedures with theassistance of consultants employed under an Inter-American DevelopmentBank loan.

Cooperative Bank

13. The Cooperative Bank (Banco de Cooperativas - BC) was formed in 1964by a group of cooperatives and presently has 320 shareholders, all cooper-atives. The principal objective of the bank is to promote the development ofits shareholders through the provision of short-, medium- and long-term loans.In 1975, it was empowered to carry on all banking activities, and it nowprovides credit to non-cooperative borrowers as well. It can make equityinvestments, but only in coperative organizations. BC's operations aregoverned by its charter of 1975, the general banking laws, and regulations ofthe Central Bank.

14. The head office of BC is in Quito. It has a branch in Guayaquil andan office in Sucua, in the Oriente. Of the total staff of 47, 27 are in Quito,

ANNEX 3Page 6

18 are in Guayaquil, and two are in Sucua. There are five technicians whoevaluate loan applications: three in Quito, one in Guayaquil, and one inSucua.

15. Loans committed increased from 90 for S/ 41 million in 1971 to184 for SI 94 million in 1975, or about 100% in number and 130% in amount.Thus, the average loan size increased from S/ 455,000 in 1971 to SI 510,000in 1975, or somewhat more than 10%. In terms of 1975 sucres, loan commitmentsrose about 35% from S/ 69 million to S/. 94 milion, but average loan sizedecreased about 35%, from SI 770,000 to SI 510,000. The proportion of loansrenewed to total loans committed is less than 5%.

16. About 5% of commitment was short term (less than one year) in 1975,63% was medium term (one to five years) and 32% was long term (over fiveyears). In terms of loan size, about 3% of loans was under S| 100,000, 11%was S/ 100,000 to S/ 500,000, 16% was SI 500,000 to S/ I million, and 70% wasover SI 1 million. 1/

17. The regional distribution of loan commitments in 1975 was 57% forthe Sierra, 30% for the Costa, and 13% for the Oriente. According to purpose,34 loans (18%) for S/ 39 million (42%) were granted for agriculture; 39 (21%),amounting to S/ 28 million (30%), for consumption; 9 (5%), amounting to SI 7million (7%), for services; 85 (46%), amounting to S/ 3 million (3%), forcommerce; and 17 (10%), amounting to S/ 17 million (18%), for miscellaneous.

18. The loan portfolio at the end of 1975 represented 81% of totalassets. From the end of 1971 to the end of 1975, it increased from S/ 40million to S/ 132 million, or 230%. In terms of 1975 sucres, it increasedabout 95%, from S/ 68 million to SI 132 million. The portfolio not yet duewas distributed among production (47%), consumption (29%), services (22%),and commerce (2%).

19. Arrears amounted to 8% of the loan portfolio at the end of 1975,about the same level as during the previous four years. This figure is abouthalf that of BNF, for example, but it is still too high. At the end of 1975,somewhat more than 40% of arrears were less than 90 days overdue, 30% were90 days to one year overdue, and less than 30% were more than one year over-due. Arrears overdue by more than a year represented about 2% of the loanportfolio. Write-offs of bad debts against reserves amounted to S/ 261,000in 1973, S/ 49,000 in 1974, and S/ 290,000 in 1975. BC follows the CentralBank regulation of writing off accounts overdue by more than five years.

1/ The figures in this paragraph are estimates.

ANNEX 3Page 7

Results of Operation

20. Net income is low but it increased from 0.7% of loan portfolio in1971 to 2.3% in 1973 before falling again to 1.3% in 1975. It also variedin relation to equity, rising from 2.1% in 1971 to 7.0% in 1973, thendeclining to 4.9% in 1975. Nevertheless, if appropriate provision for baddebts had been properly charged against income, BC's income may well havebeen negative over the entire period.

21. Interest and commissions received and paid showed parallel risingtrends, with the result that the gross spread was about the same, at fivepercentage points, at the beginning and end of the period. Administrativeexpenses decreased from 5.8% in 1971 to 4.0% in 1975, although the latterfigure is still quite high.

22. BC can make an important contribution to the small farmer componentof the proposed project. However, it will need strong assistance from theProject Unit in order to continue its improvement of subproject appraisal andsupervision. In addition, the project could support BC's efforts to raise theefficiency of its operations by financing items such as vehicles, accountingequipment, and technical assistance. Perhaps an appropriate initial studywould focus on the accounting, auditing and statistics systems. It wouldresult in the production of information which would give a more accurateindication of BC's operations and position, and would provide a basis forfurther organization and management studies.

COFIEC

23. The private development finance corporation - Compania FinancieraEcuatoriana de Desarrollo (COFIEC) - was created in 1966 and, like its public

counterpart (CV-CFN), one of its principal functions in its initial stageswas to channel external resources to private sector investment. Among itsoriginal shareholders was the IFC. COFIEC mainly invests in and lendsto large and medium-sized industry. Its portfolio at the end of 1974amounted to S| 1,248 million, with equity investments representing a mere2%; project loans, 49%; and combined short-term operations, mostly guaranteesand letters of credit, 49%.

ANNEX 3Page 8

24. The structure of COFIEC lending is as follows:

COFIEC - Volume of Credit(in SI million)

Year Manufacturing Agriculture /1 Construction Others Total

1966 47.8 /2 /2 10.0 57.81967 111.3 5.8 11.1 12.9 141.01968 137.6 29.8 3.3 47.6 218.31969 209.0 55.4 48.3 57.7 370.41970 198.5 38.4 49.4 72.5 358.91971 229.0 30.5 63.7 121.3 444.41972 366.7 44.5 108.8 113.4 633.41973 439.1 51.5 202.7 137.2 830.51974 752.1 99.6 268.9 184.9 1,305.5

/1 Includes livestock and fishing.

/2 Included under "others".

Source: COFIEC.

Fondo Nacional de Desarrollo

25. Although kept in an account of the Central Bank, the resources ofthe Fondo Nacional de Desarrollo (FONADE) are not administered by the CentralBank. Allocation of available funds is made by an inter-ministerial com-mission. The resources of FONADE come from that portion of the Government'stax receipts on oil exports in excess of US$7.42 per barrel. By the end of1974, the fund had been given S/ 3,342 million and had disbursed S/ 2,313million. In order of importance, SI 536 million was allocated for theconstruction of the state petroleum refinery, S/ 505 million for emergencyworks, SI 502 million for project financing at BNF, SI 250 million for projectfinancing at CV-CFN, S/ 200 million for discounting purposes at the CentralBank under the Fondos Financieros' mechanism and the remaining S/ 320 millionfor projects of various ministries and other development agencies.

Measures Affecting the Flow of Resources in Ecuador

26. The principal monetary instruments which directly or indirectlyaffect the flow of resources are legal reserve requirements, minimum capitalrequirements, portfolio ceilings, directed investments, open market operations,advance import deposit requirements, and interest and rediscount rates. Toassist certain sectors, in particular the small entrepreneurs, farmers and

ANNEX 3Page 9

artisans, the local and foreign commercial banks are required to invest 20%and 25%, respectively, of their portfolio in loans which qualify under theFondos Financieros mechanism. Banks which fail to reach the prescribed levelsmust make up the difference by purchasing 4% Government Development Bonds, arather unattractive alternative. Effective January 1975, another measureobliges the banks to relend the minimum of 80% of their deposits in theprovinces where they originate. In 1974, about 80% of the banks' deposits hadoriginated in the Quito/Guayaquil areas whereas 87.6% of their portfoliocovered loans to Quito/Guayaquil accounts.

27. The future interest of the banking system in medium- and long-termlending for crop and livestock activities will depend on changes in theinterest rate structure which would make those loans at least as attractive asshort-term lending. Ecuadorian monetary authorities have recognized thissituation and on November 9, 1976 the Monetary Board issued Resolution No.927-76, which introduced a graduated structure of allowable commission chargeson medium- and long-term lending. According to the new regulations, both thebanking system and DFCs are allowed to charge, in addition to the (unchanged)interest rate for agricultural lending, the following maximum commissions onnew contracts:

Commission on:Loans financed Loans financed with

Original final maturity with bonds other resouces

More than 3 years and up to 5 years 2.5% 2.0%More than 5 years and up to 8 years 3.5% 3.0%More than 8 years 4.5% 4.0%

The new interest and commission structure represents a major step toward pro-viding both the public and private lending institutions with a reasonableeffective interest rate spread, especially with its differentiation betweenshort, medium- and long-term operations. Most lending is anticipated to beat the maximum maturity period (more than eight years) under this project.

ANNEX 3ECUADOR Table 1

Page 1


Interest and Rediscount Rates(nominal annual rates in percent)

Before Before SinceJan.'75 Aug.'76 Aug.'76

I. CREDIT RATES

A. Central Bank

1. To Commercial Banks

a. Discount rate 8 8 8b. Agricultural, fisheries and artisan

credits (redisc.) 8 6 6c. Industrial credits (redisc.) 8 7 7d. Commercial credits (redisc.) 8 10 10e. Special advances 5 7 7f. Advances to cover reserve requirements 10 12 12

2. To National Development Bank (BNF) and CooperativeBanks for Rediscounts and advances

1/a. Agricultural, fisheries and artisan credits 4 3 3b. Small-scale industry 2/ 7 3 3c. Commercial credits 8 10 10

3. To Public Sector Finance Corporation

a. Industrial rediscounts and advances - 7 7b. Rediscounts FOPEX 3/ - 4 4

4. To Private Sector Finance Corporation

,a. Rediscounts and advances 9 8 8

5. To Financial Institutions through Fondos Financieros

a. General rediscounts - 3 3b. Rediscounts under Livestock Development Program 4/ - 7 7

6. To Private Individuals

a. Direct credits and discounts 12 12 12

1/ Including rediscounts of credits to Empresa Nacional de Almacenamientoy Comercializacion (ENAC).

2/ Regulation 755 of January 1975 set this rate at 4%; however, regulation781 of July 1975 set it at 3% and extended it to commercial banks.

3/ Fondo de Promocion de Exportaciones.4/ Including private Financieras.

ANNEX 3Table 1Page 2


7. To Private Individuals through Fondos Financieros

a. Agricultural, fisheries, artisans - 7 7b. Industry for purchase of agricultural raw

materials - 7 7c. Other industrial credit - 8 8d. Advance for future exports 6 6 6e. Reliquidation after export failure 12 12 12

8. To Public Sector

a. Central Government 3 3 3b. Others 5 5 5

B. Commercial Banks 1/

1. Ordinary loans 12 12 122. World Bank DFC loans 2/ 13 13 133. Bond financial loans 3/ 14 14 144. Overdue loans 14 14 145. CV-CFN through FOPEX 8 86. CV-CFN on rediscount of credits to small-scale and

artisan industries:Commercial Banks - 5 5BNF - 3 3

7. Letters of Credit and guarantee of foreign loans(commission) 4 4 4

C. National Development Bank and Cooperative Banks

1. Agricultural credit (max.) 8 9 92. Small-scale and artisan industries (max.) 10 9 93. Commercial credits (max.) 12 12 124. ENAC - 4 4

D. Fondos Financieros 4/

1. Credits under Livestock Development Program 5/ - 12 122. Other lending operations - 9 9

1/ Including private Financieras.2/ Including 1% inspection commission.3/ Including 2% commission on bond issue.4/ Commercial and Development Banks have access to this mechanism.5/ For credits of more than S/ 625,000 (222-EC).

ANNEX 3Table 1Page 3


E. Commissions

1. On foreign guarantees and letters of credit 4 4 42. On loans (on balance outstanding for the

indicated period)(a) Less than 3 years - - 0(b) More than 3 years but less than 5 years - - 2(c) More than 5 years but less than 8 years - - 3(d) More than 8 years - - 4

II. DEPOSIT RATES

A. Pass book savings

1. Commercial banks 6 6 62. Savings and Mortgage banks

B. Deposits with Commercial Banks

1. 31-180 days, maximum interest 7 7 72. 181-360 days, maximum interest 8 8 83. Over 360 days, maximum interest 9 9 9

C. Deposits with Savings and Mortgage banks

1. 31-180 days, maximum interest 8 8 82. 181-360 days, maximum interest 9 9 93. Over 360 days, maximum interest 10 10 10

D. Government Bonds, Cedulas Hipotecarias, andsecurities issued by stock companies 1/ 12 12 12

Source: Monetary Board Resolutions.

1/ May be sold at discount for higher effective yield.

January, 1977

ANNEX 3Table IPage 4

ECUADOR


Effective Interest Rates, Resulting fromNew Commissions

Loan maturity, Loans financed Loans financed withYears with bonds 1/ other resources

1 14 12.0

2 14 12.0

3 14 12.0

4 15.7 13.7

5 15.7 13.7

6 15.8 13.8

7 15.8 13.8

8 15.9 13.9

9 16.0 14.0

10 16.0 14.0

11 16.1 14.1

12 16.1 14.1

13 16.2 14.2

1/ No bonds of less than 5 years have been issued.

January, 1977.

ECUADOR


Beef Ranch, 50 ha

Investment Costs

Units Unit Total Cost Investment by Year Total Cost Foreignper Cost Per Farm 1 2 3 per farm ExchangeFarm --------------------- S/ 000 ------------------------ US$ x % US$

PastureNew (ha) 9 4.0 36.0 - 12.0 24.0 1,140 19 - -Renovated (ha) 18 0.7 12.6 4.2 4.2 4.2 504 7 - -

FencingNew (km) 1.2 15.0 18.0 6.0 6.0 6.0 720 9 40 288Renovated 0.5 6.0 3.0 3.0 - - 120 2 40 96

Water SupplyTrough and pipe 1 6.0 6.0 6.0 - - 240 3 20 48

Farm StructuresCorral 0.5 10.0 5.0 5.0 - - 200 3 20 40Building improvements 1 25.0 25.0 25.0 - - 1,000 13 30 400

EquipmentSundry (Veterinary & tools) 5.0 5.0 - - 200 3 85 170

Breeding StockBulls 1 25.0 25.0 - 25.0 - 1,000 13 30 300Heifers 5 8.0 40.0 24.0 16.0 - 1,600 21 30 480

175.6 78.2 6=77 IW2 6,724 87 26 1,822OtherPhysical Contingencies 17.4 7.8 5.8 3.8 996 13 26 182

Total 193.0 86.0 69.0 38.0 _7720 100 26 2,004

January, 1977 |

ANNEX 4(a)ECUADOR Table 2


Beef Ranch, 50 ha

Herd Development Projection

Before - …________--…Year…------Herd Composition Development 1 2 3 4 5 6 7 8 9 10-15

Bulls 1 1 1 1 2 2 2 2 2 2 2Cows 20 23 25 27 29 32 34 37 37 37 37Heifers (2-3 years) 5 5 6 8 9 8 9 8 8 8 8Heifers 1-2 years) 5 6 8 9 10 12 13 14 15 15 15Calves (weaners) 13 17 20 22 25 27 28 30 32 32 32Steers (1-2 years) 6 7 9 10 11 12 13 13 14 15 15Steers 2-3 years) 5 6 7 9 10 11 12 13 13 14 14Steers (3-4 years) 5 5 6 7 6 5 4 3 - - -

Total Animals 60 70 82 93 102 109 115 120 121 123 123Total Animal Units (AU) 47 53 62 71 77 82 87 90 89 91 91

Mortality

Adults 3 2 2 3 3 3 4 4 4 4 4

Sales

Bulls - - 1 - - _ 1 _ 1 _ 1Cows 3 3 3 3 4 4 4 4 7 7Heifers - - - - 1 2 3 4 8 7 7Steers (2-3 years) - - - 3 5 7 9 13 13 14 14Steers (3-4 years) 5 5 6 7 6 5 4 3 _ _ _

Total 8 8 10 13 16 18 21 24 26 28 29

Purchases

Bulls - - 1 _ 1 - 1 _ 1 _ 1Heifers - 3 2 - - - - - - -

Technical Coefficients

Weaning rate % 55 60 65 70 70 70 70 70 70 70 70Mortality rate % adults 5 4 3 3 3 3 3 3 3 3Cow culling rate % 12 12 13 12 15 14 16 15 14 19 19Carrying capacity .

AU/ha - 1.1 1.3 1.4 1.4 1.5 1.6 1.7 1.8 1.8 1.8 1.8Pasture area ha 41 41 44 50 50 50 50 50 50 50 50Total beef output OOO'kg 3.0 3.0 3.9 4.9 6.1 7.1 8.1 50 5 11.1 11.1Beef output Kg/ha 72 72 90 98 121 141 163 194 199 223 223

ECUADOR


Beef Ranch, 50 ha

Sales and Operating Costs(SI 000)_

yearUnit Before 1 2 3 4 5 6 7 3 9 10-15

Unit Price DevelopmentKg S/

Sales

Bulls 640 9,000 - 9 - - - 4.5 4.5 4.5 4-5 4-5Cows 380 5,000 15 15 15 15 20 20 25 25 25 35 35Heifers 360 8,000 - - - - 8 16 24 32 64 56 56Steers (2-3 years) 400 6,000 - - - 18 30 42 54 78 78 84 84Steers (3-4 years) 365 5,500 1/ 27.5 27.5 33 38.5 33 30 24 18 - - -

Total sales 42.5 42.5 57 71.5 91 108 131.5 157.5 171.5 179.5 179.5 g/

Operating Costs

Labor - owner 2/ 9.1 13.0 15.0 17.0 18.2 18.2 18.2 18.2 18.2 18.2 18.2casual 3/ - - - - - - 3.0 5.0 7.0 9.0 9.0

Maintenance - pasture 4/ - 5 10 15 25 25 25 25 25 25

Fences and water 5/ 2.2 2.2 2.2 2.2 2.7 3.3 4.2 4.2 4.2 4.2 4.2Construction 6/ 1.0 1.0 1.0 1.0 1.5 2.0 2.5 2.5 2.5 2.5 2.5

Animal health 7F 2.3 6.9 8.1 9.2 10.0 10.7 11.3 11.7 11.8 11.8 11.8Bull replacements 8/ 5.0 - - - 12.5 12.5 12.5 12.5 12.5 12.5 12.5Miscellaneous 10% 2.0 2.3 3.3 3.9 6.0 7.2 7.7 7.9 8.9 8.3 8.3

Total operating costs 21.6 25.4 34.6 43.3 65.9 78.9 84.4 87.0 90.1 91.5 91.5

Net operating income 20.9 17.1 22.4 28.2 25.1 29.1 57.1 70.5 81.4 88.0 88.0

1/ From year 5, S/6,000 per head.2/ Before development 0.5 labor unit, increasing to 1 labor unit in year 4.3/ S/50 per day.4/ Before development maintenance by owner, once a year cleaning; at full development

pastures cleaned twice a year, cost S/500 per hectare.5/ 7.5% of value.6/ 5% of value.7/ Before development S/50 per AU; from year 1, S/130 per AU.8/ After development S/25,000 per head.d / Not including incremental herd value S/306,500.

,4£ 1 0

ECUADOR


Beef Farm, 50 ha

Cash Flow Projection

(S/ '000)

Before ------------------------------------------------------Year-------------------------------------------------------Development 1 2 3 4 5 6 7 8 9 10 11 12 13-15

Cash Inflow:

Sales 42.5 42.5 57.0 71.5 91.0 108.0 131.5 157.5 171.5 171.5 179.5 179.5 179.5 179.5Long term loan (90%) - 68.8 55.2 30.4 - - - _ : _ _ _

Total _____

Total 42.5 111.3 112.2 101.9 91.0 108.0 131.5 157.5 171.5 171.5 179.5 179.5 179.5 17,

Cash Outflow:

Operating expensesexcluding owner's salary 12.5 14.4 19.6 26.3 47.7 60.7 66.2 68.8 71.1 73.3 73.3 73.3 73.3 73.3

Investment - 86.0 69.0 38.0 - - - - - - - - - -

Debt Service:

Interest (14%) _ 4.8 13.5 19.5 21.6 21.6 21.6 19.6 17.3 14.7 11.7 8.3 4.4 _Principal - - - - - - 14.4 16.4 18.7 21.3 24.3 27.7 31.6 -

> Total 12.5 105.2 102.1 83.8 69.3 82.3 102.2 104.8 107.1 109.3 109.3 109.3 109.3 73.3

Balance after debt service 30.0 6.1 10.1 18.1 21.7 25.7 29.3 52.7 64_4 62.2 70.2 70.2 70.2 106.2 X x

Financial Rate of Return - overall 197.- to owner 26%

ANNEX 4(b)Table 1

ECUADOR


Dairy Farm, 50 ha

Investment Costs

Units Unit Cost Investment bY Year Total Cost Foreign

per Cost per Farm 1 2 3 per farm gCategory Farm S/ S/ 000 S/ 000 S/ 000 S/ 000 US$ % U-

Pasture

New 30 ha 6,000 180 60 60 60 7,200 19 60 4,320

Fencing

New 4.0 km. 10,000 40 10 15 15 1,600 4 40 640Renovation 1.5 km. 4,000 6 2 2 2 240 1 30 72

Water Supply

Well and pump 0.7 15,000 10 10 400 1 70 280Pipe (km) 0.8 15,000 12 6 3 3 480 1 70 336Troughs 4 1,000 4 2 1 1 160 0.4 20 32

Farm Structures

Corral .3 60,000 20 20 - - 800 2 20 160

Milking parlor 1.0 50,000 50 25 25 - 2,000 5 70 1,400Calf house 0.5 40,000 20 20 - 800 2 30 240Building improvements .3 180,000 60 20 40 - 2,400 6 40 960

Roading (km) 0.5 80,000 40 20 20 - 1,600 4 20 320Irrigation canal (km) 1.4 10,000 14 7 7 - 560 1 20 112

Machinery and Equipment

Tractor and implements .1 400,000 40 40 - - 1,600 4 80 1,280Milking machine .1 200,000 20 20 - 800 2 80 640Miscellaneous equipment 20 10 5 5 800 2 70 560

Breeding Stock

Bulls 2 25,000 50 25 - 25 2,000 5 20 400Heifers 15 18,000 270 90 90 go 10,800 28 20 2,160

34,240 87.4 41 13,912

Others

Physical contingencies (10%) 86 35 31 20 3,440 9 41 1,410Project preparation (2.5%) 24 24 - - 960 2 20 192

Total 966 406 339 221 38,640 98.4 40 15,514

November 1976

ANNEY. 4(b)ECUADOR


Dairy Farm, 50 ha

Herd Development Projection

Before ------------------- Year ----------------Development 1 2 3 4 5 6 7-15

Herd Composition

Bulls 2 2 2 2 3 3 3 3

Cows 45 47 50 52 57 61 67 71

Heifers (2-3 years) 7 7 7 12 13 15 15 15

Heifers, (1-2 years) 8 8 12 14 15 16 15 16

Calves (births) 34 38 40 44 48 52 57 60

Total 96 102 111 124 136 147 157 165

Total AU 62 64 71 80 88 95 100 105

Mortality

Cows and heifers 3 3 2 3 2 3 2 3

Calves 3 3 2 2 2 2 2 3

Sales

Bulls 1 - 1 - 1 1 1

Cows 5 8 8 7 7 7 9 13

Calves - heifer (I year) 7 5 6 6 7 10 11 12

- bull (1 week) 16 18 19 21 23 25 28 29

Total 28 32 33 35 37 43 49 55

Purchases

Bulls - 1 - 1 1 1 1 1

Hleifers 5 5 5

Total _ 6 5 6 1 1 1 1


Calving rate % 75 80 80 85 85 85 85 85

Mortality rate % calves 10 8 6 5 5 5 5 5

adults 4 3 3 3 3 3 3 3

Cow culling tate 7.- 11 17 16 15 12 11 13 18

Carrying capecitv AUih. 1.2 1.3 1.4 1.6 1.7 1.9 2.0 2.1

Carrying in iilk % 65 68 70 70 70 70 70 70

Average no. cows in milk/day 29 32 35 36 40 43 47 50

Average milk produced/cow/day, liters 7.5 8 8.5 9.5 10 10.5 10.5 10.5

Total milk Production '000 liters 79.4 93.4 108.6 138.3 146.0 164.8 180.1 191.6

Milk production/ha/year. '000 liters 1.6 1.9 2.2 2.8 2. 3.3 3.6 3.8

Calf milk consumption- '000 liters 5.8 6.5 6.8 7.6 8.3 9.0 9.7 10.4

Milk sold '000 liters 73.6 86.9 101.8 130.7 137.7 155.8 170.4 181.2

360 liters per female calf.

November 1976

ANNEX 4 (b)ECUADOR Table 3


Dairy Farm, 50 ha

Sales and Operating Costs(S/ 000)

UnitPrice Before -- - - - - - - - - - - Year - - _ - - - - - - - _

Unit Si Develooment 1 2 3 4 5 6 7-15

SalesCull cows 800 lb 5,000 25 40 40 35 35 35 45 65Cull bulls 1,200 lb 8,000 8 8 - 8 - 8 8 8

Fem.ale calves 350 lb 5,0001/ 35 25 30 30 56 80 88 96Male calves 80 lb 500 8 9 9.5 10.5 11.5 12.5 14 14.5

Cattle sales 76 82 79.5 83.5 102.5 135.5 155. 183.5Milk sales litre 4.2 309.1 365.0 497.6 548.9 578.3 654.4 715.7 761.5Total sales 385.1 447.0 577.1 632.4 680.8 789.9 870.7 945.0

Operating Costs

Labor

Manager 2/ 40 50 60 60 60 60 60 60Cowhands 3/ 38 38 38 38 57 57 57 57Milkers / 14.4 14.4 19.2 19.2 19.2 19.2 24.0 24.0Casual 5/ 17.5 21 24.5 28 28 28 28 28Technical assistance 6/ - 12 12 12 12 12 12 12

Pasture renewal 7/ 11 - - - 60 60 60 60Maintenance - pasture / - - 16 32 48 64 64 64

fences q/ 1 1 1 1 2 3.5 4.5 4.5water supply IO/ 1 1 1 1 1.3 1.5 2.0 2.5construction 15/ 5 5 5 5 6 7 9 10machinery 121 5 5 7 8 10 12 12 12vehicle 3 / 16 17 18 19 20 20 20 20tractor hire 14/ 25 27 30 33 35 37 40 40

Animal health 15/ 3 12.6 14.2 15.8 17.6 18.8 20 20.8Supplements 16/ 28.3 31.4 34.1 35.5 39.3 42.4 46.2 49.2Bull replacement 10 - - - 25 25 25 25

Total operating costs 215,2 235.4 280.0 307.5 440.4 467.4 483.7 489.0

Net operating income 169.9 211.6 297.1 324.9 240.4 322.5 387.0 456.0

1/ S/8,000 from year 4.2/ Increasing from S/3,300 up to S/5,000 per month.3/ S/1,250 per month: before development, 2 menl year 4 on, 3 men.4/ S/400 per month: before development, 3 milkers; year 2, 4 milkers; year 6, 5 milkers.5/ S/35 per day: before development 500 man-days, increasing to 800 man-days from year 3 on.6/ S/500 per visit.7/ Before development, 5 ha per year, seed S/1,800/ha, fertilizer s/400/ha; year 1-3 investment costs.8/ From year 4, annual maintenance of 400 kg superphosphate per year.9/ 7.5% of value.

10/ 57. of value.11/ 5X of value.12/ 10% of value.13/ S/4 per km.14/ S/200 per hour.15/ S/200 per AU.16/ Female calves 100 kg per head; cows 300 kg per head; cost S/2.73 per kg.

Incremental herd value s/687,000.

November, 1976.

ECUADOR


Dairy Farm, 50 ha


(S/ '000)

Before- - - - - - - - - - - - - - - - Y E A R - - - - - - - - - - - - - - - - - - - - - -Development 1 2 3 4 5 6 7 8 9 10 11 12 13-15

Cash Inflow

Sales 385.1 447.0 507.1 632.4 680.8 789.9 870.7 944.5 944.5 944.5 944.5 944.5 944.5 944.5

Long-term loan (80%) - 324.8 271.2 176.8 - - - - - - -

Total 385.1 771.8 778.3 809.2 680.8 789.9 870.7 944.5 944.5 944.5 944.5 944.5 944.5 944.5

Cash Outflow

Operating Expensesexcluding owner's (manager)salary 175.2 185.4 220.0 247.5 380.4 407.4 423.7 429.0 429.0 429.0 429.0 429.0 429.0 429.0

Investment - 406.0 339.0 221.0 - - - - - - - - - -

Debt Service

Interest (14%) _ 22.7 64.5 95.8 108.2 101.5 93.8 85.1 75.1 63.7 50.8 36.0 19.2

Principal - - - _ 48.0 54.8 62.4 71.2 81.1 92.5 105.5 120.2 137.0

Total 175.2 614.1 623.5 564.3 536.6 563.7 579.9 585.3 585.2 585.2 585.3 585.2 585.2 429.0

Balance after debt service 209.9 157.7 154.8 244.9 144.2 226.2 290.8 359.2 359.3 362.0 359.2 359.3 359.3 515.5

Financial Rate of Return - overall 227 lb- to owner 40% f4II4

AMNEX 4(c)Table 1

ECUADOR


Dairy Farm, 10 ha (6 ha in pasture)

Investment Costs

Units Unit Cost Investment by Year Total Cost ForeignCategory per Cost per farm 1 2 3 per farm Exchange

Farm S/ S/ S/ S/ S/ US$ %

Pasture I/New 6 ha 4,100 24,600 8,200 8,200 8,200 984 33 60 590

FencingNew 0.4 km lo,ooo 4,ooo 2,000 2,000 160 5 40 64

Water SupplyTrough and pipe 1 3,000 3,000 3,000 120 4 20 24

Building 2Cow yard improvement 5 m 600 3,000 3,000 120 4 20 24Builling improvement 1 5,000 5,000 2,500 2,500 200 7 40 80

Breeding StockHeifer in calf 1 12,000 12,000 12,000 480 16 20 96Heifer (2 year old) 2 8,000 16,000 8,000 8,ooo 640 22 20 128

Subtotal 67,600 30'200 26,700 10,700 2,704 91 37 1,006

Physical Contingencies (10%) 6,800 3,000 2,700 1,100 272 9 37 101

TOTAL 74,400 33,200 29,400 11,800 2,976 100 37 .1,107

/ Pasture sown following cropping.

January, 1977

ANNEX 4(e)Table 2

ECUADOR


Dairy FBrm, 10 ha (6 ha in pasture)

Herd DeVelopment ProJectiOn

-efore Year -----------Before 45671

Herd Composition Development 1 2 3 4 5 6 7-15

Cows in production 2 3 4 4 4 5 5 5Cows dry 2 2 2 2 2 2 2Heifers (2-3 years) 0-1 1 1 1 2 2 2 2Heifers (1-2 years) 1-0I1 1 2 2 2 2 2Calves females 1 2 2 2 2 2 2Calves males 1 2 2 2 2 3 3 3

Total aninals 7 3-0 12 13 14 16 16 16Total animal units (AU) 5 7 9 9 10 11. 11 1LCarrying capacity (AU) 6 7 9 10 11 11 11 11

Sales

Cull ca 0-1- 3- 1 11 1 1 2 2Male ealves (1 yr) 1 2 2 2 2 2 3 3Total 1-2 I 3 3 3 3 3 5 5

Purchases

Heifer in calf - 1 -

Heifer (2 years) _ 1 1


Weaning rate 0% 50 6o 66 66 66 70 70 70Cow culling rate % 13 20 17 17 17 14 12 25Carrying capacity AU/ha 1.0 1.2 1.5 1.7 1.8 1.8 1.8 1.8

Milk production/cow/day, (liters) 5 5.5 6 6.5 7 7 8 8Total milk production,(liters) 3,650 6,023 8,760 9,49O 10,220 12,775 14,600 14,600Milk Production/ha/year,(liters) 608 1,004 11460 1,502 1,703 2,129 2,453 2,433Calf milk (liters) Z 720 1,080 1,440 1,440 1,440 1,800 1,800 1,800House milk (liters) 730 1,460 1,460 1,460 1 460 1,460 1,460 1,1460Milk sales 2,200 3,483 5,860 6,590 7,320 9,515 11,340 11,340

/ Alternate years.

/ 360 liters per calf.

November, 1976

AMUE 4(c)Ta-ble 3

ECUADOR


Dairy Farm 10 ha (6 ha in pasture)

Sal-es and- Operati-tr Co0ts(S/ 000)

Unit Unit Before year______________PritcUnt Development 1 2 3 4 5 6 7-15

Sales ---------------------------- 000' S/ -----------------------

Cull cows 360 kg 4,800 2.4 4.8 4.8 4.8 4.8 4.8 9,.6 9.6Male calves (1 year) 160 kg 2,400 2.4 4.8 4.8 4.8 4.8 4.8 7.2 7.9

Cattle sales 4.8 9.6 9.6 9.6 9.6 9.6 16.8 16.8Milk sales liter 4 8.8 14.0 23.6 26.4 29.2 38.0 45.2 45.2

Total sales 13.6 23.6 33.2 36.o 38.8 47.6 62.0 62.0

Operating Costs

Labor '/-family 8.0 9.0 10.0 12.0 14.0 16.0 16.0 16.0Maintenance-pasture 2Seeds and cultivation-/ Q.8 - - - -- - 5.0 5.0Fertilizer 31 - - 3.2 6.4 9.6 9.6 9.6 9.6Fences and watP 4- 0.5 0.5 o.6 0.7 0.7 0.8 o.8 0.8Constructions 0! 0.4 o.4 o.4 0.5 o05 o.6 o.6 o.6Supplements 6/ o.6 0.8 3-1 3.2 3.0 6.5 6.5 6.5Animal 1ealthZ7/ 0.3 1.4 1.8 1.8 2.0 2.2 2.2 2.2Bull services 0.5 0. 1.2 1.2 1.2 1.5 1.5 15Miscellaneous (5%) o.6 o-X 1.0 1.3 1.6 1.9 2.1 2.1Total Operating oosts 11.7 13.7 21.3 27.1 32.6 39-1 44-3 44-3

Net operating income 1.9 9.9 11.9 8.9 6.2 8.5 17.7 17.7

/ Before development 0.5 labor unit; increasing to 1 labor unit in year 5.8/ Years 1-3 investment cost, 5 year pasture life.3/ New pasture annually starting with new pasture 400 kg/ha of superphosphate or 200 kg of 18.46.n mixture plus 20 kg4/ 5% of value. sulphurlha. Superphosphate S/4,000/f ton.

5% of value.Calves 90 kg concentrate per head: milking cows years 2 and 3, 0.5 kg per head; year 4, 0.7 kg/head; year 5,on 1 kg per head/dav.5 Cost Sf3.0 ner k

j Before development s/SO per AU; atter dCvelopment SI 200 per AU (siinerals S/ 50, medicines s/ 150)I/ S/ 150 per service.

Incremental herd value S/ 75,000

November, 1976

ANNEX 4(c)ECUADOR Table 4


Dairy Farm, 10 na kb ha in pasture)


(S/ '000)

Before ------------------------------------------------- Year -------------------------

Development 1 2 3 4 5 6 7 8 9 10 11 12 13-15

Cash Inflow:

Sales 13.6 23.6 33.2 36.0 38.8 47.6 62.0 62.0 62.0 62.0 62.0 62.0 62.0 62.0Long-term loan (90%) 29.9 ,26. 1 0.-

Total 13.6 53.5 59.7 46.6 38.8 47.6 62.0 62.0 62.0 62.0 62.0 62.0 62.0 62.0

Cash Outflow:

Operating expensesexcluding family labor 3.7 4.6 11.3 15.1 18.6 23.1 28.3 28.3 28.3 28.3 28.3 28.3 28.3 28.3

Investment 33.2 29.4 11.8 - - - - -

Debt Service:

Interest (11%) 1.7 4.8 6.7 7.4 7.4 7.4 6.6 5.8 4.9 3.8 2.7 1.4 -

principal _ _ _ - _ 6.9 7.6 8.4 9.4 10.4 11.5 12.8 -

Total 3.7 39.5 45.5 33.6 26.0 30.5 42.6 42,5 42.5 42.6 42.5 42.5 42.5 28.3

Balance after debt service 9.9 14.0 14.2 13.0 12.8 17.1 19.4 19.5 19.5 19.4 19.5 19.5 19.5 33.7

Financial Rate of Return - overall 20%

May, 1977

ANNEX 4(d)ECUADOR Table I


Sheep Farm, 40 ha

Investment Costs

Units Cost Investment by Year 'tTotal

Category per Unit per 1 2 -- ost per ForeignFarm Cost Farm 2 Farm Exchange

S/ ----- -___-/. '000_________ Us X % 4US$

rasture:

New - 9 ha 3,600 32.4 10.8 10.8 10.8 1,296 25 58 752

Fencing:

New 2 km 10,000 20.0 10,% - 10-0 800 15 40 320

Water Supply:

Well and pump 1 10,000 10.0 10.0 - - 400 8 70 280

Constructions:

Houses 1 18,000 18.0 18.0 - - 720 14 40 288Sheep shed and yard extensions 1 13,200 13.2 9.2 4.0 - 528 10 40 211

Equipment:

Sundry tools 1 3,000 3.0 3.0 - - 120 2 85 102

Breeding stock

Rams 3 800 2.4 1.6 - 0.8 96 2 - --Ewes 35 600 21.0 6.0 6.0 9.0 840 16 - --

Physical Contingencies 10% 12.0 6.9 2.1 3.0 480 10 41 197

Total Investment Costs 132.0 75.5 22.9 33.6 5,280 100 41 2,150

1/ Pasture sown following cropping.

November, 1976

ECUADOR ANNEX 4(d)Table 2


Sheep Farm, 40 ha

Flock Development

…eor ------------- Years…------------Before

Development 1 2 3 4 5 6 7 8-15

Herd Composition

Rams 2 3 2 3 3 4 4 4 4Ewes (mixed ages) 50 60 71 94 103 114 120 125 125Ewes (1-2 years) 13 14 21 27 34 42 36 31 31Wethers (1-2 years) 15 15 21 28 35 46 53 60 60Lambs 31 44 59 73 97 110 125 125 125

Total 111 136 174 225 272 316 338 345 345

Total sheep units (SU) 80 92 115 152 175 206 213 220 220

Mortality

Adults 9 8 8 10 11 13 13 15 15

Sales

Cull rams I 1 - 2 - 1 1 1Cull ewes 9 9 10 10 12 16 21 24 25Ewes (1-2 years) - - - - - 4 24 26 26Wethers (1-2 years) 13 14 14 20 27 34 45 51 60

Total 22 24 25 30 41 54 91 102 112

Purchases

Rams - 2 - 1 2 1 1 1 1Ewes - 10 10 15 - - - - -


Weaning rate % 50 60 70 75 80 80 80 80 80Mortality rate X 8 6 5 5 5 5 5 5 5Ewe cplling rate % 14 14 14 11 12 16 18 20 20Carrying capacity SU/ha 2.0 2.3 2.9 3.8 4.3 5.1 5.3 5.5 5.5Wool yield kg per SU 1.0 1.5 2.0 2.5 3.0 3.5 3.5 3.5 3.5

Total wool yield kg 80 138 230 380 525 721 745 770 770

November, 1976

ECUADOR ANNEX 4(d)Table 3

AGRICULTURAL CREDIr PROJECT

Sheep Farm, 40 ha

Sales and nperating Costs

Unit Before ----------------------- Years…---------------------------------

Unit Price Development 1 2 3 4 5 6 7 8-15Kg S/ _--______________----_________ S/ 000 --------------------- ___________-------

Sales

Cull rams 40 600 - 0.6 0.6 - 0.6 - 0.6 0.6 0.6Cull ewes 35 600 5.4 5.4 6.0 6.0 6.0 7.9 9.6 12.6 15.0Ewes (1-2 years) 30 700 - - - - - 2.8 16.8 18.2 18.2Wethers (1-2 years) 30 600 7.8 8.4 8.4 12.0 16.2 20.4 27.0 30.6 36.0Wool 30 2.4 4.1 6.9 11.4 15.7 21.6 22.4 23.1 23.1

Total 15.6 18.5 21.9 29.4 38.5 52.7 76.4 85.1 92.9

Labor 1/ 6.0 7.0 8.0 10.0 12.0 16.4 16.4 16.4 16.4

Maintenance - Pasture 2/ _ - - 10.8 10.8 10.8 10.8 10.8Fences and water 3/ - - - - .3 .7 .9 1.2 1.5Construction 4/ 1.0 1.0 1.0 1.0 1.3 1.7 2.0 2.1 2.8

Animal health 5/ 1.6 2.8 3.4 4.6 5.2 6.2 6.4 6.6 6.6

Ram replacements 6/ - - - - 1.4 .7 .7 .7 .7

Miscellaneous (5%) .4 .5 .6 .8 1.5 1.8 1.9 1.9 1.9

Total operating costs 9.0 11.3 13.0 16.4 32.5 38.3 39.1 39.7 40.7

Net operating income 6.6 7.2 8.9 13.0 60.0 14.4 37.3 45.4 52.2

1/ S/45 per day.2/ Pasture renewal program following cropping: years 1-3 investment cost.3/ 5% of value.4/ 5% of value.5/ S/30 per annual unit.6/ S/700 per head.

Incremental flock value S/102,100.

November, 1976

ECUADOR


Sheep Farm, 40 ha


(S/ '000)

…efore --- ---------- ---------- ---------- --------- ----…Years ------------ -- - - - - - - - - - - - - - - - - -Before

Development 1 2 3 4 5 6 7 8 9 10 11 12 13-15

Cash Irflow:

Sales 15.6 18.5 21.9 29.4 39.7 54.4 79.4 86.9 92.9 92.9 92.9 92.9 92.9 92.9Long-term loan (90) - 69.5 20.6 28.7 - _ -

Total 15.6 88.0 42.5 58.1 39.7 54.4 79.4 86.9 92.9 92.9 92.9 92.9 !92.9 92.9

Cash Outflow:

Operating expensesexcluding owner's wage 3.0 4.3 5.0 6.4 20.5 21.9 22.7 23.3 24.3 24.3 24.3 24.3 24.3 24.3

Investment - 77.2 22.9 31.9 - - - - - - - - -

Debt Service:

Interest (11%) - 3,8 8.8 11.5 13.1 13.1 13.1 11.7 10.3 8.6 6.8 4.8 2.5 -

principal _ - - - - - 12.1 13.5 15,0 16.6 18.4 20,5 22.7 _

Total 3.0 85.3 36.7 49.8 33.6 35.0 47.9 48.5 49.6 49.5 49.5 49.6 49.5 24.3

Balance 12.6 2.7 5.8 8.3 6.1 19.4 31.4 38.4 43,3 43.4 43.4 43.3 43.4 68.6

Financial Rate of Return - overall 18%- to owner 41%

May, 1977

ECUADOR

AGRICULTURAL CRFDIT PROJECT

Small Farm Crop Intensification Model

Investment_Costs

Units per Unit Cost US Dollar % of Foreign ExchangeCategory Farm Cost per Farm Equivalent Total Component

(S/) (S/ ) x US$

On-farm irrigation works: 12,000 480 22 30 144Lined ditches 200 m 20 4,000Drainage ditches 100 m 10 1,000Interior roads 100 m 50 5,000Structures and misc. 2,000

Contract Cultivation!/ 4 ha 1,750 7,000 280 13 20 56

Building Improvements 20 m2 800 16,000 640 29 40 256

Incremental Production Inputsr2 20,000 800 36 49 389Improved seeds 2,100 84 50 42Fertilizers 5,200 208 80 166Pesticides 2,400 96 80 77Tools and harvest inputs 2,700 108 80 86Hand labor 5,400 216 - -Miscellaneous 2,200 88 20 18

Total 55,000 2,200 38 845

1/ Includes land clearing, land levelling and land preparation(Maize and oilseeds; S/ 1,500 per ha; rice and vegetables, S/ 2,000 per ha).

2/ Maize, S/ 3,500 per ha; oilseeds, S/ 4,500 per ha; vegetables, S/ 7,000 per ha;rice, SI 5,000 per ha.

January, 1977

rri

ECUADOR



Production Costs and Incremental Net Production Value

Area Yield Cross Value of Production

Crop Production Pattern Before Full Before Full Prices Before Full

on a 4-ha Farm Development Development Development Development S/ m ton Development Development

… - _ - ha - - - - - - m ton/ha - - - - - - - - - - 5/ - - - - - -

Maize (sorghum) 1.2 1.0 1.0 2.5 3,500 4,200 8,750

Oilseeds 0.3 1.5 0.8 1.4 8,500 2,040 17,850

Vegetables 0.2 1.0 6.0 9.0 4,000 4,800 36,000

Rice (milled) 1.8 1.5 1.5 3.0 5,500 14,850 24,750

Fallow and brush land 0.5 - - - - - _

Total physical 4.0 4.0 -25,890 87,350

Cropped area 3.5 5.0

Cropping intensity % 87.5 125.0

Production Cost Net Value of Production

Before Full Before Full Net

Development Development Development Development Incremental Value

SI - - - - - - - - - - - SI - - - - - - - - - SI - - -

Maize (sorghum) 3,240 7,000 960 1,750 790

Oilseeds 900 12,000 1,140 5,850 4,710

Vegetables 2,400 20,000 2,400 16,000 13,600

Rice 8,640 15,000 6,210 9,750 3,540

Fallow and brush land - - - -

Total 54,000 10,710 33.350 22,640

Production Costs per ha Maize Oilseeds Vegetables Rice Total

-- - - - - - - - - --S/ /ha - -

Hand labor 2,250 2,700 7,200 4,500

Farm inputs and supplies 4,000 4,400 11,500 4,600

Miscellaneous 750 900 1,300 900

At Full Development: 7. 000 20,000 10,000 45,000

Before Development: 2,7000 4,800 22,500

November, 1976

rlM

X P

ECUADOR




(S/ 000)

Before - - - - - Y E A R - - - - - - - - - - - - - - - - - - - -Development 1 2 3 4 5 6 7 8 9 10

Cash InflowLoan 1/ - 27,000 22,500 - - - - - - - -Sales 2/ 25,890 41,255 71,985 87,350 87,350 87,350 87,350 873505

Total 25,890 68,255 94,485 87,350 8 0 8 8 87,350 87,350 87,350

Cash OutflowInvestments and Replacements 3/ - 30,000 25,000 - - - 3,000 2,500 - - -Production Costs 4/ 15,180 43,200 54,000 54,000 54,000 54,000 54,000 54,000 54,000 54,000 54,000Debt Service

Interest (11%) - 1,490 4,210 5,450 5,450 4,570 3,600 2,530 1,320 - -Principal - - - _ 8,820 9,790 10,870 12,060 _

Total 15,180 74,690 83,210 59,450 67,390 70,390 69,900 67,380 54,000 54,000

Balance after Debt Service 10,710 (6,435) 11,275 27,900 19,950 19,960 16,960 17,450 19,970 33,350 33,350

Financial Rate of Return - overall 26%- to owner 47%

1/ Loan represents 90% of investments.2/ Sales: First year equivalent to 25% of increment of sales at full development: 61,460 x 0.25 = 15,365 + 25,890 = 41,255.

Second year equivalent to 75% of increment of sales at full development: 61,460 x 0.75 = 46,095 + 25,890 = 71,985. ZAll other years equivalent to sales at full development. 5 9

3/ Investments would take place during first and second years. Replacements equivalent to 10% of investments during sixth and seventh years. X x4/ Production costs: First year equivalent to 80% of total costs, All other years equivalent to 100% of one year's full production. W

May, 1977

ANNEX 5Page 1

ECUADOR


Terms of Reference for Tropical Crop/PastureSpecialist for the Oriente Research Program

1. Establishment of proper coordination with INIAP.

2. Identification of lands suitable for crops, pasture/livestock andforestry (preferably with the aid of aerial mosaics).

3. Study of different crops: annual and perennial on identified landssuitable for crops, including macro and micro element requirements(two or three representative sites).

4. Study of different grass-legume mixtures or identified landssuitable for pasture development, including macro and microelement requirements (two or three representative sites).

5. Study and proper management of lands suitable for permanentforestry production (one or two sites).

6. On the job training of counterpart local agricultural staff inidentification of lands suitable for crops, pasture and forestryas well as in carrying on field trials, analyses and evaluationof results, decisions on alternatives and formulation ofrecommendations.

7. Study of grazing system, assessment of results and preparation ofrecommendations.

8. Dissemination of research findings through extension offices,publications, lectures, audio-visual aids, radio and television.

January 1977

ANNEX 5Page 2

ECUADOR


Terms of Reference for Plant Nutrition Specialist forSierra Research Program in Interandean and Paramo Zones

1. Identification of soil deficiencies in various soil types of thecountry.

2. Determination of optimum doses of phosphorus for establishment andmaintenance of improved pastures.

3. Study of different grass-legume mixtures in various regions.

4. Investigation for early deterioration of pastures.

5. Identification of soil types for successful growth of alfalfa.

6. Training local agricultural officers in field fertilizer trials andthe analysis of obtained results.

7. Evaluating the impact of increased fertilizer usage on pastureproduction and the economy of the country.

8. Dissemination of research findings through extension officers, throughpublications of trial results, lectures, radio talks, and so forth.

9. Correlation of field fertilizer responses with soil and plant tests.

10. Study of the potential of winter and summer fodder crops.

January 1977

ECUADOR


Technical Assistance and Training Costs

Y E A R S1 2 3 4 5 Total Foreign Exchange

- - - - - - - S/ 000- - - -- - - -- - S/ 000 US$,000 % US$,000Activities

Research and training, Sierra 1,500 1,500 1,500 - - 4,500 180 100 180Research and training, Oriente 1,500 1,500 1,500 - - 4,500 180 100 180Financial advisory work 1,000 1,000 1,000 1,500 1,500 6,000 240 100 240Preparation of bookkeeping manual 500 500 500 - - 1,500 60 80 48Agricultural extension 1,000 1,000 1,000 1,000 1,000 5,000 200 100 200Pilot areas surveying 200 200 - 400 16 10 1.6Preparation of farm plans 300 300 300 300 300 1,500 60 60 36Cooperative Bank consultants 3,000 3,250 - - - 6,250 250 80 200Short term consultants 500 500 500 500 500 2,500 100 100 100

Sub-total 9,500 9,750 6,300 3,300 3,300 32,150 1,286 92 1,185.6

Procurement

Construction , Oriente 100 50 50 - - 200 8 20 1.6Equipment, Oriente 165 90 45 - 300 12 60 7.2

"1 Sierra 575 50 50 - 675 27 60 16.2Machinery, Sierra 150 - - - 150 6 70 4.2Laboratory, Sierra 80 - - - 80 3.2 70 2.2Vehicles 1,050 400 - - 1,450 58 90 52.2Audio visual aids 100 30 20 - 150 6 70 4.2Office equipment and supplies 50 40 30 20 10 150 6 60 3.6

Sub-total 2,270 660 195 20 10 3,155 126.2 72 91.4

Scholarships - 375 375 - - 750 30 100 30

Sub-total 375 375 750 30 100 30

Total 11,770 10,785 6,870 3,320 3,310 36,055 1,442.2 91 1,307

Personnel - - - - - - - - - - numbers - - - - - - - - -

Pasture specialist 1 1 I - _Soil fertility specialist 1 1 1 - -Senior financial analyst 1 1 1 1 1

extension officer 1 1 1 1 1Short-term consultants 2 2 2 2 2Cooperative Bank consultants a consulting tirm

Notes: 1. Pasture, soil fertility, senior financial analyst and senior extension officer at US$60,000/year, each.

2. Short-term consultants: US$100,000 for the life of the project.

3. Consulting firm: US$250,000.

November, 1976

ECUADOR


Farm Investment Costs by Category

Beef Small Sheep CropItem Ranches Dairies Dairies Ranches Farms Total %

… - - - - - - - - - - - S/ O000 - - - - - - - - - - - - - - - - - -

Pastures and fencing 55,680 45,200 17,160 2,620 120,660 27

Breeding stock 52,000 64,000 16,800 1,170 133,970 30

Farm structures 24,000 40,800 4,800 1,560 16,000 87,160 19

Water supply or irrigation 4,800 5,200 1,800 500 12,000 24,300 5

Machinery and equipment 4,000 16,000 150 20,150 4

Land clearing and preparation 7,000 7,000 2

Incremental Inputs 17,800 17,800 4

Other 13,920 22,000 4,080 600 2,200 42,800 9

Total 154,400 193,200 44,640 6,600 55,000 453,840 100

January, 1977

ECUADOR


Project Cash Flow - Central Bank

(S/ 000)

Project Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14

INFLOWSWorld Bank Loanl/ 35,178 69,977 96,020 57,788 15,314

Participating Bank RepaymentsSmall Farmer Loans

2/ 140 664 1,758 4,002 6,663 11,236 12,497 14,278 13,189 10,262 4,182 4,396 3,765 2,363

Other Loans 1,541 6,741 15,513 26,846 35,512 44,717 48,882 53,353 54,848 56,551 58,198 60,102 47,123 25,975

Cooperatives and Cooperative Bank Loan Debt Service 140 240 974 974 974 974 974 974 974 974 974 974 - -

TOTAL INFLOWS 36,999 77,622 114,265 89,610 58,463 56,927 62,353 68,605 69,011 67,787 63,354 65,472 50,888 28,338

OUTFLOWSLoans Rediscounted

Small Farmer Loans 5,617 15,336 28,440 16,521 2,077

Other Loans 34,240 79,300 113,575 70,060 16,875

Research, Training and Technical Assistance 11,800 10,800 6,900 3,300 3,300

Administration (Central Bank)3/ 100 350 750 1,150 1,350 1,275 1,125 1,975 825 675 525 375 225 75

Sub-TotalDebt Service - Bank Loan

Commitment Charge (0.75%) and Interest (8.2%) 3,575 7,450 13,650 19,850 22,950 23,231 20,400 17,850 15,300 12,750 10,200 7,650 5,100 2,550

Principal 30,436 30,436 30,436 30,436 30,436 30.436 30,436 30,436 30,790

TOTAL OUTFLOWS 55,332 113,236 163,315 110,881 46,552 54,942 51,961 50,261 46,561 43,861 41,161 38,461 35,761 33,415

Surplus (Deficit) of Year / (18,333) (35,614) (49,050) (21,271) 11,911 1,985 10,392 18,344 22,450 23,926 22,193 27,011 15,127 (5,077)

Cumulative Balance (53,947)(102,997)(124,268)(112,357)(110,372) (99,980)(81,636) (59,186) (35,260) (13,067) 13,944 29,071 23,994

1/ The amount of the loan, and the rest of the figures in the cash flow, are based on the costs before price contingencies and assume the following phasing of credit operations

Estisated Number of Loans

Year 1 YeAr 2 Year 3 Total

Beef Ranches 100 150 150 400

Dairies 50 75 75 200

Small Dairies 50 100 150 300Sheep Ranches 10 15 25 50

Crop Farms 150 300 550 1,000

Small Industries 10 15 25 50

Professionals 5 5 10

375 660 975 2,010

2/ Loans for small dairies, sheep ranches and crop farms.

3/ Equal to 1/2% of outstanding balance on subloans.

4/ Includes financing part of subloans.

LCUAOOR

AG775ICL11RAL CREDIT PROJECI

Project Cash_FowP=r~iptn Os

(S/ 000)

I ovect Year 1. 2 3 4 5 6 8 9 10 t1 12 3 14

IPF7,0WSSmall Farmer Loans

Rdsncus-t.6 5,617 15,336 28,440 16,521 2,077 - -- - -

Repaymsents Interest 345 1,627 4,302 7,045 8,046 7,777 6,790 5,601 4,135 2,724 1,610 1,178 699 274Principal - - - 1,193 ~ 3708 8.952 I0,801 1 12,776 10,162 3,916 4,349 3866 2 491

Subtotal 5,962 16,963 32,742 24,759 13,831 16,729 17,591 18,921 16,911 12,886 5,526 5,527 4,565 2,765

Other LoansRediscounted 34,240 79,300 Ul3,575 70,060 16,875 - - - - - - - -Repsy.rents - Interest 3,128 13,501 31,091 47,806 55,163 55,210 52,012 47,760 42,308 36,091 29,006 10,983 ll,896 4,355

Principal - 117 249 4,278 10_868 3822.7 43259

37 457 30 64.943 53,844 31,098Subtstair 37,368 92,918 144,915 122,144 82,906 78,077 82,371 86,687 86,690 86,688 86,307 85,926 65,740 35,453

Total Inflws 43,330 109,881 177 657 146.903 9 9, 962 l05,60B 9,57 4 91,833 _1_4 5 3 37,28

ODTFLOWSSmall Farmer Loans

Disb-rsementa 6,240 17,039 31,599 18,356 2,306 - - - - ---

Repayments to CB - Interest 140 664 1,758 2,928 3,326 3,179 2,776 2,290 1,691 1,116 658 482 286 113Principal _ - - 1,074 _3,337 8,057 9,721 11,988 11,498 9,146 3,54 3,914 ,,, 2,250-f7,703 T-,5 2235 123,497 ___ 3 98 ___ ___ .- ,- ___ 3 7 _Subtotal 6,380 17,703 33,357 33,358 8,971 11,236 12,497 14,278 13,189 10,262 4,182 4,396 3,765 2,363

Other LoansDisbursements 42,988 101,788 148,020 91,280 22,380 - - - - - - - -Repay,ments to C8 - interest 1,541 6,651 15,322 23,568 27,184 27,195 25,618 23,524 20,839 17,779 14,289 10,337 5,858 2,145

- Principal - 90 191 3,278 8,328 29 829 34 009 38 772 4~3909 49.765 41,265 23 830Subtotal 44,529 108,529 163,533 11.,l26 57,992 44,712 48,882 53,353 54,848 56,551 58,198 60,102 47,123 25,975

Total Outflows 50,909 126,232 196,890 10,484 66863 55,953 61,379 67,631 68,037 66,813 62,380 64,498 50888 28,338

BALANCES M-FURL ADMINISSRATIVZ EXPENISESSmlall Farmer Loans ( 418) ( 740) ( 615) 2,401 4,860 5,493 5,094 4,643 3,722 2,624 1,344 1,131 8D0 402Other Loons ( 7,161) ( 15,611) ( 18,618) 4,018 25,014 33,360 33,489 33,334 31,842 30,137 28,109 25,824 18,617 9,478All Loans ( ,519) t 16,351) 1 39,233) 6,419 29,874 38,853 38,583 37.977 35,564 32,761 29,453 26,955 19,417 9,880

ADMInISTRAT IVE EXPZNSES1 Small Farmer Loans 650 1,850 3.600 2,650 1,400 1,650 1,750 1,900 1,700 1,300 550 550 450 300Other Loans 3,500 8,750 13,700 11.200 7,100 6,300 6.600 6,900 6.900 6,900 6,900 6,900 5,250 2,850All Loans 4,150 10,600 17,300 13,850 8,500 7,950 8,350 8,800 8,600 8,200 7,450 7,450 5,700 3,150

BALANCES AFTER ADISPNISTRATIVE EXPEZ%3E9.Z/Small Farmer Loans 7 1,068) ( 2,590) ( 4,215) ( 249) 3,460 3,843 3,344 2,743 2,022 1,324 794 581 350 102Other Loans (10,661) (24,361) (32,318) ( 7,182) 17,914 27,060 26,889 26,434 24,942 23,Z37 21,209 18,924 13,367 6,628All Loans (11,729) (26,951) (36,533) ( 7,431) Z1,374 30,903 30,233 29,177 26,964 24,561 22,003 19,505 13,717 6,730

1/ Administrative expenses (including bad debts) have been calculated as followso

(a) In respect of small farmer loans, 10% of trsnsactions (disbursements ,ade. re.p.ynts received) in each ye,r; the total of these ecpenses represents roughly 4%uf tthe average ,wntstanding balances.

(b) as is (a) above, except that the percentages are 7-1/27 and 34, respectively.

2/ The balances, after imputed administrative expenses, indicate rates of return on the sarticiparing banks' own fonds of:

(a) 19.17 on asall farmer loans.

(b) 18.87, on other loans.

(C) 18.84 oserail,

ANNEX 9

ECUADOR


Estimated Schedule of Disbursements

Disbursements UndrawnBank Fiscal Year During Cummulative Balanceand Quarter Quarter Disbursements of Loan

------------------ US$ 000…-----------------

1978

December 31, 1977 - - 15,500

March 31, 1978 250 250 15,250June 30, 1978 500 750 14,750

1979

September 30, 1978 500 1,250 14,250December 31, 1978 500 1,750 13,750March 31, 1979 750 2,500 13,000June 30, 1979 750 3,250 12,250

1980

September 30, 1979 1,000 4,250 11,250December 31, 1979 1,000 5,250 10,250March 31, 1980 1,250 6,500 9,000June 30, 1980 1,250 7,750 7,750

1981

September 30, 1980 1,250 9,000 6,500December 31, 1980 1,250 10,250 5,250March 31, 1981 1,000 11,250 4,250June 30, 1981 1,000 12,250 3,250

1982

September 30, 1981 750 13,000 2,500December 31, 1981 750 13,750 1,750March 31, 1982 500 14,250 1,250June 30, 1982 500 14,750 750

1983

September 30, 1982 500 15,250 250December 31, 1982 250 15,500

January, 1977

ANNEX 10Page 1

ECUADOR


Economic Rate of Return

1. The economic rate of return of the project was calculated on the

basis of the models presented in Annex 4. (The incremental volume of outputowing to the Project is in Table 1.) Key computations and adjustments wereas follows:

(a) the prices of investment and operating cost items in constantmid-1976 prices were assumed to remain unchanged throughoutthe life of the project;

(b) the prices for rice, soybeans and maize were recalculatedaccording to the projections of the Bank's Economic Analysisand Projections Department (in EPD memo of November 23, 1976).The beef and wool prices were assumed to move according tothose same projections. For vegetables and milk, farmgateprices as used in the financial analysis were assumed to movein line with the general inflation rate so that they would notchange in constant terms. All incremental production isintended to supply the domestic market, in some cases substi-tuting for imports, and no export of output is foreseen. Theresulting prices appear in Table 2. The notable differencebetween the economic and financial prices for rice owes inpart to the use of a more conservative price in the financialanalysis than the Government-decreed US$264 per m tons (milled).These disparities reflect the difficulty of forecasting theadjustment of current financial prices to long-term worldmarket price projections. In general, the financial pricesand results have thus been treated conservatively.

(c) incremental herd values were credited to the project at theend of the life of the investments (in 15 years);

(d) costs of fertilizers were readjusted according to the fer-tilizer price projections reported in the memo cited in (b);

(e) the estimated incremental costs of administrative and technicalassistance services provided by the Project Unit, MAG and theparticipating banks were charged to the project;

ANNEX 10Page 2

(f) there are no duties on imports of agricultural inputs orfoodstuffs and the official rate of exchange applies to thesetransactions;

(g) the tax laws permit generous deductions for real estate taxesand income taxes on farms where investment in farm developmentoccurs; as these items do not appear in the financial calcula-tions, no adjustment was made for them;

(h) no shadow wage rate was applied; the sensitivity analysis,however, includes the result of assuming an economic wagerate equal to 80% of the financial wage rate;

(i) no shadow exchange rate was applied, in view of the country'sfavorable trade balance in recent years, the calculated standardconversion factor near one during this period, and the Government'spolicy of free convertibility of the sucre;

(j) the economic rate of return on the small rural industrycomponent was not calculated, as this is essentially a lineof credit for developing these activities. Nevertheless, amission review of prefeasibility studies typical of the firmslikely to be financed under the project suggests a rate ofreturn in excess of 20%.

2. The economic rate of return for the project, together with indi-cations of its sensitivity to cost overruns or output shortfalls, are shownbelow:

Rate of Return %

As estimated 20

Operating CostsUp 10% 17Up 15% 16

Investment CostsUp 10% 19Up 15% 18

ProductionDown 10% 15Down 15% 13

Operating labor costed at80% of the financial rate 21

January 1977

ECUADOR


Incremental Project Output

Item 1 2 3 4 5Y E A R S 6 7 8 9 10 11-15

Crops (metric tons)

Maize 49.5 246 670.5 1,124 1,300 1,300 1,300 1,300 1,300 1,300 1,300Oilseeds 34.5 243 753.5 1,475 1,860 1,860 1,860 1,860 1,860 1,860 1,860Vegetables 292.5 1,462.5 3,997.5 6,727.5 7,800 7,800 7,800 7,800 7,800 7,800 7,800Rice (milled) 67.5 237.5 822.5 1,452.5 ],700 1,700 1,700 1,700 1,700 1,700 1,700

Livestock Products

Cattle (metric tons,liveweight) 76.27 370.18 978.43 1,779.23 2,689.57 3,709.98 4,978.09 6,162.1 7,080.25 7,500.25 7,860.25Milk ( 000 liters) 937.3 3,495.6 8,502.9 13,295.5 17,661 21,326 25,620 28,147.5 29,010 29,010 29,010Mutton (kg, slaughtered) 650 2,025 5,650 11,250 22,450 42,375 68,025 97,725 114,250 124,500 124,500Wool (kg) 580 2,370 6,700 12,700 20,585 27,390 32,900 33,875 34,500 34,500 34,500

January, 1977

CDX

ANNEX 10Table 2

ECUADOR


Producer Prices Used in the Economic and Financial Analysis

Economic Analysis FinancialItem 1978 1979 1980 1985 Analysis

US$/metric ton (Constant 1976 US$) (US$/metric ton)

Crops

Maizeel/ 127 129 128 128 140Oilseeds (soybeans)!/ 248 254 262 326 340Vegetables 160 160 160 160 160Rice (milled)!/ 295 326 360 360 220

Livestock Products

Cattle (liveweight)2/ 806 812 822 830 600Milk (,000 liters) 168 168 168 168 168Mutton (carcass) 880 880 880 880 880Wool 1,335 1,444 1,447 1,446 1,200

1/ IBRD Report No. 814/76, Price Prospects for Major Primary Commodities, June1976, and memo of H. Hughes of November 23, 1976.

2/ -Domestic price indexed per the world price projected for this product in the

reports cited above.

January, 1977

ANNEX 10Table 3

ECUADOR


Economic Rate of Return Calculation

(S/ Million)

NetIncremental Costs Incremental Incremental

Year Investment Operating Other-Y Total Benefits Benefits

1 35.8 6.2 30.5 72.5 7.3 - 65.22 86.1 22.6 30.8 139.5 31.6 -107.93 149.4 52.7 28.1 230.2 83.3 -146.94 95.4 83.2 24.6 203.2 140.4 - 62.85 35.9 115.3 24.6 175.8 186.6 10.86 0.4 147.5 10.0 157.9 223.6 65.77 1.3 160.0 10.0 171.3 268.5 97.28 2.4 166.3 10.0 178.7 308.4 129.79 1.4 170.8 10.0 182.2 331.5 149.310 - 171.5 10.0 181.5 340.4 158.911 0.5 172.8 5.0 178.3 347.9 169.612 1.3 172.8 5.0 179.1 347.9 168.81.3 2.4 172.8 5.0 180.2 347.9 167.714 1.4 172.8 5.0 179.2 347.9 168.715 - 172.8 5.0 177.8 758.1 580.3

1/ Includes costs of Project Executive Unit and imputed costs of participating banks.

January, 1977

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report no. 1499-ec appraisal of agricultural c credit project...

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