World Bank Document

ReportNo. 1448a-PA Appraisalof SecondRural r DevelopmentProject Paraguay Public Disclosure Authorized

April 12, 1977

Regional Projects Department Latin America and the Caribbean Regional Office FOR OFFICIAL USEONLY Public Disclosure Authorized Public Disclosure Authorized

Document of the World Bank Public Disclosure Authorized

Thisdocument has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bankauthorization. CURRENCYEQUIVALENTS

US$1.00 = G 126 G 1.00 = us$o.oo8 G 1,000 = US$T.94 G 1,000,000 = US$7,937

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS

ARO - Auxiliary Rural Obstetrician IDB - Inter-American Development Bank BNF - National Development Bank CAH - Small Farmer Credit Agency (of the Ministry of Agriculture and Livestock) CB - Central Bank CENFAE - National Training Center for Auxiliary Nurses CNPS - National Council for Social Progress COMDESA - Paraguayan Development Company DGV - Highways Authority GOPA - Society for Organization, Planning and Training IBR - Institute of Rural Welfare IICA - Inter-American Institute of Agricultural Sciences KfW - Kreditanstalt fur Wiederaufban MAG - Ministry of Agriculture and Livestock MOPC - Ministry of Public Works and Communication M4SPBS - Ministry of Public Health and Social Welfare NGP - National Grain Program PAEN - Food and Nutrition Education Program RHP - Rural health Promoter SEAG - Agricultural Extension Service SENALFA - National Service for the Prevention of Foot and Mouth Disease SENASE - National Seed Service SNPP - National Service of Professional Promotion UNIFACO - Paraguayan Union of Cooperatives USAID - United States Agency for International Development

GOVERNM4ENTOF PARAGUAY

FISCAL YEAR

January 1 - December 31 FOR OFFICIAL USE ONLY

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Table of Contents

Page No.

SUMMARY AND CONCLUSIONS ...... i-iii

I. INTRODUCTION ...... 1

II. BACKGROUND ...... I

A. General ...... 1 B. Agricultural Sector ...... 2 C. Rural Infrastructure and Services ...... 6 D. Government Strategy in Rural Development ...... 7 E. Performance Under the First Rural Development Project ...... 7

1II. THE PROJECT ...... 9

A. Project Area ...... 9 B. Brief Description ...... 9 C. Detailed Features ...... 10 D. Cost Estimates ...... 13 E. Financing ...... 15 F. Procurement ...... 16 G. Disbursements ...... 0 ...... 16 H. Organization and Management ...... 16

IV. PRODUCTION, MARKETING AND PRICES, AND PRODUCER BENEFITS . 21

V. BENEFITS AND JUSTIFICATION ...... 23

VI. AGREEMENTS REACHED AND RECOMMENDATION ...... 25

The project was appraised during September/October 1976 by a mission comprising Messrs. D.B. Parbery, G.G. Luhman, and W.A. Price (Bank), with B. Bilbo, P. Borrowman, and 0. Echeverri (Consultants).

Thisdocument hu a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. TABLE OF CONTENTS (Continued)

ANNEXES

1. Agricultural Background

Table I - Balance of Payments, 1970-76 Table 2 - Production of Annual Crops Table 3 - Production of Permanent Crops

2. Land Demarcation and Titling

Table 1 - Public and Private Colonies in the Department of Itapua, 1976 Table 2 - Land Titles Issued by IBR and Predecessor Agencies in Paraguay

3. National Development Bank

Table 1 - Actual (1971-75) and Projected (1976-81) Balance Sheets Table 2 - Actual (1971-75) and Projected (1976-81) Income Statements Table 3 - Project Cash Flow

4. Performance Under the Small Farmer Credit and Rural Development Project

5. Description of Project Area

Table I - Weather Data

6. On-farm Investments under the Project

Table I - Model I: Crop Farming - 20-ha Farm with 4.8 ha Partly Cleared, Remainder Heavy Forest Table 2 - Assumptions and Enterprise Net Margins, Model I Table 3 - Model II: Mechanized Crop Farming - 40-ha Farm with 8 ha Fully Cleared, 6 ha with Stumps, Remainder Heavy Forest Table 4 - Assumptions and Enterprise Net Margins, Model II Table 5 - Analysis of On-farm Investment Costs - Areas A and B

7. Rural Infrastructure and Service Investments under the Project

Table 1 - Roads Equipment Schedule Table 2 - Roads Cost Estimates Table 3 - Road Component - Project Costs and Disbursements Table 4 - Community Centers Schedule of Accommodation Table 5 - Community Centers Cost Estimates Table 6 - Coordination Agency's Costs Table 7 - Implementing Agencies' Costs Table 8 - Rural Health Promoters, Location and Referral Facilities - Western End, Area B Table 9 - Rural Health Promoters, Location and Referral Facilities - Northeastern End, Area B Table 10 - Staff for the Rural Health System Units TABLE OF CONTENTS (Continued)

ANNEXES (Continued)

Table 11 - Health Component - Project Costs and Disbursements Table 12 - Health Component - Operating Costs Table 13 - Foreign Exchange Component - Area B Table 14 - Summary of Project Preinvestment Costs for Civil Works

Appendix 1 - Road Classifications and Standards Appendix 2 - Terms of Reference for Consulting Engineers Appendix 3 - Schedule of Duties - The Project Coordinator and Deputy Coordinator

8. Estimated Disbursement Schedule

Table I - Area A Table 2 - Area B

9. Production, Prices and Marketing of Farm Commodities under the Project

10. Economic Rates of Return

Table I - Model 1 - 20 ha Farm with 4.8 ha Partly Cleared, Remainder Heavy Forest Table 2 - Model II - Mechanized Crop Farming - 40 ha Farm with 8 ha Fully Cleared, 6 ha with Stumps, Remainder Heavy Forest Table 3 - Overall Sub-Project - Area A Table 4 - Overall Sub-Project - Area B

MAPS

12550 - Project Area B 12551 - Project Area A 12552 - Department of Itapua and Project Areas

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

SUMIARY AND CONCLUSIONS

i. This report appraises a Second Rural Development Project in Paraguay for which a loan of US$22 million is proposed. The project, in line with the Government's overall long-term land settlement policy, would be aimed mainly at helping small farmers in newly developing land colonies along the Parana River in the Southeastern part of Itapua Department. Besides supplying investment credit to farmers, the project would also provide supporting services such as roads, land demarcation and titling, community development and health care. These components would all be aimed at (a) expanding the area cultivated; (b) increasing mainly small farmer incomes; (c) improving the physical and social infrastructure in the project area; and (d) strengthening institutions such as the National Development Bank (BNF), the National Council for Social Progress (CNPS), the Mlinistryof Agriculture and Livestock (MAG), and the Institute of Rural Wlelfare (IBR).

ii. The Bank Group has made 18 loans to Paraguay, including 10 from IBRD and eight IDA credits amounting to US$103.8 million (US$58.3 million, IBRD; US$45.5 million, IDA) in support of livestock and rural development (45%), transport (32%), education (19%) and preinvestment studies (4%). The first Rural Development Project became effective on April 14, 1975 and is assisting small farmers in three public settlement colonies located in the Eastern Region of Paraguay.

iii. Agriculture is a major sector of the Paraguayan economy 'and accounted, during 1975, for approximately 35% of GDP, 97% of export value (including wood and processed products), and 50% of employment. The expansion of crop, forestry and livestock production during 1969/74 resulted in an agricultural sector growth rate of 6%, compared with only 1.3% during the period 1964-69, mainly as a result of Paraguay's efforts to encourage production of exportable crops. During the period 1970/75, production of such commodities increased by an average of 16.6% annually compared with a rate of only 1.4% p.a. for domestically consumed crops. Out of a total land area of nearly 41 million ha, only about 1 million ha (2%) are used for crop purposes. An additional 7 million ha could be cultivated, but this land is currently used for extensive livestock farming or is covered with forest or bush. Aware of the country's unexploited agricultural potential, the Government is seeking to expand the area under cultivation through the colonization of virgin lands. The proposed project is consistent with this strategy.

iv. More equitable distribution of potentially productive land in Paraguay has been achieved in recent years through colonization of both Government and privately owned land. IBR, which deals with all aspects of land reform and - ii -

settlement, has so far established 250 colonies of over 40,000 families on unused state lands. This effort has helped ease the pressure on land, though distribution of land holdings is still uneven. The proposed Second Rural Development Project fits this general Government strategy for agricultural growth and rural development.

v. Project cost is estimated at about US$42.8 million, including physical and price contingencies, with a foreign exchange component of US$24.6 million (57%) and a local cost component of US$18.2 million (43%). The project would be financed by: (a) the proposed Bank loan of US$22 million; (b) a loan of US$2.6 million from the Kreditanstalt fur Wiederaufbau (KfW); (c) a Government contribution of US$16.4 million; and (d) subborrowers' contribution of US$1.8 million. The proposed Bank loan would finance part of the foreign exchange costs and would be made to the Government at 8.2%. It would be channelled to participating agencies through the Central Bank (CB).

vi. CNPS would coordinate the operations of the various institutions involved in the project both at the national and field levels. It has appointed a Project Coordinator who would be stationed in Asuncion and be responsible for overall project coordination and implementation and a Deputy Coordinator to be stationed in project area B at the main community center and be responsible for coordination and supervision at the project level. Both would be acceptable to the Bank. A system of project monitoring and evaluation would be introduced within CNPS.

vii. The farm credit component would be managed by BNF, assisted by MAG technicians. As BNF is in a weak financial position agreement has been reached on an overall rehabilitation plan, in line with terms and conditions for the proposed Bank Industrial Credit Project, including government equity contribution, reduction in operating costs, increase in the average yield on loans, strengthening of BNF's collection office and improvement of loan recovery. First phase implementation of the debt recovery plan and the receipt of a government capital contribution of G 1,300 million are conditions of loan effectiveness. viii. As is usual in agricultural credit projects, farm inputs would be procured through regular commercial channels. Contracts for the construction of all-weather roads, MOPC, CNPS, IBR and MAG equipment, and vehicles would be procured through international competitive bidding. Health and community facility construction, with furniture and equipment, would be procured on the basis of local competitive bidding. Civil works for earth roads would be carried out on force account. The project would be implemented over a three- year period.

ix. The overall economic rate of return for the project, including both sub-project areas A and B, is estimated at 14%. Should yields be lower than expected, or commodity prices drop to cause a 10% decline in benefits, then the overall economic rate of return on the project would be 10%. A 10% increase in investment costs would also reduce the project economic rate of return to 10%. - iii - x. About 12,000 families, including 3,600 credit beneficiaries, would benefit from the project at full development. Farmers and villagers in area B would benefit from the availability of better health and extension services, as well as higher farm gate prices due to transport savings generated by road construction and improvement. The latter will lead to further development and settlement of additional areas. xi. During negotiations, assurances were obtained which provide a suitable basis for a Bank loan of US$22 million for a term of 17 years, including 3.5 years of grace. The loan would be to the Government of Paraguay, which would bear the foreign exchange risk.

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

I. INTRODUCTION

1.01 The Government of Paraguay has requested a Bank loan to help finance a Second Rural Development Project in the southeastern part of the Department of Itapua along the Parana River as part of its overall, long-term land settlement policy. The First Rural Development Project is assisting small farmers in three public settlement colonies located in the Eastern Region of Paraguay. The Bank Group has so far made 18 loans to Paraguay, including 10 from IBRD and eight IDA credits, amounting to US$103.8 million (US$58.3 million, IBRD, US$45.5 million, IDA) in support of livestock and rural development (45%), transport (32%), education (19%), and preinvestment studies (4%).

1.02 The project was identified by an FAO/CP mission to Paraguay during September 1975 and subsequently prepared by a second FAO/CP mission during April/May 1976. The preparation report was based on data from a detailed Government survey of the project area between February and April 1976.

II. BACKGROUND

A. General

2.01 Paraguay is an agricultural country with 60% of its 2.6 million population living in rural areas. The average family size in the rural area is 6.2 persons, and 65% of the rural population earns less than the poverty income level, estimated by the Bank at US$188 per capita in 1975, making Paraguay one of the poorest countries on the Latin American mainland. However, in contrast, it is one of the least densely settled, with an average of about 6.3 persons per square kilometer. Living conditions of the rural population are characterized by a high birth rate (39.8/1,000 population) and high infant mortality (84.3/1,000). Life expectancy is 61.8 years and adult illiteracy is widespread.

2.02 Overall, the economy has grown at a faster rate during recent years (7.5% GDP growth during 1972-74), particularly in the agricultural sector (9% in 1973 and 1974), than in earlier years (5.2% GDP for the period 1965-74). The trade balance has deteriorated from a small surplus in 1972 and 1973 to a deficit of US$50 million in 1974, US$85.5 million in 1975 and an estimated US$130.6 million for 1976 (Annex 1, Table 1) as imports have moved ahead of export expansion which was stimulated by the initiation of Itaipu works (a large hydroelectric project on the Parana River). The country's progress is heavily dependent on a buoyant agricultural sector, which, in turn, must be based increasingly on improved farming conditions for Paraguay's large population of small farmers to augment its output of export crops. -2 -

B. Agricultural Sector

Agriculture in the Economy

2.03 The agricultural sector is the major source of national income, export earnings and employment. Approximately 35% of GDP, 97% of export value (including wood and processed products), and 50% of employment are provided by the sector (1975). The rate of growth in agricultural production has been reasonably good, at about 6% annually for the 1970-75 period. Esti- mates of crop growth rates show that the main export commodities have expanded in volume at an average of 16.6% annually, compared with a rate of only 1.4% p.a. for domestically consumed crops 1/. Continued investment in agricultural development, particularly for the production of export produce, is considered essential for Paraguay's economic progress (Annex 1).

Regional Setting and Land Use

2.04 The country can be divided into two major regions: the Chaco and Eastern Paraguay (Annex 1). The Chaco, composed of 24.7 million ha west of the Paraguay River is virtually flat, sloping southward at a grade of less than 1%. Its temperatures are usually high, and rainfall, averaging some 750 mm annually, is seasonally variable, thus making the region subject to periodic drought. Occasional flooding also occurs, however, as the Chaco's rivers swell with melting snow from the Andean highlands. Fresh water supplies are limited and saline ground water limits the use of its relatively fertile land. The Chaco is sparsely populated and the land is used mainly for extensive cattle raising. Eastern Paraguay, comprising about 40% (16 million ha) of the country and containing about 90% of the population, is a region of spacious plains, broad valleys and low plateaus. Of an estimated 8 million ha of potentially arable land in Eastern Paraguay, only 1 million are used for agriculture. Much of the remaining land is covered with forest. Rainfall averages 1,500 mm annually and is generally well distributed throughout the year.

Land Distribution and Tenure

2.05 Some progress towards a more equitable distribution of potentially productive land in Paraguay has been achieved primarily through colonization of both Government and privately owned land. Though this effort has helped ease the pressure on land, the distribution of land holdings is still uneven (Annex 1). While land distribution could be improved through expropriation from the private sector, particularly in Eastern Paraguay, a careful analysis shows that most of the large holdings, which are situated in the Chaco region and in the less productive or undeveloped areas of Eastern Paraguay, are devoted to extensive livestock ranching or forestry and do not necessarily represent a misallocation of land resources under present conditions. In terms of land tenure, some 65% of all farmers owned their land in 1971, as compared with 54% 10 years earlier (Annex 1).

1/ The Agriculture Sector of Paraguay, IBRD, February 1976. - 3-

Crop Production and Farming Systems

2.06 Crop production is concentrated in the central part of the Eastern Region which accounts for about half of the total output of the most important crops: cassava, soybeans, corn, cotton, tobacco, oranges, wheat, sugarcane, castor seed, and coffee. Other important producing subregions are Itapua, Concepcion-San Pedro, and Alto Parana, which, together, account for about 40% of total crop production. Future expansion of production is likely to occur in Itapua and Alto Parana as these regions already have two well-established poles of development between which lie about 1 million ha of undeveloped land suitable for crop production. The proposed project is designed to develop this area. Crop production in the Chaco region is not likely to increase significantly during the next five years as its potential lies mainly in extensive livestock production (Annex 1, Tables 2 and 3).

2.07 There are three principal crop farming systems in Paraguay, recognizable by the type of farm power involved: (a) subsistence, or traditional, farming, which depends solely on family labor; (b) more progressive traditional, or small commercial, farming, which draws its farm power requirements from draft animals; and (c) commercial farming, primarily in and around the Japanese, German, and Mfennonite settlements, depending mainly on tractors.

2.08 The subsistence, or traditional, farms with only manual labor, derive over half their production from the three subsistence crops--maize, cassava and beans. Farmers with draft animals plant about 30% of their land in the three subsistence crops. The tractor-powered farms produce little or none of the subsistence crops, concentrating on double cropping of wheat with soybean or single cropping cotton. In and around the larger towns, vegetables make up an important part of small cultivators' cash crop production.

Agricultural Services

2.09 Land Settlement and Colonization. Land settlement and colonization are the responsibility of the Institute of Rural Welfare (IBR). IBR was established under law 852 of 1963 as an autonomous agency to determine and execute policy in respect of land reform, land settlement and rural affairs under the provisions of the Agrarian Statute and related legislation. The President of IBR and the five-member council are given broad authority in dealing with these matters even though IBR's official channel of communication is through the Minister of Agriculture and Livestock (MAG) (Annex 2).

2.10 IBR works mainly with state lands entrusted to its control. Colonies may be for livestock, agriculture/forestry or agricultural production, and the majority are located in the Eastern Region, where the average size of an individual farm plot is 20 ha. On the basis of an average family size of six persons, it is estimated that over 21% of the rural population of Paraguay now live in official Government colonies. This effort has been largely financed out of IBR's own resources and at the relatively low settlement cost of approximately US$300 per family. When health, education and other services provided by Government are included, the total settlement cost per family is estimated to be US$500. 2.11 Extension. Se' er 'Covernment institutions provide technical assistance to farmers: -he AAG through its various commodity divisions and Extension Service and Small Farmer Credit Agency (CAH), the IBR, and the National D veJopment Bank (BNF). The National Service of Professional Promotion 'SNPP), being expanded and improved under the Bank's Second Education .roject, trains skilled and semi-skilled agriculturalists, using mobile un-ts a.nd short courses in regional training centers. The main responsibility for providing technical assistance to farmers at the field level, however, -rsts with the Agricultural Extension Service (SEAG), which has 23 field offices distributed throughout the country, covering 12% of the number of dist:icts in Paraguay (estimated at about 180). SEAG has a technical staff of 79 and a countrywide coverage of about one technician to 2,500 farmers, and concentrates on promoting export crop development, particularly tobacco and cotton (Annex 1).

2.12 Research. Agricultural research is carried out by both MAG and the National University. Works programs are crop-oriented, primarily in terms of technical factors, but often there is no thorough economic and financial assessment of the farming system recommended (Annex 1). USAID plans to assist MAG in upgrading research that will benefit small farmers by: (a) expanding research programs oriented toward their needs; (b) establishing a research training program within MAG; (c) expanding the Ministry's Planning Office to deal with economic analysis and planning of rural development programs; and (d) creating a funding mechanism to provide the National Seed Service (SENASE) with resources to secure, process and distribute improved seed varieties.

Agricultural Credit

2.13 Institutional credit to the agricultural sector in Paraguay is provided by the banking system, controlled by the Central Bank (CB), through the state-owned BNF and 13 commercial banks. In addition, CB provides funds for on-lending through the Livestock Fund (FG), using IDA and IBRD funds. FG is now the principal source of long-term credit to the livestock sub-sector, holding by the end of 1975 a portfolio of G 3,619 million (US$28.7 million). Some agricultural credit is also provided by a number of smaller, non-bank institutions, in particular the state-owned CAH and the privately owned Paraguayan Development Company (COMDESA), which are subject to certain provisions of the General Banking Law and to the control of CB. A reportedly substantial but unquantifiable amount of non-institutional credit is provided by traders and agricultural produce merchants.

2.14 BNF is by far the most important source of credit to the agricultural sector. In 1975, it granted loans to the crop sub-sector totalling G 2,459 million (US$79.5 million), which represented 61% of total bank credit extended to the sub-sector during the year, compared to 90% in 1970. BNF's portfolio of loans outstanding to the crop sub-sector rose from C 3,518 million (US$27.9 million) at the end of 1970 to G 7,402 million (US$58.7 million) at the end of 1975 (Annex 3). 2.15 The commercial banks, mostly affiliates of foreign banks, have been historically reluctant to finance the crop sub-sector but, in recent years, they have substantially increased credit to crop farmers, which is primarily short term and highly selective (emphasizing large farmers, machinery, and specialized crop production such as wheat and cotton).

2.16 CAH is a small farmer credit agency within MAG which provides short-term subsidized credit to members of newly formed farmers' associations at an interest rate of 9% per annum, plus a 2% commission fee. Loan disbursements increased from G 9.9 million (US$78,000) in 1971/72 to G 83.3 million (US$661,000) in 1975/76.

2.17 COMIDESA is a private development bank which finances investments in development-oriented projects, including, where necessary, feasibility studies and technical assistance. During the six years of its existence, COMDESA had approved financing for 272 projects, totalling G 1,389 million (US$11.0 million), of which 2% was for crops, 31% for livestock, and 34% for agroindustries.

2.18 Although no firm data are available, it is estimated that non- institutional credit provided by shopkeepers, input suppliers, and produce merchants reaches some 17% of farmers, while institutional credit reaches only about 7%. Interest rates on non-institutional credit generally are very high and often are hidden in the purchase of output at lower than market prices.

Cooperatives and Farmer Associations

2.19 The cooperative movement has gained momentum in Paraguay, supported by development promoted by foreign immigrants. Some successful cooperatives have been established by Mennonite colonies in the Chaco, while others have been established by German and Japanese settlers in Itapua and the central region. Recently, the movement has spread to small farm areas through the Paraguayan Union of Cooperatives (UNIPACO), a marketing organization that is expanding its activities with USAID assistance. Its network of local cooperatives presently covers 21 locations in Eastern Paraguay. Mutual help among farmers is a common practice in Paraguay, and many such groups (mingas) exist in the Itapua area (Annex 1).

Program Administration

2.20 Since 1972, the National Council for Social Progress (CNPS) has been responsible for planning and supervising integrated rural development programs in 23 public colonies in Paraguay's northern axis and for coordination of the various institutions involved in the IDA-assisted First Rural Development Project in eastern Paraguay. The CNPS was established by Presidential decree in 1967 as an interministerial organization in which IBR and BNF are also represented (Annex 1). - 6 -

C. Rural Infrastructure and Services

Roads

2.21 The Highways Authority (DGV) within the Ministry of Public Works and Communication (MOPC) is responsible for planning, constructing and maintaining all national and departmental roads in the country (about 80% of the entire network). The primary highway network in Paraguay totals about 6,500 km, of which more than three-quarters are earth. The network as a whole provides acceptable transport to most of the populated areas of the country but some of the existing paved and gravel roads need to be improved to meet growing traffic volumes and to facilitate the development of new agricultural areas. Responsibility for construction and maintenance of feeder roads is entrusted to two other departments within MOPC -- the Road Authority and Mineral Authority (Annex 1).

Education

2.22 Education in Paraguay is improving at a rapid rate, supported by Bank lending. The third education project (US$8 million loan, and US$4 million IDA credit) will help finance primary and secondary school facilities in Paraguay, with emphasis on the rural and semirural population. It provides for a school construction program to service the proposed project area. Overall, Paraguay's eductional system is characterized by high dropout and repetition rates are reflected in nationwide completion rates of only 26% at the primary level and 41% at the secondary level. Secondary school enrollment has increased by 8.3% per year during the past 10 years but the increase has benefitted mainly urban children. In 1974 total secondary enrollment was about 72,000, or 10% of the 13 to 18 year age group, some 46% of which is in Asuncion (Annex 1).

Health

2.23 The quality of medical services in Paraguay is generally satisfactory in that major diseases, such as malaria, poliomyelitis and leprosy, have been largely controlled, but major deficiencies exist in the diffusion of medical services and health education to rural areas. Nutritionally, deficiencies of certain vitamins and minerals are evident in a diet heavy on cassava, beef, maize and wheat derivatives, and weak on dairy products, green vegetables and fresh fruit. Malnutrition, particularly in low income families, is evidenced by slow physical development and maturation.

2.24 The improvement of rural health infrastructure has been included as part of the current National Health Plan. A total of 112 new rural health posts is planned for the entire rural area during the next five years. Also, 20 new health centers are planned for population clusters of 2,000 to 20,000 inhabitants (Annex 1). - 7 -

D. Government Strategy in Rural Development

2.25 The Government, aware of the country's unexploited agricultural potential, has committed itself to a policy of increasing the production of exportable agricultural commodities and expanding the area under cultivation through the colonization of virgin lands (Annex 2). The IBR has established some 250 colonies of over 40,000 families on unused state lands for settlers from the Asuncion minifundia zone, which has led to a proliferation of potentially viable farm units in the more fertile areas of Eastern Paraguay. The colonization program has concentrated on settling the largest number of families at the lowest possible cost, basing development largely on family self-reliance. Although this policy opened rich new lands to agricultural production and brought about major changes in the land tenure structure, existing institutions have been unable to provide colonies with needed services and infrastructure, and as a result, the standard of living of many colonists remains at the subsistence level. Government is now interested in correcting the situation to prevent the deterioration of settlements and proliferation of subsistence farming. The proposed project would assist in this effort and support a more controlled pattern of regional development designed to assure the rational exploitation of land, water, and forestry resources. It would supplement existing rural development programs financed by the Bank, the Inter-American Development Bank (IDB), USAID, and other lending and aid agencies (Annex 1).

E. Performance Under the First Rural Development Project

2.26 The First Rural Development Project (Credit 509 of September 6, 1974) included a lending program to finance on-farm investments and incremental working capital for about 2,000 small farmers; the construction of about 60 km of all-weather roads and 250 km of earth roads, 26 primary schools, two health centers (plus the purchase of equipment for a third), three community centers, the purchase of some 50 vehicles for technical staff, and the appointment of a Project Coordinator (Annex 4). Project policy is established by CNPS and. implementation is being undertaken by BNF, MOPC, MAG, IBR, Ministry of Educa- tion, and Ministry of Public Health and Social Welfare (MSPBS). The Project Coordinator works with these agencies through CNPS.

2.27 From the beginning of the lending program through the end of February 1977, 861 long-term subloans for US$2.2 million had been committed, in comparison with the appraisal estimate of 1,200 subloans for US$3.4 million through the end of 1976. For the same period, 1,102 short-term subloans for US$0.7 million had been committed, compared with the appraisal estimate of 1,200 subloans for US$2 million. IBR had issued 707 titles, compared with the appraisal estimate of 1,200 by the end of 1976. Various factors might have contributed to the failure to reach projected targets: the lending program was initiated six months later than expected, partly because of a delay of four months in effectiveness; IBR was initially slow in assigning land titles, although this process was expedited by the issuance of temporary certificates - 8 - beginning in September 1975; BNF did not assign its full complement of technicians to the project area until September 1976; many farmers are not familiar with debt financing and are reluctant to incur debt; and substantial farmer liquidity, resulting from favorable crop prices, reduced the total demand for, and average size of, subloans. As a result, full commitment of subloan funds will be achieved by about the end of 1978, or one year later than the appraisal estimate.

2.28 During the design phase of the roads, temporary improvements were made to existing earth tracks to provide easier market access for farmers. About 700 km of tracks had been improved through February 1977. Construction of new roads was started in October 1976 and is expected to be completed by the end of 1978. Because of unforeseen cost increases, the schools component had to be modified and now includes 19 primary schools with 92 classrooms, as compared with the appraisal estimate of 26 schools with 102 classrooms. Nine schools were completed by December 1976, and the remainder are expected to be completed to start operation in June 1978. The health component, however, was expanded to include the construction of three health centers, as compared with the appraisal estimate of two. Their construction was completed by December 1976, and equipment for the three centers is expected to be delivered by September 1977. Construction of the three community centers is scheduled for completion by the end of 1977. Twenty-five vehicles were purchased instead of the 50 proposed at appraisal.

2.29 In view of the important role of BNF in agricultural credit in Paraguay, agreement was reached, under the First Project, on various steps to be taken to strengthen its financial position, including a Government equity contribution of US$1.2 million equivalent per year, planned efforts for the recovery of loans in arrears, and maintenance of minimal liquidity and debt/ equity ratios. Government has made contributions to BNF's paid-in capital as contemplated, but its financial position has deteriorated because of continuing operational losses and the need for additional provisions emerging from the auditors' analysis of its loan portfolio. As for the reduction of arrears, BNF undertook to (a) strengthen its loan recovery office and collection procedures, (b) recover no less than 20% of the overdue loans under the National Grain Program (NGP) made prior to December 31, 1972, (c) present a plan to recover the principal of the remaining NGP loans by May 1983 and outstanding interest by May 1988, and (d) present and implement a plan to reduce all the other arrears to no more than 10% of the portfolio of each Department by September 6, 1976. BNF has met the first two conditions satisfactorily but did not meet the latter two on schedule. However, BNF has now formulated and adopted recovery plans for its entire overdue portfolio with the help of its external auditors and the Bank. A loan recovery plan, including realistic schedules and goals consistent with BNF's organizational capacity, has been discussed and finalized in connection with the processing of the proposed industrial credit project, and the proposed project (para. 3.25).

Evaluation

2.30 It is too early to determine project impact on production, but the implementation of farm development plans and the construction of infrastructure - 9 - facilities are proceeding satisfactorily after a slow start. A system to measure project impact is being developed and will be formalized in the proposed second project. Project cost per farm family was just over US$1,000 (excluding credit).

III. THE PROJECT

A. Project Area

3.01 The area of the proposed project is located in the southern part of the Eastern Region, along the Parana River, which divides Paraguay from Argentina, and for purposes of the project, has been divided into areas A and B (refer Mlaps). Project area A, just east of Encarnacion and encompassing about 80,000 ha and 22,000 settlers, is relatively well developed, while area B, further east running along the Parana River to Itapua's northern boundary, and covering about 110,000 ha occupied by 28,000 settlers, on about 5,000 farms, plus 125,000 ha available for settlement, requires substantial infrastructure investment. This area is still, for the most part, covered with original forest and, until timber operations started some 20 years ago, was completely isolated. The Parana River was the only means of access to area B until the 1960s, when an earth road was built to Capitan Meza. Most of the area north of the Tembey River, however, is still accessible only by river craft to the small settlements along the Parana, and thence by logging tracks, which penetrate from 20 km to 75 km into the forest in a northwesterly direction. There are upwards of 16 riverside villages but none has even rudimentary port facilities. Other tracks, which have been developed by settlers, meander haphazardly but predominantly along a southwest-northeast axis. Except where farm land has been cleared alongside earth tracks, mainly in the southern part, clearing has been minimal and seldom exceeds the width of the track. The southwest boundary of area B is about 84 km distant from Encarnacion by earth road, paved with stone in some sections, while vehicular access to the northeastern corner is possible in dry weather by an earth track from Puerto Presidente Stroessner, about 100 km to the north. This track is intended to be improved by army engineers but only to earth standards, and several rivers will remain unbridged. Health services in area B are inadequate, with only three health centers of the lowest category (type D) and three health posts. All are ill-equipped and inadequately staffed. Annex 5 has further details.

B. Brief Description

3.02 The project would provide funds for supervised farm credit covering both areas A and B, as well as infrastructural and administrative investments for area B. Small farmers would be the principal beneficiaries as they work to clear the forest for crop land. Investments in infrastructure would include an expanded road network and regional health system. Administratively, the line agencies (BNF, MAG and IBR) would be strengthened by additional staffing to improve basic services to project area B, working through two new community centers under the control and supervision of CNPS. - 10 -

3.03 Loan proceeds would be channelled through the Central Bank (CB) to the various executing institutions as follows: farm credit by the BNF, roads and administrative centers by MOPC, health centers by MSPBS, agricultural extension by MAG, and land demarcation and titling by the IBR. All work would be coordinated by CNPS, which would appoint two Coordinators. No education component is included as the cost of the proposed school program for project area B has been incorporated in the Bank's third education project (1269-PA).

C. Detailed Features

Farm Credit

3.04 About 3,555 farmers would receive long-term credit to finance investments and short-term credit to finance incremental working capital requirements; 600 of these farmers would be in area A and 2,955 in area B, as shown below. Two main types of farmers would participate. The first type, with 20 ha or less, would number about 3,060, of whom 370 are located in area A and 2,690 in area B. Such farmers would have approximately 5 ha partially cleared and farmed primarily with family labor. Under the project, they would destump the 5 ha currently farmed and cut about 2 ha of forest. One ha would be put under pasture for feeding draft oxen and minor livestock and the remaining 6 ha would be cropped. Crops would be mainly maize, cassava, beans, and soybeans. Investments would be primarily in cutting and destumping (29%), fencing (8%), draft animals (21%), equipment (18%), and storage facilities (6%) and incremental working capital (18%). The amount of investment per farm would be about G 388,600 (US$3,100) (Annex 6).

3.05 About 495 farmers would be of the second type, with between 20 and 50 ha, of whom 230 are located in area A and 265 in area B. These farmers would have about 8 ha destumped and 6 ha cut; those 14 ha would be farmed primarily with oxen and family labor. Under the project, they would destump the 6 ha of cut land. A farmer would be eligible to purchase a tractor provided he has made appropriate arrangements to utilize each tractor on a minimum of 40 ha per year. These arrangements might involve group purchase of a tractor or agreements to undertake custom work for neighboring farmers. An assurance on this matter was obtained at negotiations. The main crops would be soybeans, wheat, tung (for oil), maize, cassava, and beans. Invest- ments would be primarily in destumping (9%), tractor and implements (67%), and incremental working capital (24%). Investment per farm would amount to about G 1,260,800 (US$10,000) (Annex 6). Participation is expected to be as follows: - 11 -

Typical Number of Subloans Farm Projected Cost per Project Size Year 1 Year 2 Year 3 Total Subloan Cost (ha) (US$) (US$'000)

Small Farmers 20 or less Area A 140 230 - 370 3,084 1.1 Area B 390 1,080 1,220 2,690 3,084 8.3

Sub-total 530 1,310 1,220 3,060 9.4

Larger Farmers 20 to 50 Area A 80 150 - 230 10,006 2.3 Area B 45 100 120 265 10,006 2.7

Sub-total 125 250 120 495 5.0

Totals Area A 220 380 - 600 5,733 3.4 Area B 435 1,180 1,340 2,955 3,706 11.0

Overall total 655 1,560 1,340 3,555 4,048 14.4

Roads

3.06 The project would finance construction of a road network in area B costing US$12.9 million that would bring almost all farmers in the area to within 5 km of a road. The network would include 99 km of all-weather roads, providing direct access to the whole of area B, with about 238 km of feeder earth roads, mostly on the river side (Annex 7). Investments would cover civil works such as land clearing, cutting, drainage and erosion control, culverts and bridges, and stone paving for the all-weather component (78%); supervision (7%); equipment (10%); and maintenance (5%). Provision would be made under the project for consultants to supervise the execution of the work. Civil works for all-weather roads would be done under contract while civil works for the earth roads may be done either under contract or force account, according to the available resources of DGV. Roads in area A are adequate to meet project needs.

Health

3.07 The project would develop a rural health services delivery system, based on community organization and auxiliary personnel. Task assignments would stress environmental sanitation and communicable disease control, health and nutrition education, as well as mother and child health and family planning. The project would finance construction (57%) and equipping (21%) of eight community health posts, two new health centers, and two upgraded centers in area B. Funding for operational costs (18%), including staff, and training expenses (4%) would also be provided during the three-year disbursement period after which time the Government would be responsible for maintaining the facil- - 12 - ities. Assurances to this effect were obtained at negotiations. Existing staff from MSPBS would be responsible for training auxiliary personnel, with some foreign technical assistance. Provision for short-term visits by technical specialists from overseas has been included within the training component (Annex 7).

Community Centers

3.08 The project would finance construction of two community centers in area B adjacent to the proposed all-weather road (Annex 7). Investments would consist of civil works (85%) and equipment (15%). The first and principal center would be located roughly at km 38 (at Domingo Robledo) and the second near km 98 (in the Otano area). Each center would consist of office accommodation, conference room, warehouse, and vehicle maintenance workshop, with power and water supplies, basic office equipment, furniture, and a radio link. Some staff housing and resthouses, intended for the use of project staff during implementation, and for Government and local officials on completion, would also be provided (Annex 7).

Vehicles

3.09 The project would help finance the purchase of about thirty-nine vehicles, mostly four-wheel-drive jeeps, costing US$0.3 million. The vehicles would be used by all incremental project staff, the Project Coordinator, the Deputy Coordinator, and the Farm Management Adviser. Operational costs for the first three years of the project would also be covered. The community centers would be provided with electrical generators and equipped service workshops, together with fuel outlets. The service facility would be leased on a private contractual basis during the disbursement phase of the project (Annex 7).

Coordination

3.10 Equipment and operational expenses relevant to the Project Coor- dinator, Deputy Coordinator and support staff would be financed up to US$0.03 million. Maintenance and operational expenses for the coordinators' two vehicles would also be covered during the disbursement period (Annex 7).

Personnel

3.11 Present staff available in area A can service most of the project requirements. However, two additional BNF and two MAG technicians would be provided in the first year (Annex 7). Present staff in area B cannot be expected to meet the demand for services in this region. Provision has therefore been made under the project to provide, as and when needed, additional personnel, including the two coordinators, 14 MAG technicians, 14 BNF technicians, 14 IBR technicians, and supporting administrative staff (Annex 7, Table 7). An internationally recruited consultant would be appointed by August 31, 1977, financed by UNDP, for three years to provide a farm management input to the credit program. (The proposal for UNDP assistance is being processed.) Initially, he would work out of the MAG extension office in Encarnacion, but later would move to the main community center in area B. - 13 -

He would work under the Project Coordinator. Assurances that the above ap- pointments would be made and that the technicians would stay in the project area were obtained at negotiations.

D. Cost Estimates

3.12 The total cost of the project is estimated at US$42.8 million, of which US$24.6 million, or 57%, represents the foreign exchange component. Costs have been based on September 1976 prices, with a physical contingency of 10% added overall. A price contingency of 31% of baseline costs has also been added, based on the assumption that the dollar costs of civil works and related investment items would rise by 9.5%, 9.0%, 9.0%, and 8.5%, respectively, over the next four years from appraisal, and that the cost of equipment, vehicles, and similar items would rise by 7.75%, 7.5%, 7.5% and 7.25%, respectively, over the same period. Area A is treated separately since it is not to be financed by the Bank. Total project cost for area A is estimated to be US$5 million, of which US$2.6 million, or 52%, is foreign exchange. Farm investment items for area A, with their respective foreign exchange components, are compared with those for area B in Annex 6, Table 5. The total cost for area B is estimated at US$38 million, of which US$22 million, or 58%, represents the foreign exchange component, details of which are provided in Annex 7, Table 13. Project costs are summarized in the table on the next page.

3.13 For the supervised credit and vehicle components, baseline figures are current guarani costs as of September 1976 on imported vehicles, farm machinery and equipment, chemicals and operating capital at farm level. For the road component, labor costs are based on salaries and wages actually paid by the DGV. Equipment costs were estimated using international bids for similar items received by DGV. All costs were checked against net rates obtained in recent contracts and current force account rates for civil works on road construction and maintenance. For the health and community centers, personnel and administration expense cost estimates are based on local prices, particularly for civil works, and international prices where relevant. For the technical assistance and training components, basic costs are comparable to those incurred under the first project and other current studies and training programs in Paraguay. Foreign Local Foreign Total Local Foreign Total Exchange ----- (G million) ------(US$ million)------()

I. Area A

Farm Credit Investment 167.6 168.8 336.4 1.3 1.3 2.6 50 Operational 40.3 56.7 97.0 0.3 0.4 0.7 58 Personnel 3.8 0.0 3.8 0.1 0.0 0.1 0 Vehicles 1.3 6.3 7.6 0.0 0.1 0.1 81 Baseline Cost 213.0 231.8 444.8 1.7 1.8 3.5 52 Physical Contingency (10%) 21.4 22.7 44.1 0.2 0.2 0.4 52 Price Contingency 65.5 71.8 137.3 0.5 0.6 1.1 52 Sub-Project Cost 299.9 326.3 626.2 2.4 2.6 5.0 52 II. Area B

Farm Credit Investment 656.5 449.8 1,106.3 5.2 3.6 8.8 41 4 Operational 137.4 134.8 272.2 1.1 1.1 2.2 49 Roads 435.9 1,146.6 1,582.5 3.5 9.1 12.6 72 Health 56.7 85.7 142.4 0.4 0.7 1.1 60 Community Centers 34.1 68.0 102.1 0.3 0.5 0.8 66 Personnel 68.0 0.0 68.0 0.5 0.0 0.5 0 Vehicles 16.4 63.0 79.4 0.1 0.5 0.6 80 Coordination and Agency Equipment 6.3 18.9 25.2 0.1 0.1 0.2 73 Baseline Cost 1,411.3 1,966.8 3,378.1 11.2 15.6 26.8 58 Physical Contingency (10%) 141.1 196.6 337.7 1.1 1.6 2.7 58 Price Contingency 439.7 612.4 1,052.1 3.5 4.8 8.3 58 Sub-Project Cost 1,992.1 2,775.8 4,767.9 15.8 22.0 37.8 58 Overall Project Cost 2,292.0 3,102.1 5,394.1 18.2 24,6 42.8 57 - 15 -

E. Financing

3.14 Project financing would be shared in the following proportions:

Government

Mlinistrv of Subborrowers BNF CB Finaice KfW Bank Total Aountc Aot X Amount _x Amount 7 ,Amount ;, Amount X Amouut & ------(lTS$ million) ------'I. Area A

Farm Credit 0.3 10 1.2 34 t.1 4 - - 1.7 52 - - j.3 100 Personnel - - - 0.1 100 0.0 0 - - 0.1 100 Vehicles - - - - - 0.0- 19 0.1 81 - - 0.1 100 Concingencies 0.1 7 U.3 24 0,1 3 U.2 14 0.8 52 - _ 1 100

Total 0.4 9 1.5 30 0.2 4 0.3 5 2.6 52 - - 5.0 0

II. Area B

F:rm Credit 1.1 10 3.7 t4 1.5 14 - 4.7 42 11.0 100 Roads ------3.5 28 - . 9.1 72 12.6 100 Health ------0.4 40 - - 0,7 60 1.1 100 Community Centers ------0.3 34 - - - 0.5 66 0.8 100 Personnel -- - - . - 0.5 100 - - 0.0 0 0.5 100 Vehicles ------0.1 20 - - 0.5 8D 0.6 100 Coordination and Agency Equipment ------0.1 27 - - 0.1 73 0.2 100 Contingencies 0.3 3 1.1 10 0.4 4 2.8 25 - - 6.4 58 IL I0

Total 1.4 4 48 13 I.q 5 7.7 20 _ _ 2I, 5 X7.a lO

Overall Project Cost 4 6.3 15 1 5 8.0 19 2_.6 6 220 51 42.8 100

The project is divided into two sub-projects (area A and area B) financed from four sources: subborrowers (farmers), the Government, the Bank and the Kreditanstalt fur Wiederaufbau (KfW). KfW would be responsible for area A, project costs of which are US$5 million. If the KfW credit covers only foreign exchange, it would be for US$2.6 million (52%). The Government would provide US$2.0 million (39%) and subborrowers US$0.4 million (9%). Project costs for area B amount to US$38 million, net of taxes, and would be met partly by the Bank, US$22 million (58%) covering the foreign exchange component; partly by Government, US$14.4 million (38%); and partly by subborrowers, US$1.4 million (4%). Design and document preparation costs for civil works in area B, amounting to US$1.08 million (Annex 7, Table 14), would be covered by the Bank's Preinvestment Studies Project (587-PA). The overall Government contribution to the project totals US$16.4 million and includes the contributions of CB and BNF to the farm credit component. - 16 -

3.15 The KfW credit would be for 30 years, including 10 years of grace, at an interestrate of 2% per annum. The Bank loan would be made to the Governmentat 8.2% for 17 years, including3.5 years of grace. The Government would bear the foreign exchange risk and make available the proceeds of the loan to the Central Bank for financingthe differentproject components. Assuranceson these points were obtained during negotiations. A subsidiary loan agreementbetween the government,the CB and BNF, acceptableto the Bank, would stipulate the terms and conditionson which the Bank loan proceeds would be passed on to BNF for carrying out the farm credit componentof the project. The executionof the subsidiaryloan agreementwould be a conditionof effectiveness.

F. Procurement

3.16 Goods and services financedwith the proceeds of the proposed loan would be procured as follows: (a) as is usual in agriculturecredit projects, farm inputs (US$11.0million) would be procured through regular commercial channels; (b) contractsfor the constructionof all-weatherroads (US$4.8 million), as well as M4OPC,CNPS, IBR and MAG equipment (US$1.53 million), and vehicles (US$0.31million) would be procured through internationalcompetitive bidding; (c) health and communityfacility construction(US$1.33 million), with furniture and equipment (US$0.36million), would be procured on the basis of local competitivebidding; and (d) civil works for earth roads (US$5.0 million) would be carried out on force account provided MOPC has the technical capabilityto perform the work. Assuranceson the above were obtained during negotiations.

G. Disbursements

3.17 Since commitmentof subloans by BNF would extend over three years, Bank disbursementswould spread over three and a half years (Annex 8). The Bank would disburse 100% of foreign expendituresfor vehicles and equipment, and for consultingservices; 66% for civil works, training and project administration;and 47% for farm credit (Annex 7, Table 13). The price contingency componentwould remain unallocated.

H. Organizationand Management

Administration

3.18 CNPS would coordinatethe operationsof the various agencies involved in the project both at the national and field levels. The performanceof CNPS under the first project, as well as its interministerialcharacter, makes it the most suitable coordinatingagency for the project. CNPS has appointed a Project Coordinatorwho would be stationed in Asuncion and would be responsible - 17 -

for the overall project. A Deputy Coordinator would also be appointed by August 31, 1977 to coordinate and supervise at the field level, reporting directly to the Project Coordinator in Asuncion. During negotiations, assurances were obtained that both the appointment would be made (with duties set out in Annex 7, Appendix 3) and that it would be subject to Bank approval and that CNPS would ensure close cooperation among the participating agencies, require each of them to assign an officer to program with the Project Coordi- nator, and to prepare annual programs for the project and periodic progress reports. Assurances were also obtained that roads, buildings, and equipment included in the project would be adequately maintained after its completion.

Farm Credit

3.19 General. The lending program that would finance on-farm investments and incremental working capital would be managed by BNF (Annex 3), with the cooperation of MAG in the provision of technical assistance to project beneficiaries. MAG extension agents would be responsible for recommending improved production techniques to the farmers, as well as drawing up farm plans with BNF technicians, and for animal health, including supply of vaccine and inoculation of oxen financed in both project areas. Area A would be serviced mainly by existing staff from both the Encarnacion and Hohenau extension offices.

3.20 Lending Operations. MAG extensionists and BNF technicians, working individually or in combination, would assist farmers in preparing subloan applications based on farm plans. The applications would be submitted to BNF for determining creditworthiness and legal requirements and would be approved by BNF and by the Project Coordinator. During implementation of the plans, MAG extensionists and BNF technicians would provide technical assistance to the farmers. MAG and BNF would be assisted in this work by an internationally recruited farm management specialist, financed by UNDP. Collection of subloans would be the responsibility of BNF, which would also collect farmers' land payments on behalf of IBR.

3.21 tAG and BNF would appoint two technicians each to work with subborrowers in area A and 14 technicians each to work with the project beneficiaries in area B (Annex 7), during the course of the project. Initially, the BNF technicians in area B would be responsible to a new office to be opened in Capitan Meza at the southern border of the area in 1977. Later, as the demand for credit expanded, one or two more offices would be established within the area, according to BNF policy. Assurances on the above were obtained during negotiations.

3.22 The farm credit portion of the proceeds of the Bank loan and that of KfW would be onlent by CB to BNF. CB would rediscount 62% of the subloan amount at 7% interest, a rate approximately equivalent to the blended cost of KfW and Bank funds. BNF would repay to CB funds so lent, over a period of 17 years, including a grace period of three years and a half. BNF would finance the remaining portion of subloans (38%) from its own resources which are being substantially strengthened through additional Government equity contributions (para 3.26). Subloans for incremental working capital would - 18 - have maximum maturity of one year and normally would be granted only to farmers implementing an investment plan under the project. Subloans for investments would have a maturity of not more than 10 years, including a maximum of three years' grace. No subloans, or combination thereof, to an individual sub-borrower would exceed US$50,000. Not more than US$1,730,000 of the Bank loan proceeds would be withdrawn for subloans to beneficiaries with more than 20 ha, of which, again, no more than US$1 million would be allocated to farmers with 50 ha or more. Farmers would be required to contribute at least 10% of the project cost and BNF would provide sufficient short-term loans to subborrowers to cover additional working capital requirements. BNF would recognize either a certificate of ownership from IBR or a normal land title as meeting the requirements for an investment subloan. Subloans would yield BNF a minimum of 13% per annum, including interest and commissions. As the consumer price index currently is rising at an annual rate of about 6%, the real cost of the subloans would be roughly 7% per annum. This real cost is above that in most other Latin American countries for loans to the agricultural sector and is the same as that stipulated for the proposed Industrial Credit Project. Assurances that subloans would be made on the terms and conditions set out above were obtained at negotiations.

3.23 BNF. In 1975 and 1976, BNF incurred losses of about US$2.6 million and US$8.5 million respectively, mainly as a result of provisions for un- collectable loans. These losses are expected to decline to about US$0.7 million in 1977. Considering these losses and the increases resulting from Government capital contributions during the year, BNF's equity at the end of 1976 was about US$10.5 million and its total debt/ equity ratio about 12.9:1. Arrears as of December 31, 1976 amounted to approximately 22% of portfolio.

3.24 Recognizing the grave difficulties confronting BNF, the Government installed a new management team at the beginning of 1976 with a firm mandate to transform the bank into a viable institution. In the context of the proposed Industrial Credit Project, the Bank has agreed with BNF on a financial and institutional rehabilitation program which involves, inter alia, a Govern- ment equity contribution (para 3.26), increasing the average yield on loans granted from about 11.2% in 1975 to a minimum of 13% by the end of 1978, decreasing operating costs to 5.4% of portfolio by the end of 1978, and reducing arrears (para. 3.25). 1/ As part of its effort to fulfill these objectives, BNF, with the assistance of a UNDP supported technical assistance program, would establish a programming and budgeting office, improve its accounting system, and formulate a manpower development plan. Assurances were obtained that BNF would take appropriate measures to comply with the above requirements.

3.25 In order to improve its recovery performance and reduce its ex- posure on agricultural credit programs, BNF intends to strengthen its Recovery Office and proposes to transfer to this unit all loans in arrears for more than a given period and to initiate a new procedure for recovering the payments overdue. Arrangements have been made for data collection on overdue

1/ Further details of BNF's financial position and the rehabilitation plan are given in the appraisal report of the proposed Industrial Credit Project. - 19 - loans and for designing control and procedures for a more effective recovery system. Accordingly, BNF adopted on April 5, 1977, by resolution of its Administrative Council, a debt recovery plan for its entire portfolio formulated with assistance from its external auditor and the Bank, including collection goals commensurate with its organizational and manpower capacity. These goals are to reduce BNF arrears to 15% of the total portfolio by December 31, 1978 and to 10% by December 31, 1978. It is a condition of loan effectiveness that BNF shall have adopted a manual for debt collection and that the measures required to carry out the debt recovery plan are being taken.

3.26 To strengthen BNF's financial structure and position, the government has agreed to make capital contributions of about G 2,437 million (US$19.3 million) to be paid in over the 1977-80 period. This would compensate for past substantial decapitalization, likely losses in the immediate future, and support additional internal and external borrowing needed to finance BNF's development lending. The government has already taken appropriate measures to provide G 1,137 million (US$9.0 million). It would now need to make, in addition, an immediate contribution of about G 1,300 million (US$10.3 million). Assurances were, therefore, obtained that prior to loan effectiveness, the Government would make such a contribution. These capital contributions, together with BNF's improved operating efficiency, would permit the reduction of the total debt/equity ratio to 6.6:1 by December 31, 1977. An assurance was also obtained that BNF would maintain a ratio not to exceed 8:1. This assurance, and the one on the debt recovery plan (para. 3.25), modify the targets set under the Small Farmer Credit and Rural Development Project.

3.27 Land Survey and Titling. Under the project, land demarcation and titling would be the responsibility of TBR. IBR's role under the project would be to carry out a land demarcation and titling program of sufficient magnitude to assure a solid base of titled land holders within the project area, who could then qualify for on-farm credit. While the relatively high proportion of land owners (nearly 50%) in area A means that a farm credit program could be initiated soon after project approval, in area B, a land demarcation and titling program would be a prerequisite to successful project implementation. Of the estimated 5,000 farm families in this area, some 4,400 do not have land titles and with the influx of settlers expected under the project, this figure could rise to 7,600 by 1980 (Annex 2). In order to get a headstart on project lending, IBR would begin work in the southern part of area B (south of the Tembey River) during 1977 and 440 titles should be granted in this area by the end of November. Assurances to this effect were obtained during negotiations. Specified annual quotas of titles should be met before spring (September) each year so that farmers have adequate time to prepare farm plans and complete credit requirements with BNF for the following summer cropping season. During the first year of project execution, one IBR field supervisor and six technicians would be assigned to area B and they too would concentrate on land regularization and titling among already established settlers in the area south of the Tembey. As bridge and road construction opens up new lands for settlement north of the river, seven more technicians would be added in year 2 and one in year 3 to work with incoming settlers. - 20 -

Lot boundaries would be clearly indicated before titles were granted in order to avoid subsequent disputes over land ownership. In order to avoid delays in the farmers' access to credit, the IBR would grant "certificates of intent to issue titles" for periods of up to six months to farmers upon payment of 10% of the value of their land purchase. Assurances to this effect were obtained during negotiations. In addition to granting titles to sub-borrowers under the project, the IBR would also strive to grant titles to other settlers currently in area B as well as to other incoming settlers. A proposed schedule for land titling is presented in Annex 2.

Roads

3.28 Existing communications are so difficult in the project area that road construction should begin as soon after loan signing as possible. Due to inadequacies of staffing, DGV is not organized to cope with major construction works by force account and depends heavily on consultants and contractors to carry out specific projects. Therefore, construction of all-weather roads and structures for the project would be undertaken by contractors, while the improvement of existing tracks and the construction of earth roads, to supplement the more permanent road network :would be done under force account, provided DGV has the technical capability to perform the work. Consultants would provide DGV with a complete service for supervision of new construction, and advise and assist the Government with improvement And maintenance programs. Consulting engineers would be recruited early in 1977, under the Preinvestment Studies Project (587-PA), to undertake design and document preparation work. Existing facilities of MOPC at Encarnacion and in or near the project area are considered adequate to handle this work.

Health

3.29 The expansion of the health program would be administered by the Regional Director of MSPBS through the Ministry of Health offices in Encarna- cion, utilizing the new and upgraded centers as they emerge, together with the improved and new health posts. He will be responsible for the civil works and procurement under the project. Staffing for the new centers and posts is provided for under operational costs amounting to US$205,000 (Annex 7, Table 11).

Community Centers

3.30 Two centers would be constructed by the MOPC in the first year of the project. They would contain offices for project implementing staff from BNF, MAG and IBR, under the supervision and direction of the two Project Coordinators appointed by CNPS. At the end of the three-year disbursement period, the centers would be transferred to appropriate Government agencies for use and maintenance.

Evaluation

3.31 A system of project monitoring and evaluation would be established within CNPS by not later than January 1, 1978. As data accumulate in the line agencies and appear in reports by field technicians to their Asuncion offices, - 21 - the information would be screened on a selective basis to develop a monitoring and evaluation system which would be reviewed in association with project supervision by Bank staff.

Accounts and Auditing

3.32 Project accounts would be established by the Central Bank, BNF, CNPS, MAG, MOPC, and MSPBS. BNF's financial accounts, and the project account in BNF, would be audited annually by an external auditor acceptable to the Bank. The project audit would comment on the fulfillment of project conditions and would include field spot checks of subloans. The project accounts of CNPS, MAG, MOPC, and MSPBS would be audited by the Ministry of Finance, as has been agreed for the on-going project. In all cases, the audit reports would describe the procedures followed and the checks undertaken. Certified copies of the audited financial statements and signed copies of the auditors' reports, including that of BNF's financial accounts, would be sent to the Bank within four months of the end of the year. Assurances on the above were obtained at negotiations.

IV. PRODUCTION, MARKETING AND PRICES, AND PRODUCER BENEFITS

Production

4.01 Incremental annual production generated by the project at full development is estimated below (Annex 6):

Production Additional Additional on New Farms Production Production Established on Small Farms on Medium Farms Total under the (20 ha) Receiving (40 ha) Receiving Incremental Project /1 Credit /2 Credit /3 Project Commodity (Area B) (Areas A and B) (Areas A and B) Production Value ------('000 m tons)…------(US$ million)

Cassava 11.7 6.2 -2.9 15.0 0.3 Maize 4.8 -1.2 1.1 4.7 0.3 Beans 0.9 -- 0.3 1.2 0.2 Soybeans 6.1 14.4 4.8 25.3 3.5 Sunflower 1.2 9.9 -0.3 10.8 1.3 Wheat - _ 6.3 6.3 1.0

Totals 24.7 29.3 9.3 63.3 6.6

/1 It is estimated that some 4,000 new settlers would locate in area B as a result of improved infrastructure (mainly roads). /2 Derived from model I; small farmers receive on-farm investment and incremental working capital, covering about 3,000 families. /3 Derived from model II; mechanized farmers receive on-farm investment and incremental working capital, covering about 500 families. - 22 -

The project would result in incremental annual production of 63,300 metric tons of produce, worth US$6.6 million, at present prices, at a cost of about US$15 million (before contingencies) in non-recoverable items such as road and community center construction and equipment; health systems; vehicles and administration. There is no provision under the project to directly recover these investments, but IBR will recover some of the outlay through land sales to settlers. It is expected that land will be sold to farm settlers in project area B at an average price of G 6,000/ha (about US$48/ha), payable in equal annual installments over individually determined repayment periods, which would ordinarily be five years but could range up to 15 years, depending on the capacity of the prospective settler, at 8% interest. Annual export taxes on incremental soybean and sunflower products will amount to about US$0.2 million. However, annual Government expenditure at the end of the disbursement period will increase by US$0.7 million to provide for additional road maintenance, salaries and operating (vehicles, health systems, and administration) costs due to the project (Annex 7).

Marketing and Prices

4.02 In general, the market for agricultural commodities in Paraguay is free of controls and Government constraints. There is little evidence of mono- polistic practices, and prices fluctuate according to natural market forces of supply and demand. Markets in Argentina and Brazil strongly influence those in Paraguay. As a result, domestic prices tend to follow world market trends.

4.03 Farmers in Paraguay sell their produce mainly to intermediary buyers and, to a lesser extent, to cooperatives and Government agencies. In the project areas, produce is sold primarily to merchants or truckers who come to the farm to buy directly from the producers. Most of the production is sold at harvest time as the farmer needs the money and has little or no storage capacity. Occasionally, farmers who have excess storage buy from neighbors. Also, a few local merchants give merchandise in kind for crops such as soybeans, sunflower, beans, peanuts or tung. The merchant and the farmer then arrange for transportation to Encarnacion when they have enough for a load, or sell to higher volume merchants who come to the area.

4.04 Paraguay does not have a commodity purchase program, but Government, nevertheless, establishes minimum prices for sugarcane, wheat, and soybeans delivered to the mill. In some years, the Government has also resorted to export quotas, which, except for beef, are inoperative because of the prevalence of an illegal border trade. M4arketing conditions in project areas A and B differ considerably because of the proximity of area A, and the remoteness of area B, to Encarnacion, the principal trade center for the region. In addition, area A is adjacent to an all-weather road, while the southern end of area B has 60 to 100 km of dirt roads that are impassable in wet weather. As a result, farmgate prices for grains received by producers in the southern part of area B are US$15 to US$17.50/ton lower than in area A. As the middle and northern parts of area B do not have any road access to Encarnacion, the farraersmust send their products by boat, which requires considerable handling and, again, reduced revenues (Annex 9). - 23 -

Producer Benefits

4.05 Producers benefiting from the project at full development fall into two main categories:

(a) about 3,600 farmers would benefit directly from the credit program; and

(b) in addition, many other farmers, including new settlers, in area B would also benefit from the road construction and improvement program.

4.06 A summary of benefits received by recipients of supervised credit is as follows:

20-ha Crop Farm 40-ha Mechanized with 4.8 ha Crop Farm with Partly Cleared, 8 ha Fully Cleared, Remainder Heavy 6 ha with Stumps, Forest Remainder Heavy Forest ------($------(US$)-

Investment costs 3,084 10,006 Net income without project /1 258 1,794 Net income at full development 1,313 3,873 Debt service 513 1,540 Net income after debt service 800 2,333

/1 Poverty income level, US$1,166/farm family, averaging 6.2 members.

4.07 It is estimated that the financial rates of return from the on-farm investments proposed (29% for farm model I, and 19% for farm model II) will be sufficiently attractive to provide an adequate incentive to the settlers under the project to undertake such investments and borrow for the purpose (Annex 6).

V. BENEFITS AND JUSTIFICATION

5.01 The proposed project would be of major benefit to Paraguay as it would increase production of both cash and subsistence crops in a fertile region and open up virgin lands for settlement through the construction and improvement of feeder roads. The total beneficiaries from the project are estimated at about 12,000 families (about 60,000 people) comprising: (a) 3,600 farm families participating in the credit program (para. 4.05); and (b) some 8,400 families in area B (of which 2,400 are non-farm, and 4,000 are new settlers) that would benefit from the new and improved roads and socialI- infrastructure. About 95% of the project beneficiaries currently live, or are expected to settle, in project area B. The average investment cost would be about US$2,200 per family, excluding credit. - 24

5.02 The project would contribute significantly to institution building. It would strengthen BNF as a farm credit institution and improve profitability of its agricultural department; CNPS would be broadened as an interministerial planning and coordinating agency in rural development through its participation in the Bank's First Rural Development Project and the proposed Second Project; and MAG would be able to divert more resources to its experimental, research and extension effort in Itapua Department as farmers press for new technology and improved crop varieties. The region's land tenure situation should also improve as IBR resolves its problems of titling existing settlers as well as the relatively large population of farm "squatters" under the project, with resultant benefits to other farmers in the Department.

Project Risk

5.03 Whether the project timetable will be met depends on the coordination effort of the implementing agencies and settler response. As past experience is encouraging on both counts, there appear to be no particular project risks beyond those ordinarily associated with such a program of land settlement and development. Another difficulty affecting project implementation might arise if BNF's institution building efforts do not fully restore the institution's financial viability. In the past, BNF, despite chronic financial problems, has demonstrated its ability to execute externally financed projects in a satisfactory manner.

Impact on Environment

5.04 The supervised credit component of the project is not expected to have any long-term adverse environmental effects. While land erosion could increase in the initial stage of the agricultural development program, as forest is converted to crops, preventive measures would be taken to keep it to a minimum, such as not removing forest cover from land near water courses nor from sloping land and encouraging farmers to retain woodlots on their farms to supply firewood and construction material and to replace cut trees. Assurances to this effect were obtained at negotiations. Project technicians would oversee this aspect of the project during farm plan preparation, when they would also ensure the proper use of chemicals, such as pesticides or herbicides, in the farming system.

Economic Rate of Return

5.05 The overall economic rate of return for the project, including both areas A and B, is estimated at 14%. The economic rates of return for the investment components, including the proportionate costs of proposed infrastructure in each case, are as follows: small farm credit, 28X area A and 19% area B; medium and large farm credit, 24% area A and 19% area B; overall sub- project, 26% area A and 14% area B. Sensitivity analysis shows that should crop yields be lower than expected or produce prices decrease to cause a 10% decline in benefits, the overall economic rate of return would be 10%. Should investment costs increa e by 10%, the rate would again be reduced to 10% (Annex 10). - 25 -

VI. AGREEMENTS REACHED AND RECOMMENDATION

6.01 During negotiations, assurances were obtained from the Government that:

(a) only farmers who could utilize a tractor on a minimum of 40 ha a year would be eligible to purchase such equipment (para 3.05);

(b) health facilities would be maintained after the three-year disbursement period of the project (para 3.07);

(c) an internationally recruited farm management adviser would be appointed for the project by August 31, 1977, and MAG, BNF and IBR would appoint 14 technicians each during loan disbursement and these additional positions, except that of the farm management adviser, would be absorbed by the Government after the disbursement period of the project (para 3.11);

(d) Government would bear the foreign exchange risk and make available the loan proceeds to the Central Bank for financing the different project components (para 3.15);

(e) procurement would be in accordance with the provisions of paragraph 3.16;

(f) a Deputy Project Coordinator would be appointed, not later than August 31, 1977 with Bank approval and that project roads, buildings, and equipment would be adequately maintained after the project's completion (para 3.18);

(g) BNF would establish a new office in Capitan Meza, area B, at the project's outset and open one or two more offices in the area as work expands, according to BNF policy (para 3.21);

(h) BNF would make subloans on the terms and conditions set out in paragraph 3.22;

(i) BNF would implement the agreed rehabilitation plan, and maintain a debt-equity ratio not to exceed 8:1, as specified in paragraphs 3.24 and 3.26;

(j) IBR would grant 440 titles to farmers in area B by November 30, 1977 (para 3.27);

(k) IBR would grant "certificates of intent to issue titles" for periods of up to six months to farmers upon payment of 10% of the value of their land purchase (para 3.27); - 26 -

(1) project accounts would be established by CB, BNF, CNPS, MAG, MOPC, and MSPBS at the project's outset, and the accounts would be audited according to the provisions of paragraph 3.32; and

(m) project technicians would ensure that adverse environmental effects would be avoided by the application of sound management practices (para 5.04).

6.02 Conditions of loan effectiveness are that:

(a) A subsidiary loan agreement has been entered into by government with the CB and BNF (para 3.15);

(b) BNF shall have adopted a manual for debt collection and that the measures required to carry out the debt recovery plan are being taken (para 3.25); and

6.03 With the above conditions and assurances, the proposed project is suitable for a Bank loan of US$22 million to Paraguay for a period of 17 years, including 3.5 years of grace.

April 11, 1977 ANNEX 1 Page 1

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Agricultural Background

A. General

The Role of Agriculture in the Economy

1. Agricultural production, including livestock and forestry, consti- tutes the most important activity of the Paraguayan economy. In 1975 it accounted for more than a third (34.1%) of the Gross Domestic Product (GDP) (1972 prices) and provided employment for about 50% of the labor force. It was also the main source of foreign exchange earnings, accounting for about US$170.9 million, or 97% of export value (including wood and processed products) in 1975 (Table 1). About two-thirds of these exports consist of semiprocessed agricultural commodities.

2. From 1969 to 1974, the agriculture sector grew at 6% per annum but during 1975, the rate dropped to 3.9% due to unfavorable weather conditions and lower prices for some commodities. Following is a summary of the growth rates attained by the sector and each subsector:

1964-74 1964-69 1969-74 1975

Crops 4.8 1.9 7.5 3.1 Livestock 2.8 1.1 4.5 3.7 Forestry 3.5 (-) 4.6 10.4 Fisheries and hunting 3.2 13.5 0.8 - Agricultural sector 3.9 1.3 6.0 3.9

Source: Central Bank Statistical Bulletins 1964-1975.

3. Crop production accounts for the major portion of GDP in agriculture (53% in 1975). During the last five years, the expanding share of crop production, mainly soybean production, has been accompanied by a decline in the share of livestock (from 38% in 1969 to 35% in 1975) as the better lands are being shifted from livestock to crop production. This trend should continue in the future, although, in absolute terms, both activities can be expected to increase significantly. ANNEX 1 Page 2

Climate and Soils

4. Paraguay has no well-defined topgraphic barriers and is thus open to currents of cold air from the south and warm air from the north. Its climate, described as continental subtropical, is characterized by sharp contrasts in temperatures and precipitation. Annual temperatures may fluctuate from 400C in the summer to around 0°C in the winter. Mean annual temperature varies from 21 C on the southern border to about 260C in the north. Annual rainfall varies from 1,700 mm near the Parana River in the east to 500 mm near the Bolivian border. The country can be divided into two major regions: the Chaco and Eastern. The Chaco region, a land area of 24.7 million ha west of the Paraguay River, is virtually flat, sloping southward at a grade of less than 1%. Rainfall, averaging some 750 mm annually, is seasonally variable, thus making the region subject to periodic drought. Occasional flooding also occurs, however, as the Chaco's rivers swell with melting snow from the Andean highlands. Fresh water supplies are limited and saline ground- water limits the use of its relatively fertile land. Eastern Paraguay, comprising about 40% (16 million ha) of the country, is a region of plains, broad valleys and low plateaus. Its local relief seldom exceeds 100 feet, and the highest peak rises to 2,300 feet above sea level. Rainfall averages 1,500 mm annually and is generally well distributed throughout the year. The most fertile soils are concentrated in the Itapua and Alto Parana Department of the Eastern region. The Itapua subregion embraces an area of about 1.5 million ha, of which about two-thirds are suitable for intensive land use. The Alto Parana subregion has an area of about 5.1 million ha. Soils there are considered among the best in the country, but it is sparsely populated and not yet developed.

Land Use

5. About a fifth (8 million ha) of Paraguay's land area is suitable for crop production and surveys indicate that the area presently under cultivation with annual and tree crops could be expanded eightfold, provided certain improvements are made. Much of the land now classified as forest (24 million ha) retains little commercially exploitable high forest, while the larger part--mostly in the Chaco--contains mainly scrub forest of insignificant commercial value. An additional 5 million ha could be brought into production by clearing bush and planting pastures for livestock production. The following table gives details of land use: ANNEX 1 Page 3

1/ 2/ Actual (1972) Potential '000 ha % '000 ha %

Crops 952 2.32 8,000 19.7 Pasture land 14,849 36.53 14,050 34.5 Forest 23,929 58.85 18,625 45.8

Total 40,675 100.00 40,675 100.0

1/ Agricultural Survey, Government of Paraguay. 2/ IBRD Agricultural Sector Report Estimates, 1976.

Land Distribution and Tenure

6. More equitable distribution of productive land in Paraguay has been achieved primarily through colonization of Government-owned land, and in some cases, of privately owned land. The Institute of Rural Welfare (IBR) has concentrated on settling the largest possible number of people on hitherto unutilized state lands. This approach, however, has caused the settlers considerable hardships as the settlement of large numbers of new farmers in relatively inaccessible areas without sufficient preparation, financial support or technical assistance has led to the proliferation of subsistence farming. In the 12 years since its inception, IBR has colonized three times more land than had been settled in the previous half century and its programs have benefited about 3,000 families per year (Table 2). On the basis of an average family size of six persons, it is estimated that over 21% of all Paraguayans now live in official Government colonies. This effort has helped ease the pressure on land even though distribution of land holdings is still skewed, as shown below. While improvements could be made in land apportion- ments in the private sector through expropriation, particularly in Eastern Paraguay, analysis reveals that most of the large holdings are situated in the Chaco region and in the less productive or undeveloped area of Eastern Paraguay. These holdings are devoted to extensive livestock ranching or forestry and do not necessarily represent a misallocation of land resources under present conditions. ANNEX I Page 4

1961 1970 Farm Size No. of Units % No. of Units %

Less than 1 ha 7,937 5 11,887 7 1 - 4.9 66,622 41 56,441 35 5 - 9.9 37,735 24 31,565 19 10 - 19.9/20.9 26,451 16 40,080 25 21 - 50.9 - - 21,708 8 20 - 49.9 13,700 9 - - 50 - 99.9 3,053 2 2,642 2 More than 100 ha 5,279 3 6,886 /1 4

Total 160.777 100.0 162,211 /2 100.0

/1 of which 2,370 are in the Chaco (mostly ranches). /2 of which 158,387 are in Eastern Paraguay, and 3,824 in the Chaco.

Source: Technical Planning Secretariat: Government of Paraguay.

7. Some 65% of all farmers owned their land in 1971, as compared with 54% 10 years earlier. The following table indicates the pattern of land tenure by farm size category in 1971.

Farm Size Owners Squatters Renters ------%…------

Less than 1 ha 54 33 13 1 to 10 ha 52 36 12 10 to 50 ha 61 32 7 50 to 600 ha 80 15 5 600 ha and over 93 3 4

Source: Institute of Rural Welfare, Census, Asuncion.

B. Agricultural Production

Crops

8. Crop production is presently concentrated in the Central subregion. This area accounts for about half of the total output of the most important crops: cassava, soybean, corn, cotton, tobacco, oranges, sugarcane, castor ANNEX 1 Page 5 seed, and coffee. Other important producing subregions are Itapua, Concepcion- San Pedro, and Alto Parana, which, together, account for about 40% of total crop production (Tables 2 and 3). Development projects programmed for the Concepcion-San Pedro region, such as improvement of the Coronel-Oviedo-Ybu Yau road and establishment of a sugar mill, are likely to have an important impact on growth prospects there, while production in the Chaco region is not likely to increase significantly during the next five years as its potential lies mainly in extensive livestock production, at least, during the medium term.

Farming Systems

9. There are three main systems of farming in Paraguay, recognizable by the type of farm power involved: (a) subsistence or traditional farming, which depends solely on manual family labor; (b) the more progressive traditional, or small-scale commercial farming, which uses draft animals; and (c) commercial farming, primarily found in and around the Japanese, German and Mennonite settlements, where tractors are the predominant source of farm power. Current crop production from these farming systems, in terms of hectares harvested annually, are as follows:

1975 ('000 ha)

1. Maize 222.6 2. Soybean 150.2 3. Cotton 100.0 4. Cassava 96.5 5. Beans 63.4 6. Wheat 25.2

Total 657.9

10. The subsistence, or small traditional farms using only manual labor, derive over half their production from the three subsistence crops--maize, cassava and beans. The farms with draft animals, because they have more hectares in cash crops, plant about 30% of their farm in the three subsistence crops. The tractor-powered farms produce little or no subsistence crops, concentrating on double cropping of wheat with soybean, or single cropping cotton. In and around the larger towns, vegetables generate a large part of the small cultivators' cash income. A new crop to Paraguay is sunflower, which shows a marked increase in the Department of Itapua because it can be double cropped with soybean, producing income in January before other crops are harvested.

Inputs

11. The use of fertilizers and insecticides remains below recommended levels but there has been a steady increase over recent years. Chemical fertilizer is used by less than 10% of Paraguayan farmers, partly because of ANNEX 1 Page 6 the high cost of importing it into the country. Fertilizer imports increased from an annual average of 1,100 m tons during 1963-67, to 7,080 m tons during 1970-74. Since then, fertilizer use has declined due to high prices. Fertil- izer is imported in bags (mostly from Brazil) and, until recently was distributed through Government channels. The Government is now phasing out its role as input distributor and it is hoped that increased competition may lower retail prices as the private sector becomes more active. The main fertilizers are phosphates, used principally on pasture, and nitrogen fertilizers, used mainly on crops.

12. Production and importation of seed and planting materials is currently the responsibility of the Ministry of Agriculture and Livestock (UAG), and, while there have been no *Jor shortages of these inputs, quality control problems have arisen. The Nat'tpnal Seed Service, currently dealing with maize, soya, cotton and wheat, is also responsible for the importation and marketing of recommended vegetabl'e-and potato varieties. Its staff is limited, consisting of about two professionals and three technicians. Five inspectors are responsible for advising on all aspects of production.

The Role of Small Farms in Crop Production

13. Small farmers in Paraguay produce a wide array of crops and account for over two-thirds of the country's production of cotton, peas, sweet potatoes, cassava, peanuts, soybeans and tobacco. They also produce about half of the annual production of sugarcane, onions, lima beans, corn and potatoes. Three of the major Government commodity programs involve soybeans, cotton, and tobacco, which are the crops that offer the greatest potential for improving small farmers' income. The National Soya Program was designed to increase the area planted by 100% during a three-year period (from 73,000 ha in 1972 to 146,000 ha in 1974) and targets were nearly met in 1973, when the area harvested reached 140,000 ha. Considerable success has also been achieved in implementing the cotton and tobacco programs. The area planted with cotton more than doubled over a three-year period (33,000 in 1971 to 81,000 ha in 1974), while the area planted with tobacco increased by 50% over the same period. These three crops accounted for nearly 29% of commodity export receipts in 1975, and it can be expected that they will continue to play a key role in the future.

Main Export Crops

14. While soybean production has expanded rapidly during the last few years, further growth will be closely linked to increases in drying capacity. Drying capacity is presently insufficient and large losses occur at harvest time in years when the humidity is high. Soybean prices and exports are regulated by MAG, which encourages local processing and sets minimum prices. These prices are not effective, however, because producer prices are set by market forces in the absence of a Government purchasing program, and because of illegal trade across the country's borders. ANNEX 1 Page 7

15. Cotton production in Paraguay is characterized by low yields and excess processing capacity. Production consists mostly of short fiber varieties grown by small farmers in the Departments of Paraguari, Caaguazu, Concepcion and Missiones. At present, part of the total production is processed by 11 cotton gins with a total capacity of 300,000 tons, about 200,000 tons in excess of the current level of production. There is also a modern multi-purpose textile plant in Pilar, considered among the best in the Latin American Free Trade Association. This plant, however, also operates below capacity. Cotton is exported as lint and marketed in Uruguay, the UK, France, Federal Republic of Germany, and Japan.

16. Although tobacco production has experienced a favorable growth rate over recent years (12% in 1973/74), further expansion is dependent on increased external demand, which, in turn, will depend on Paraguay's ability to improve quality, particularly curing and classification methods. Investments in curing facilities at the farm level appear to be absolutely essential.

17. Sugar could become one of Paraguay's major export products. Foreign investors are considering two modern sugar mills north of Asuncion, which would double the current level of production. At present, most of Paraguay s sugarcane is grown in the Departments of Guaira, Presidente Hayes and Paraguari. Mlost of the existing mills are obsolete and their production costs are high. In addition, production is fragmented and farm units are small.

Main Crops for Domestic Consumption

18. Cassava, one of the main domestic crops, is grown as a staple all over the country and has good export prospects as chips and flour. Production was close to 900,000 m tons in 1975.

19. Corn is the second most important domestic crop after cassava. Although most of the production is consumed internally, some is exported to Brazil and Argentina. Output of grain reached 338,000 m tons in 1975.

20. Paraguay is self-sufficient in rice production and some exports may be possible to neighboring countries. In 1975, about 50,000 tons were produced, of which over 80% was grown as irrigated rice and the remainder, dryland rice. Most of the rice produced is medium-grain but farmers are experi- menting with long-grain varieties. Dryland rice can be grown as a summer crop in rotation with wheat.

21. Sorghum production for domestic consumption, mainly in the livestock subsector, could be increased significantly. Sorghum is drought-resistant and grows well in areas where summer rainfall is limited. It also has the advan- tage of being less demanding in terms of soil fertility. The Upper Chaco subregion appears to have the best conditions for increasing the production of this crop. At present, only 6,000 tons are being produced. ANNEX 1 Page 8

22. Paraguay continues to be dependent on imported wheat despite Govern- ment efforts to boost production. In 1967, the Government formulated a wheat program that called for a rapid expansion in the area planted by introducing large-scale mechanized farming methods, modern inputs, and basic on-farm infrastructure. The main vehicle was a credit program administered by the Agricultural Department of the National Development Bank (BNF) and funded by the United States Agency for International Development (USAID) (19% of the cost), suppliers' credit (19%) and local resources, particularly those from the Central Bank (about 40%) and BNF (22%). The program was initially successful but problems soon developed. BNF's appraisal of sub-loan applications was minimal and wheat often was planted on unsuitable land. There was considerable over-investment in machinery and, reportedly, misapplication of resources. Bad weather in 1967 and 1969 caused serious financial losses to growers and, in 1972, there were serious losses from a blight infection. The net result of the accumulated losses was an overall financial crisis for wheat growers and BNF. The latter failed to properly assess the viability of each borrower and as a result granted loans with unreasonably short repayment periods and with inadequate collateral. This, in part, reflected the structure of the original program's financial plan, which was based on relatively short-term loans. While by itself the program was not successful, it encouraged the planting of soybeans as a summer rotation crop to spread machinery costs and reduce the risk associated with monoculture. Soybean production was more successful than wheat production and has increased rapidly since. Present limitations are the unavailability of seed from high-yielding varieties adapted to Paraguay's environment and the sparse use of fertilizer and lime.

Livestock Production

23. Paraguay's ecology, its ample supply of land, and the relatively favorable long-term market prospects for beef indicate that the livestock subsector will continue to play an important role in the nation's economy. In 1975, livestock production accounted for about 12.2% of GDP and about one-fifth of Paraguay's exports. It employed about 5.5% of the labor force and utilized about 37% of the country's land area. In addition, it accounted for about 82% of the country's capital stock in the agricultural sector. Grazing land for cattle production comprises an area of about 14.3 million ha, of which 40% is in the Eastern region, and 60% in the Chaco. With a cattle population of 2.9 million head in the Eastern region and 2.0 million head in the Chaco, the average density in each region is estimated to be about 2 ha per head and 4.3 ha per head, respectively. The grazing density for the country as a whole is estimated at 2.9 ha per head. Potentially, this could be reduced to 2 ha per head, thus permitting a 45% increase in the national herd without danger of overgrazing existing pastures. The adoption of improved practices such as fencing, pasture improvement, pasture rotation, supplemental winter feeding and breeding is an important requirement for increasing the size of the herd. The Bank Group has financed four livestock projects in Paraguay since 1963. In the first two projects, emphasis was laid on financing basic farm infrastructure; pasture improvement was emphasized in the ANNEX 1 Page 9 third project. The fourth project, currently being implemented, piaces greater emphasis on small farmers and cooperatives and on improvement of breeding stock.

Forestry

24. Continued commercial exploitation of Paraguay's forest is feasible, particularly in the area east of Coronel Oviedo, classified as high forest (Bosques Altos). Paraguay has about 21.1 million ha (54% of the total land area) of forest classified as temperature-warm-humid located in the Eastern region between the Paraguay and Parana Rivers. An inventory of Paraguay's forest resources carried out by FAO between 1967 and 1972 showed that more than 50% of the forest area in Paraguay contains commercially valuable timber. In the area surveyed, there were more than 105 million m of wood with some commercial value. Most of these areas were privately owned (absut 80%). The FAO survey also showed that the f rest area contains about 16 m per ha (in log equivalent) and about 75 young trees per ha of exportable types of wood.

25. The survey pointed out the need for improving the management of the country's forest resources, which are not being efficiently exploited. The annual rate of extraction of valuable species exceeds the process of natural growth and regeneration and the existence of a large number of small3 operations contributes to the accelerated rate of extraction (about 1.4 m log equivalent) per year. However, the Government is initiating studies to improve the nation's forestry industries. There will be scope for forestry investment in Itapua Department, similar to that occurring on the Argentine side of the Parana River.

C. Marketing and Prices

Marketing

26. Prices for agricultural commodities in Paraguay are determined largely by competitive bidding. The market is influenced by supply and demand conditions from other countries, particularly Argentina and Brazil. As a result, domestic prices follow closely the movements of world market prices.

27. Paraguay does not have a commodity purchase program, but the Govern- ment establishes minimum prices for sugarcane, wheat, and soybeans delivered to the mill. In the case of the first two, the minimum prices are enforced, as it is relatively easy to control the price at the mills, but this is not the case for soybeans. In some years, the Government has also resorted to ANNEX 1 Page 10 export quotas, mainly for soybeans and cattle. Except for beef, however, these are inoperative because of the prevalence of an illegal border trade.

28. Farmers in Paraguay sell their produce mainly to intermediary buyers and, to a lesser extent, to cooperatives and Government agencies. Intermediary buyers, usually merchants, farmers or truckers, purchase the farm products within their localities and frequently use secondary agents to help them contact all producers in their area. They own available storage facilities, which are generally very rudimentary, and use their own resources for financing their operations. They are not fully engaged in marketing and depend on other activities for their livelihood. The main problems limiting efficiency are lack of storage capacity to meet peak requirements; low level of technology (a major cause of losses at the storage stage); and lack of sufficient resources to finance construction, transport equipment, and higher volume operations.

29. The Government's old Department of Marketing in MAG has been restructured into a Division of Marketing and Agricultural Economics, consisting of two units--Operations and Engineering, and Standards and Marketing--and staff has been increased from eight in 1971 to 39 and there are nine temporary employees working as grain receivers or inspectors. The Inter-American Devel- opment Bank (IDB) has assisted the Government through its Agricultural Devel- opment Program, an ambitious plan for investments in marketing infrastructure, particularly silos.

Prices

30. Since 1968, agricultural prices have increased steadily and stimulated output. During the 1971-74 period, the input/output price relationship turned against agriculture (total input costs rose faster than prices), but a subsequent price increase stimulated output, particularly that of export products. Since labor accounted for about 60% of the increase in input costs, farmers that depended on hired labor changed their operations to less labor- intensive practices. For example, there was a rapid expansion in soybean production, a crop with relatively low labor requirements (soybeans utilize about 34 man/days per hectare, compared with 74 for cotton, 92 for rice, and 139 for tobacco). The rapid increase in soybean prices and its lower manpower requirements allowed most farmers to improve their overall incomes. The table below summarizes the price movements of selected annual crops and beef (liveweight basis) from 1968-1974. ANNEX 1 Page 11

Crop 1968 1969 1970 1971 1972 1973 1974 ------'000 Guaranies per ton…

Garlic 177.0 179.2 166.7 129.9 142.9 275.0 57.2 Cotton 14.9 14.8 13.8 17.6 21.0 24.0 38.3 Rice 9.7 9.0 6.9 13.1 13.2 17.0 22.9 Corn 4.1 4.5 7.1 8.0 6.5 9.0 9.8 Peanuts 12.7 12.9 12.6 13.0 15.0 18.0 23.1 Cassava 2.9 3.0 3.0 3.0 3.5 4.0 Beans 10.8 11.9 12.4 15.7 14.0 18.0 Soybeans 8.0 7.5 7.5 10.0 11.0 23.5 20.8 Tobacco 24.3 24.3 27.7 31.8 28.0 50.0 40.8 Wheat 10.7 10.7 9.6 10.1 10.0 14.0 26.3

Beef (liveweight) 18.5 18.8 19.1 25.6 37.7 47.3 50.5

Source: Technical Secretariat of Planning and Ministry of Agriculture and Livestock, Government of Paraguay.

D. Institutional Services

Rural Welfare

31. IBR is an autonomous agency, established under Law 852 of 1963 to determine and execute policy on land reform, land settlement and rural welfare under the provisions of the Agrarian Statute and related legislation. The President and five-member counsel of IBR are given broad authority in dealing with these matters, even though IBR's official channel of communication is through MAG. Since its inception, the IBR has established 250 colonies of over 40,000 families.

32. IBR's organization is highly centralized, with nearly 80% of its 545 permanent staff located in Asuncion. Field staff are hampered by lack of clearly defined work assignments and proper technical and administrative support. While most field staff are agronomists by training, their assignments generally consist of debt collection, farmer group organization, and marketing assistance projects. Lack of vehicles and proper vehicle maintenance also hinders their work.

33. Concentrating mainly on state lands entrusted to its control, IBR's principal activities have been in land settlement. Settlers are chosen from the more densely settled minifundia areas and from expatriate Paraguayans. ANNEX 1 Page 12

Colonies may be for livestock, agriculture/forestry or agricultural production, but the majority are located in the Eastern region, where the average size of an individual farmer plot is 20 ha (Annex 2).

Technical Assistance

34. Several Government institutions provide technical assistance to farmers: MAG through its various commodity divisions, the Extension Service and the Small Farmer Credit Agency (CAH); IBR; and BNF. The main responsibility for providing technical assistance to farmers at the fteld level, however, rests with the Agriculture Extension Service (SEAG). SEAG has 23 field offices distributed throughout the country, and a technical staff of 79 which provide a countrywide coverage of about one officer per 2,500 farmers. SEAG concentrates its work on promoting export crop development, particularly tobacco and cotton. Some demonstration plots have been established on farmers' land and have proved effective, despite severe staff limitations.

35. The major factors affecting SEAG's efficiency are the low salary level and the low level of financial resources available for operational activities and for equipment. SEAG's personnel is relatively well qualified and most have had some training abroad. Also, a program financed by the UNDP has strengthened SEAG's training capability.

Research

36. Agricultural research in Paraguay is carried out by both MAG and the National University. The professional staff of these agencies have been assisted by various foreign experts over the past 10 years. Work programs are crop-oriented, primarily in terms of technical factors, such as variety selection, correct soil preparation, correct planting distances, use of improved seed, and use of fertilizer. However, work has not been accompanied by a thorough economic and financial assessment of the recommended farming systems' financial viability.

37. USAID plans to assist MAG upgrade its research programs which will benefit small farmers. The project, which will be in operation during the period 1978-82, has the following objectives: (a) expansion of agricultural research programs oriented toward the needs of small farmers; (b) establishment of a permanent research training program within MAG: (c) expansion of the Ministry's Planning Office to deal with economic analysis and planning of rural development programs; and (d) creation of a funding mechanism to provide the National Seed Service (SENASE) with resources to secure, process and distribute improved seed varieties.

Agricultura1 Credit

38. Institutional credit to the agricultural sector in Paraguay is provided by -he banking system, controlled by the Central Bank (GB) through ANNEX 1 Page 13

BNF and 13 commercial banks. In addition, CB provides funds for on-lending through the Livestock Fund (FG), using IDA and IBRD funds. FG is now the principal source of long-term credit to the livestock sub-sector, holding by the end of 1975 a portfolio of G 3,619 million (US$28.7 million). A number of smaller non-bank credit institutions, in particular, the state-owned Small Farmer Credit Agency (CAH) and privately owned Paraguayan Development Company (COMDESA), are subject to certain provisions of the General Banking Law and to the control of CB. A reportedly substantial but unquantifiable amount of non-institutional credit is provided by agricultural produce merchants.

39. BNF is by far the most important source of credit to the agricultural sector. In 1975, it granted loans to the crop sub-sector totalling G 2,459 million (US$79.5 million), which represented 61% of total bank credit extended to the sub-sector during the year, compared with 90% in 1970. BNF's portfolio of loans outstanding to the crop sub-sector rose from G 3,518 million (US$27.9 million) at the end of 1970 to G 7,402 million (US$58.7 million) at the end of 1975. (Annex 3).

40. The commercial banks, which are mostly affiliates of foreign banks, have been historically reluctant to finance the crop sub-sector because of what are considered to be unduly high risks. However, in recent years, they have increased their lending to crop farmers substantially, primarily as short-term credit on a highly selective basis, emphasizing large farmers and machinery. During 1975, agriculture took 4% of the commercial banks' total lending, while the year-end balance of loans outstanding to the crop sub-sector, amounting to G 1,256 million (US$10.0 million), was 7.6% of the banks' total loan portfolio.

41. CAH is a small farmer credit agency within IAG which provides short- term (six to eight months) subsidized credit to members of newly formed farmers' associations at an interest rate of 9% per annum, plus a 2% commission fee. Funds have come largely from USAID at concessional interest rates. Loan disbursements increased from G 9.9 million (US$78,000) in 1971/72 to G 83.3 million (US$661,000) in 1975/76. MAG is interested in CAH participating in the project, possibly as a sub-borrower from BNF, and as an on-lending agency to groups of small farmers in the project area.

42. COMDESA is a private development bank which finances investments in development-oriented projects, including, where necessary, feasibility studies and technical assistance. During the six years of its existence, COMDESA had approved financing for 272 projects, totalling G 1,389 million (US$11.0 million), of which 2% was for crops, 31% for livestock, and 34% for agroindustries. About 70% of COMDESA loans are long-term (five to 10 years) maturity, while the remainder are for medium term (two to five years). The interest rate is about 12% per annum with a 5% one-time commission. ANNEX 1 Page 14

43. Although no firm data are available, it is estimated that non- institutional credit provided by shopkeepers, input suppliers, and produce merchants reaches some 17% of farmers, while institutional credit is granted to only about 7%. Interest rates on non-institutional credit generally are very high and often are hidden in the purchase of output at sub-market prices.

Cooperatives and Farmer Associations

44. The cooperative movement has gained momentum in Paraguay, its development promoted by foreign immigrants. Some successful cooperatives have been established by Mennonite colonies in the Chaco, while others have been established by German and Japanese settlers in Itapua and the central region. Recently, the movement has spread to small farmers through the Paraguayan Union of Cooperatives (UNIPACO), a marketing organization that is expanding its activities with USAID assistance. Its network of local cooperatives presently covers 21 locations in Eastern Paraguay. Mutual help among farmers is a common practice in Paraguay, and many such groups (mingas) exist in the Itapua area. The experience of CAH indicates that low-income farmers will form associations initially but will drop out unless a complete package of services (technology, inputs, technical assistance, credit, and marketing) is provided as an inducement for their continuing participation.

45. Since 1972, the Government's National Council for Social Progress (CNPS) has been responsible for planning and supervising the execution of integrated rural development programs in 23 public colonies in Paraguay's Northeastern region, and for coordination of the various institutions involved in the IDA-assisted First Rural Development Project. CNPS was established by Presidential decree in 1967 as an interministerial organization in which IBR and BNF are also represented.

E. Project-related Infrastructure

46. The Highways Authority (DGV) within the Ministry of Public Works and Communication (MOPC) is responsible for planning, constructing and maintaining all national and departmental roads in the country (about 80% of the total network). Responsibility for construction and maintenance of feeder roads is entrusted to two other departments within MOPC (Road Authority and Mineral Authority). Additionally, the Ministry of Defense constructs and maintains about 1,200 km of roads in the Chaco region through its Civil Action program. Some minor road works are also carried out by IBR and by the Paraguayan-Brazilian Commission. ANNEX 1 Page 15

47. Road transport is the main mode for domestic freight and passengers, particularly since the railway system has steadily declined over the past 20 years. A domestic air service network complements surface transport. River transport is unimportant domestically, except for timber rafting and some internal river shipping on the Paraguay and Parana Rivers, but it does provide Paraguay with her vital link to the sea. About 85% of all foreign trade is carried by this mode. The river route, however, is facing competition following construction in the early 1960s of a bridge across the Parana River between Paraguay and Brazil, and the recent completion of a paved road from the Paraguayan border through Brazil to the Atlantic port of Paranagua; this bridge and road, together, provide an alternative link to the sea.

48. The highway network in Paraguay totals about 6,500 km, of which more than three-quarters are earth. Road development over the past 20 years has been concentrated on paving primary roads and on extending the system. The network as a whole provides acceptable transport to most populated areas of the country. However, some of the existing paved and gravel roads need to be improved to meet growing traffic volumes and to facilitate the development of new agricultural areas. For administrative purposes, the highway system is classified into national or primary highways, departmental or secondary highways, and local or feeder roads. There are, in addition, other special categories such as oil development roads, and logging tracks.

Education

49. Education in Paraguay has been improving rapidly during recent years. However, high dropout and repetition rates are reflected in nationwide completion rates of only 26% at the primary level, and 41% at the secondary level. These figures imply that roughly 40% of annual operating expenditures is spent on children who fail to complete their studies within the expected period.

50. Primary school enrollment has increased at the rate of 2.8% per year over the past 10 years, which is slightly higher than the 2.6% rate of population growth. In 1974, about 82% (360,000) of the seven-to-12-year-old- age group was enrolled in primary schools. The opportunity for a full six grade primary education in rural areas is limited. About 75% of the students remain in the first three grades; only a few (36%) entering grade 1 reach grade 4 (the minimum literacy level); and only 17 out of 100 complete grade 6. There is no lack of motivation to attend school on the part of either parents or children, but there is a lack of rural schools which offer complete primary education, relevant curriculum, and basic teaching and learning materials. Moreover, rural teachers need upgrading. Although the majority of teachers (70%) have teaching certificates, they have not been trained to work in a rural environment. These teachers have proved to be inadequate when it comes to dealing with bright rural children who have broad experience in agriculture but limited familiarity with urban life. Rural teachers are also largely unsupervised and only by chance are they informed of new educational trends. ANNEX 1 Page 16

51. Secondary school enrollment has increased by 8.3% per year during the past 10 years but the increase has benefitted mainly urban children. In 1974 total secondary enrollment was about 72,000, or 19% of the 13-to-18-year- old-age group, and some 46% of these live in Asuncion. The Bank Group has made two loans to the education sector and a third loan is under consideration. The first education project (Credit No. 347-PA) was designed to assist the Government in developing a more effective system of secondary and vocational education, while the second (Loan No. 1252-PA) aimed at meeting Paraguay's need for nonformal vocational training. A proposed third education project, partially financed by the Bank, would help develop the Govern- ment's nuclear school system, which consists of well-equipped community centers surrounded by associated schools, innovative curriculum, upgrading of teachers, provision of teaching materials and the establishment of a more effective, decentralized system of supervision. At the secondary level, the structure and content of education is also being reformed through the first education project. The multilateral schools concept is being introduced to offer practical options at the lower secondary level and technical courses at the higher level.

Health

52. The Ministry of Health and Social Welfare has prepared a National Health Plan for the next five years (1976-1980) in accordance with the objectives of the National Development Policy for 1976-80. The general objectives of the Plan are: (a) to increase life expectancy by three or four years; (b) to extend health services coverage, particularly in rural areas; and (c) to contribute to national economic and social development by incorporating the Health Plan into the National Development Plan.

53. These health priorities related to the rural area have been the basis for launching a Rural Health Program to provide personal and environmental health services to localities up to 2,000 population and to scattered rural inhabitants. The Rural Health Program involves activities in (a) communicable disease control, (b) maternal and child health care, (c) first aid and patient referrals, and (d) basic environmental sanitation promotion. However, little progress has been made in developing an effective methodology for program implementation.

54. As for health manpower plans for rural areas, there is a strong emphasis in training "auxiliary rural obstetricians" by the National Train- ing Center for Auxiliary Nurses (CENFAE). This Center will devote all its resources to training personnel exclusively for rural areas during the five- year plan. On the other hand, there is a proposed Government bill providing compulsory rural service by graduating health professionals and para- professionals. There is a good chance that this bill will be passed during 1977/78. ANNEX 1 Page 17

55. The improvement of rural health infrastructure has been included as part of the five-year Rural Health Program, with a total of 112 new rural health posts and 20 new health centers proposed. Finance for improving the rural health infrastructure is being sought from: (a) internal sources, which have not been clearly defined in terms of amount, sectoral participation or community participation; and (b) from the IDB and the Bank, through loans for construction, remodelling, and equipping health facilities.

F. The Role of International Agencies

56. Paraguay has made extensive use of the international credit agencies in its agricultural development programs. The principal lender has been the Bank Group, which has made 18 loans to Paraguay, including 10 from IBRD and eight IDA credits, amounting to US$103.8 million (US$58.3 million, IBRD, US$45.5 million, IDA) in support of livestock and rural development (50%), transport (30%), education (10%), and preinvestment studies (4%).

57. IDB made a loan of US$14.8 million to Paraguay in 1971 for a four- part rural development project. The loan, now 88% disbursed, includes finance for agricultural credit, technical assistance, marketing and silos, and rural education. A second-stage silo project has been prepared and may be approved early in 1977. Also, a second-stage loan of US$5.3 million to the National Service for the Prevention of Foot and Mouth Disease (SENALFA) was recently signed. This project will help to expand the country's foot and mouth disease control program on a national scale. Further loans to SENALFA are expected in the future and will include improvement and expansion of programs to control rabies and brucellosis. IDB is currently providing technical assistance (US$480,000) to CAH for administrative reorganization and also for preparation of projects in agricultural credit, reforestation, and land clearing. Two technical assistance grants have also been made to Paraguay for consolidation of public colonies (US$256,000) and improvement of rural health services (US$135,000) in Alta Parana. A third technical assistance grant of US$461,000 is being considered for this area to study feasibility of rural road improvement. Technical assistance is also being provided to assist in the identifica- tion of rural development projects along the Chaco road.

58. USAID made loans amounting to US$6.9 million to Paraguay during 1975/76 for agricultural development. In addition, grants to the agricultural sector during this period amounted to US$3.1 million. Loans and grants during both years were for improved food production and nutrition, including projects for rural agro-industry, support to small farmer credit unions and cooperatives, and feeder road improvement. AID's proposed program for 1977 includes US$4.7 million in loans and US$1.4 million in grants, largely for continuation and expansion of the food and nutrition projects. An important component of this program is the implementation of an agricultural research project directed specifically to the needs of small farmers.

January 31, 1977 PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Agricultural Background

Balance of Trade (US$ million)

Estimated 1970 1971 1972 1973 1974 1975 1976

Exports Wood Products 12.5 10.3 9.5 11.8 24.7 27.9 12.2 Livestock Products 18.0 23.0 34.4 45.7 40.5 34.7 30.0 Crop Products 32.2 30.3 40.4 67.2 98.3 106.1 132.9 Other 1.3 1.6 2.0 2.2 6.2 7.6 7.0 Sub-total 64.0 65.2 86.3 126.9 169.7 176.3 182.1 Balance of Payments Adjust- ments 1.2 8.8 22.6 28.1 36.1 52.5 54.7

Total Exports 65.2 74.0 108.9 155.0 205.8 228.8 236.8

Imports

Food 6.2 5.7 5.6 5.3 14.4 8.8 15.6 Other Consumer 14.1 16.0 14.4 18.4 33.6 39.6 43.0 Primary and Industrial 19.0 22.2 19.7 28.6 32.3 39.3 30.0 Fuel and Lubricants 6.2 6.3 6.0 6.8 42.0 38.4 36.0 Capital Goods 18.3 20.0 24.2 45.7 49.2 59.4 109.3 Sub-total 63.8 70.2 69.9 104.8 171.5 185.5 233.9 Balance of Payments Adjustments 12.8 15.5 30.5 48.4 84.8 128.8 133.4

Total Imports 76.6 85.7 100.4 153.2 256.3 314.3 367.3

Balance -11.4 -11.7 8.5 1.8 -50.5 -85.5 -130.5

Source: Central Bank, Paraguay.

January 19, 1977 z I- r'i PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Agricultural Background

Production of Annual Crops

Average Average 1962-66 1967-71 1972-3 1973-4 1974-5 1975-6

Grains

Rice metric ton 29,760 30,244 41,700 50,700 55,900 51,300 Maize " 237,820 224,596 246,000 281,600 300,800 370,500 Beans . 33,684 24,204 34,208 42,413 49,984 37,700 Grain Sorghum 2,956 4,568 5,775 5,923 6,100 6,280 Broom Sorghum " 4,516 6,350 8,137 8,348 8,430 8,620 Soybeans " 14,200 33,520 122,637 131,262 220,086 272,586 Wheat 6,620 29,360 23,000 35,245 17,987 28,425

Tobacco " 16,550 18,980 26,700 32,400 28,300 27,740

Cotton " 35,840 30,260 8',300 89,700 99,600 112,100 Groundnuts 19,420 17,928 13,800 13,900 15,200 18,200 Potatoes 7,050 10,014 3,142 4,419 3,679 3,058 Cassava , 718,498 812,896 1,107,911 1,395,132 1,427,636 1,573,300 Vegetables

Garlic 1,000 Bunches 1,570 1,880 2,370 1,185 1,313 1,407 Peas Metric ton 2,339 3,760 3,900 3,960 4,160 4,285 Sweet Potatoes " 124,280 127,898 159,045 167,000 183,700 178,190 Gourds and Squash 1,000 Fruits 10,716 12,324 13,520 14,196 14,620 14,180 Onion Metric ton 12,530 17,994 20,400 22,440 23,560 24,740 Lima Beans " 5,144 4,404 4,220 4,431 4,560 4,790 Melon 1,000 Fruits 9,760 10,608 11,077 11,360 11,640 11,990 Watermelon " 28,462 30,840 32,232 33,070 34,720 37,500

Source: Department of Census and Statistics, Government of Paraguay.

April 7, 1977

'3 - PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Agricultural Background

Production of Permanent C_ops

Average Average Unit 1962-66 1967-71 1972-3 1973-4 1974-5 1975-b

1. Avocado 1,000 fruits 8,136 9,511 10,454 10,726 10,830 10,610 2. Banana ton 185,279 232,784 239,224 251,600 264,180 198,050 3. Coffee " 5,761 4,860 5,400 6,500 8,000 9,600 4. Sugarcane 926,280 1,036,650 1,240,000 1,458,000 1,600,000 1,200,000 5. Plums " 23,951 28,029 30,800 31,600 31,900 32,220 6. Cocoa " 120,428 188,642 198,553 249,000 275,000 200,000 7. Peach 1,000 fruits 32,540 38,050 46,510 42,589 43,780 45,000 8. Guavas " 152,453 162,890 172,730 177,221 180,700 9. Persian Limes 178,890 " 57,655 64,450 66,610 67,276 67,950 68,630 10. Linon Real " 41,297 8,339 9,240 9,702 10,109 10,700 11. Sour Lemon 23,947 26,360 29,730 31,216 32,150 32,790 12. Mango ' 133,890 142,840 147,258 148,730 104,110 83,290 13. Mamon " 6,864 8,180 8,500 8,721 8,980 8,080 14. Apples " 3,336 4,168 4,320 4,320 4,440 4,560 15. Mandarin Orange 256,320 300,302 288,190 291,072 320,180 336,190 16. Sweet Orange 956,700 1,145,600 1,182,330 1,239,780 - - 17. Sour Orange Ton 72,100 98,166 121,900 146,280 108,250 110,420 18. Pears 1,000 fruits 763 908 940 949 970 19. Pineapple 970 " 16,400 16,858 17,850 18,743 19,680 20. Grapefruit 19,680 " 65,741 71,814 82,214 90,435 99,480 99,480 21. Castorseeds Ton 12,593 13,617 20,700 24,800 26,000 22. Tung 26,000 36,764 91,979 139,600 69,800 125,640 125,640 23. Grape 9,058 11,944 12,800 12,160 13,380 13,380 24. Yerba Mate " 19,200 18,158 18,400 16,560 18,550 18,550 25. Alfalfa " 22,020 24,816 25,625 26,906 27,710 28,541 26. Small Fruit 362 423 460 483 507 520 H

Source: Department of Economic Studies, Central Bank of Paraguay, Asuncion.

January 19, 1977 ANNEX 2 Page 1

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Land Demarcation and Titling

Background

1. In the late 1800s, the Government of Paraguay entered into the sale of public lands to foreign investors to replenish the national treasury, which had been depleted by the war of the Triple Alliance. At that time, large tracts of land in Itapua and elsewhere were transferred to foreign investors (mostly Argentines), who began exploitation of the areas' vast forestry and yerbamate resources. While initial land payments were made by these investors, there is serious doubt that the properties were ever paid off in full. Nevertheless, their ownership of land was recognized once they had controlled the properties for 30 years.

2. There are no remaining latifundias within project area A, (see Annex 5 for definition of project areas) but five large land owners still own approximately 200,000 ha in project area B. However, the Institute of Rural Welfare (IBR) was recently authorized to take over this land under the terms of Decree Law 25542, signed on September 17, 1976. Private lands which are "rationally exploited" are exempt.

3. Settlement of Itapua for farming purposes is a result of Government policy that encouraged colonization by foreign emigrants and of the steady influx of colonists from other areas of Paraguay, particularly the crowded minifundia areas to the east and south of Asuncion (Table 1). Colonists have acquired land by (a) entering official Government colonization areas, (b) purchasing land directly from large land owners, and (c) settling as squatters on private or Government lands.

4. European immigrants settled the southern part of Itapua over 40 years ago and all of the presently available land has been subdivided. The two colonies comprising project area A, Unificadas and Federico Chavez, were established in 1940 and 1950, respectively. The area is subdivided into farms averaging 22.2 ha and only one-fifth remains under forest. In the land tenure structure of this zone, ownership is claimed by about half the,farmers, one-third indicate that they have official occupancy authorization, and the remainder are squatters. ANNEX 2 Page 2

5. In project area B, settlement was initiated in the 1960s. Ini- tially, new farmers settled around the small villages along the Parana River and from there settlement continued inland along logging tracks. Farms are currently being established in the southern portion up to 40 km away from the Parana. With the construction of the road, Pirapo-Capitan Meza, the southern part of the zone up to the Rio Tembey became accessible by land, thus accelerat- ing settlement; a primitive infrastructure is now being developed, such as improvement of a rudimentary road network (logging tracks) and the establishment of some inland service centers and schools.

6. With completion of the road to Capitan Meza, land sales - under the name "private colonies" - took place. These sales have come to a virtual standstill, however, as the authorities recognized the unwillingness of the latifundia to comply with legal stipulations for the establishment of private colonies and proceeded to authorize squatters to occupy the land. Even so, this situation is not a major block to development of the region, since the agrarian legislation of Paraguay protects the rights of squatters on private land which are not "rationally exploited". 1/ IBR intends to issue titles to squatters so that their applications for credit can be processed by the National Development Bank (BNF) in the usual way.

Farm Size Distribution

7. In both project areas, farm size is fairly evenly distributed as indicated by the following table:

PROJECT AREA A PROJECT AREA B Farm Size No. of Area No. of Area

(ha) Farms % ('000 ha) % Farms _('000% ha) %

1 - 9 920 24.3 4.6 5.8 559 11.0 2.8 2.5

10 - 20 1,550 40.9 23.2 29.2 3,163 62.5 47.4 43.1

Over 20 1,120 29.5 51.7 65.0 1,119 22.1 59.9 54.4

No reply 200 5.3 - - 221 4.4 - -

Total 3,790 100.0 79.5 100.0 5,062 100.0 110.1 100.0

Average farm size in project area A is 22.2 ha and in project area B 22.7 ha. In the older part of area A, however, almost a quarter of all farms are under 10 ha, which is the result of subdivision of the original 20-ha homesteads, either through inheritance or sale. If this continues, the area might soon be affected by minifundia problems. In project area B, almost 75% of the 5,000

1/ Law No. 854, Chapter XVI (Article 135). ANNEX 2 Page 3 farmers are squatters. In IBR colonies, only about 4% are owners, and, on private lands, 17% of the settlers ciaim ownership. The relatively high proportion of owners in project area A means that a farm development scheme can be rapidly developed and credit can be initiated soon after project approval. In project area B, a program of land regularization and titling would be a prerequisite to successful project implementation.

Settlement Pattern

8. Land available in project area B totals 240,000 ha, about 75% (180,000 ha) of which can be used for farming purposes. The remaining 60,000 ha consist mainly of soils subject to periodic flooding or areas where high water table conditions make intensive cropping a risky operation. Settlers are arriving in the more accessible areas of project area B, south of the Tembey, at a rapid pace, and already some 83,000 ha, or 83% of arable land, in this area have been settled. It is estimated that, even without further road improvment or provision of services, the remaining 18,000 ha of arable land in the area will be occupied by incoming settlers by the end of 1977. However, little settlement is expected north of the river until a bridge is constructed. The settlement pattern in project area B may be summarized as follows:

Land Available Land Already for Area Farm Land /1 Settled Settlement ('000 ha) ('000 ha) ('000 ha) ('000 ha)

South of Tembery 135.0 101.3 83.6 17.6 Central and Northeast 105.0 78.7 26.5 52.6

240.0 180.0 110.1 70.2

/1 Including both lands presently cultivated and forest land that could be farmed if cleared.

IBR Titling Operations

9. Normally, IBR issues only definite titles, constituting a legal transfer of the land to the name of the settler, when the purchase price is paid in full. Since 1973, however, IBR has authorized the issue of titles to settlers in colonies in the Eje Norte zone who fulfilled the following conditions:

(a) Cultivate a minimum of 3 ha; ANNEX 2 Page 4

(b) Paid to IBR at least 25% of the purchase price of their land;

(d) Have satisfactory production records; and

(e) Enter into a separate agreement with IBR to repay the outstanding balance of the purchase price of their land.

10. There are other requirements for granting of titles, which, on some occasions, have been imposed on settlers by IBR but which are not usually enforced. For example, a settler must clear at least 20% of his holding within three years. Also, he must construct a house and build a fence around the cultivated area. The maximum period allowed for payment of land is 15 years, but, in practice, shorter periods are prescribed, usually seven years, including a two-year grace period. Penalties for payment default are reva- luation of the outstanding balance at current land prices and foreclosure in the event of more than two consecutive payments being in arrears, but these sanctions are also seldom applied.

11. A modification of IBR rules was made under the first Rural Develop- ment Project wherein farmers were granted titles, or certificates of intent to issue titles, on payment of as little as 10% of the land value. The certificate system was devised as a sort of short-term title substitute to comply with BNF requirements for extending credit to producers, while their actual titles were being processed by IBR, a process which could take several months.

Titling Under the Project

12. IBR's role under the project would be to carry out a land demarcating and titling program of sufficient magnitude to assure a solid base of titled land holders within the project area who could then qualify for on-farm credit. During the first year of project execution, one IBR field supervisor and seven technicians would be assigned to project area B to concentrate on land regularization and titling among already established settlers in the area south of the Tembey. As bridge and road construction opens up new lands for settlement north of the river, seven more technicians would be added in year 2 and in year 3 to work with incoming settlers. Some 4,400 farmers in the area do not have titles now and the figure is expected to rise to 7,600 by 1980.

13. Since credit cannot be granted unless farmers have titles or certificates of intent, IBR must begin work in 1977 in order to process a sufficient number to assure successful project implementation. It is expected that some 440 farmers in project area B would receive credit under the project during 1978, 1,200 during 1979, and 1,350 during 1980. To ensure sufficient eligible participants, at least 440 titles should have been issued by the date ANNEX 2 Page 5 the end of November 1977, in readiness for the next crap season. Additionally, in a frontier area such as project area B, the IBR would be encouraged to grant titles or certificates to settlers who have paid only 10% of purchase price of their land to avoid delay of credit badly needed to boost production and inc omes.

14. The size of the farm granted to incoming settlers has averaged about 22 ha in the project area (para 7), but under the proposed project, lot size could be increased to as much as 50 ha under the condition of a recent IBR ruling. In no case, however, would they be under 20 ha. Lots somewhat larger than 22 ha might enable farmers to retain a larger forest reserve on their properties in the medium term and provide a more economically viable unit for possible mechanization. On the other hand, it would be social- ly undesirable to reduce the total number of farmers receiving land, and the larger land size would, of course, increase the purchase price of land to those who receive it. Also, while agricultural production from larger farms might be higher in the long run, this volume would initially be smaller than withi smaller farms that would accommodate more families and thus provide more labor for land clearing and cultivation. IBR has not yet decided what the actual lot size would be under the proposed project, but in view of the increasing emphasis on mechanization within the area and the fact that physiography should be taken fully into account when demarcating lots, lot size should be determined on a realistic basis, subject to considerations of production as well as equitable distribution.

15. In addition to granting titles under the project, IBR would also be encouraged to grant titles to other settlers currently in project area B during the next five years as well as to incoming settlers. The following table presents a proposed schedule of land titling:

No. of Titles to Titles to Farms No. of Farms be Granted be Granted Total No.of without Incoming without Title to Established to Incoming Titles to be Year Title Settlers (Incremental) Settlers 11 Settlers /2 Granted

1976 4,400 4,400 1977 795 5,195 440 440 1978 795 5,990 440 398 838 1979 795 6,785 440 398 838 1980 795 7,580 440 398 838 1981 440 398 838

Total 2,200 1,592 3,792

/1 Assumption: Titles would be granted to 10% of established settlers each year in order to complete one-half of the titling process on these farms within five years.

/2 Assumption: Titles would be granted to at least half of incoming settlers. AINEX 2 Page 6

16. The process or regularization of titling in project area B would require a sizable -ffro- on the part of IBR staff. In addition to not having land titles, many settlers, even in IBR colonies, are not aware of the boundaries of their farms. Furthermore, many settlers in IBR colonies are under the impression that they occupy private lands, and settlers on private land often believe they are part of an IBR colony. Therefore, IBR will have to survey each farm and determine boundaries as a first step. This process will be necessary even in colonies already surveyed by IBR since many settlers have located in these areas without regard to official boundaries. Table 2 gives data on titling operations in Paraguay since 1915.

17. It is proposed that IBR will receive revenue from land sales to settlers as titles are issued. For area B, small farmers (20 ha average) will be charged, on average, G 6,000/ha (about US$48/ha) for their land paying 20% as a deposit when title is issued (or 10% when a certificate is issued), the balance being payable in equal installments over individually determined periods ranging from five to fifteen years, with interest at 8% on outstanding balances, and a one-time commission of 4% of the total sale price payable with the deposit.

December 16, 1976 ANNEX 2 Table 1 PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Land Demarcation and Titling

Public aad Private Colonies in the Department of Itapua, 1976

Year Name Established District Sector

1. Hohenau 1 1898 Hohenau Private 2. Cenel. Bogado 1914 Cnel. Bog Public 3. Gral. Delgado 1919 Gral Delg. Public 4. Cap. Miranda 1936 Cap. Miranda Private 5. Cap. Meza 1907 Cap. Meza Private 6. Bella Vista 1918 B. Vista Private 7. Colonia Tacuari 1914 Cap. Matiauda Private 8. Fram 1940 Fram Private 9. Federico Chavez 1951 Cap. Miranda Public 10. Cap. Leguizamon 1965 S. Pedro Public 11. Cear Visconcellos 1962 S. Pedro Public 12. Tiburcio Bogado 1968 San Cosme Public 13. Vacay 1964 Hohenau Public 14. Santa Teresa 1965 Artigas Public 15. Unificada (Esculies-Tao.Parani) 1940 Cap. Miranda- Trin. Mat. Public 16. Potrero Benitez 1964 Artigas Public 17. GuazuiYcuoa 1967 S. Pedro Public 18. A pe Aime 1969 Cap. Meza Public 19. Cap. Urbina 1968 Cap. Meza Public 20. San Lorenzo 1968 Cap. Meza Public 21. Altorada 1968 Cap. Meza Public 22. Ype Curu 1969 Encarnacion Public 23. Cabayu-y 1964 Cnel. Bogado Public 24. Repatriados del Sur 196e-7-8 Cap. Meza Public 25. Triunfo 1968 D. Robledo Public 26. Yacyreta 1968 Carmen-Bogado Public 27. Tabapy-Ra 1970 Cap. Meza Public 28. Natalio 1970 D. Robledo Public 29. Otafio Cap. Meza Public 30. Valuntad G. Delgado Private 31. Alto Parana (Pirapo) 1960 Obligado Private 32. Edelira 1967 Cap. Meza Private 33. Cleto Carisimo San Pedro Private 34. Jesuisy Trinidad JesCisy Tri. Public

Source: Instituto de Bien Estar Rural (IBR).

December 23, 1976 PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Land Demarcation and Titling

Land Titles Issued by IBR and Predecessor Agencies in Paraguay

1915 - 1975

Average Titles Titles Area Size of Year Lot Issued Cumuiative Area Cumulative (cumulative) (ha) (ha) 1915-1957 14,289 14,289 349,524 349,524 24.5 1958 1,198 15,487 31,888 381,412 24.6 1959 2,710 18,197 75,954 457,366 25.1 1960 3,205 21,402 .101,795 559,161 26.1 1961 7,250 28,652 165,808 724,969 25.3 1962 10,016 38,668 209,191 934,160 24.2 1963 4,500 43,168 156,948 1,091,108 25.3 1964 6,250 49,418 165,280 1,256,388 25.4 1965 6,500 55,918 356,348 1,612,736 28.8 1966 4,007 59,925 255,800 1,868,536 31.2 1967 3,507 63,432 246,343 2,114,879 33.3 1968 3,150 66,582 293,273 2,408,152 36.2 1969 3,382 69,964 111,507 2,519,659 36.2 1970 3,170 73,134 143,635 2,663,294 36.7 1971 2,605 75,739 125,847 2,789,141 1972 37.1 2,281 78,020 182,129 2,971,270 38.4 1973 3,300 81,320 274,549 3,245,819 1974 39.9 31,06 84,346 215,320 3,461,139 41.0 1975 2,400 86,746 214,922 3,676,061 42.4

_ _ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ro Source: Statistical Department, IBR.

November 1976 ANNEX 3 Page 1

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

National Development Bank

Introduction

1. The National Development Bank (BNF), a Government-owned autonomous entity under the authority of the Ministry of Finance, was established in 1961 as the successor to the bankrupt Bank of Paraguay. Its operations are governed by its founding legislation of 1961, general banking legislation and regulations of the Central Bank. The basic objective of BNF is to promote agriculture, forestry, industry, and commerce through the provision of credit.

2. As of December 31, 1976, BNF had a nominal net worth of G 1,321 million (US$10.5 million). Based on the nominal net worth, its total assets amounted to G 18,327 million (US$145.5 million), including an agricultural loan portfolio of G 8,642 million (US$68.6 million), an industrial loan portfolio of G 3,802 million (US$30.2 million), a commercial loan portfolio of G 1,818 million (US$14.4 million), a merchandise inventory of G 421 million (US$3.3 million). Total staff of the bank was about 1,000 as of August 1976.

3. BNF's financial position is weak. It suffered a loss of about G 320 million (US$2.6 million) in 1975, and about G 1.1 billion (US$8.6 million) in 1976. The adjusted net worth of G 1,321 million (US$10.5 million) as of December 31, 1976 produced a total debt/equity ratio of 12.9:1 at that time. However, the Government has expressed its intention to rehabilitate the bank and appointed new management at the beginning of 1976 to take the necessary action. In the context of the proposed Industrial Credit Project, the new management team is initiating a financial program to establish a sound basis for the bank's operations. As a complement to that project, UNDP is considering a technical assistance program for BNF. These actions at the bank level, together with appropriate conditions for the Second Rural Develop- ment project, would make BNF an acceptable credit channel.

Organization and Management

4. General. In addition to its managerial problems, BNF's physical facilities in Asuncion are inadequate. The Central Bank and BNF share the same principal building, and many of BNF's departments are scattered among various nearby buildings because of the lack of space. This condition greatly hinders effective communication and contact among organizational units. It is likely that the situation will not be resolved until the Central Bank moves to new quarters in perhaps two years. ANNEX 3 Page 2

5. Policy and Management. The president of BNF is chairman of the board of directors, and the seven board members are representatives of the Mlinistry of Agriculture, the Ministry of Commerce and Industry, the Central Bank, the crop sector, the livestock sector, and the industrial sector. The members are appointed for three-year terms.

6. There is no clear distinction between policy establishment and execution at BNF, and the board not only sets policy but also becomes involved in operational matters. (It was meeting on a daily basis in 1976.) Included in its functions are the formulation of regulations and the approval of lending programs, budgets and financial statements. In addition, the board appoints department directors, establishes lending limits for the various levels of management, and approves loans which exceed the lending authority of the president.

7. The president is the chief executive officer, and he directs the activities of the bank in cooperation with the board. He is appointed by the President of the Republic for a term of five years. The current president was appointed in January 1976 with a clear mandate to collect old arrears and rehabilitate BNF. For about two years prior to this appointment, the Bank had been under the direction of an interim president who had neither the mandat2 nor the incentive to deal effectively with its problems. The new president had worked in the Central Bank and had been responsible for the collection of the former Bank of Paraguay's outstanding portfolio. He is an energetic individual and has begun to introduce measures to combat BNF's problems.

8. Virtually all management personnel down through the level of division chief have been replaced. In some cases, individuals have been brought in from outside the bank, while in others, transfers from other units within the bank have been used to fill the vacated positions. The two key posts of director of the Agriculture Department and director of the Development Depart- ment 1/ are now occupied by the former assistant internal auditor and internal auditor, respectively. WShile it would have been desirable to assign to these positions managers with experience in agricultural and industrial credit operations, an important criterion may have been familiarity with the bank's activities, combined with a lack of direct involvement in the previous operations of these departments.

9. Structure. The head office of BNF is located in Asuncion and serves as the Asuncion branch in addition to providing centralized services for the branch network. It consists of three operating departments-- Agriculture, Development, and Commercial--and two service departments-- Administration and Treasurer's. The branches are under the authority of the Administration Department, as is the recently strengthened Collections Office. BNF's 38 branches are concentrated primarily in the southeastern part of the country, which is the region of highest population density and crop production.

1/ This department handles primarily industrial operations. ANNEX 3 Page 3

10. Staff. In December 31, 1976, BNF had a total staff of about 985, of which 60% worked at the head office and 40% worked in the branches. Within the head office, the three operating departments had 27% of the staff, while the service departments had 73%. Of the operating departments, Agriculture had 118 staff (74%) Development had 30 (19%) and Commercial had 11 (7%). Among the branches, Caaguazu, which served two of the settlements of the on-going rural development project, had the largest staff of 26 (6%) with the remainder widely distributed in the other branches. This pattern reflects the concentration of operations in Asuncion and the wide dispersion of operations outside the capital.

11. In terms of background, about 4% of the total staff are economists, 14% are public accountants, 10% are technical specialists, 23% are service personnel (cleaning, maintenance, and such), and as many as 45% are students (about 90% of whom are secondary school students) who work at BNF while continuing their studies. There are 87 agricultural technicians (9% of total staff), of whom 48 (55%) have university-level training and 39 (45%) have training at the secondary level.

12. Various units of the bank are hard-pressed to keep up with the workload, and it is apparent that BNF has insufficient personnel in some categories (e.g., managers and technicians) and an overabundance in others (e.g., service personnel and students). Thus some additional staff are needed in selected categories and some existing staff should be released. The net effect should be to decrease the total number of staff. Those existing staff who meet the requirements need to be upgraded through training. In the case of agricultural technicians, for example, the number of borrowers which each one has to attend is frequently so high that there is no time for providing technical assistance. The effective borrower/technician ratio of 200 or more should be reduced, giving due consideration to the costs involved and the need to approach small farmers on a group basis (paras 26 and 27).

13. BNF recognizes that its staff requires a substantial amount of training, and it is preparing a program of training courses which will en- compass virtually all categories of personnel. It has requested IDB to support the design and implementation of the training program, and the IDB is now considering the request. This assistance would complement the on-going technical assistance program financed by IDB and the UNDP technical assistance program planned in conjunction with the proposed Industrial Credit Project (paras 18 and 19).

14. For all training courses, emphasis should be placed on a development approach, on instilling fundamental concepts which are actually employed in the bank's operations, and on ensuring that these concepts are well under- stood by the participants. In the case of agricultural technicians, for example, concepts for the analysis of farm development plans could include a whole-farm approach, some measure of financial viability such as the financial rate of return, and a consideration of debt service in relation to the incremental income produced by the investment (para 25). ANNEX 3 Page 4

15. Information. The present accounting system produces statements which are often delayed and distorted. Part of the problem stems from genuine accounting difficulties, such as the treatment ef the amounts owed BNF by the Government on account of the Agriculture Department losses. But much of its is due to the lack of policy guidance, the use of manual procedures, ineffec- tive controls, etc. The system has been partially computerized, and consultants under the IDB-financed technical assistance program are helping BNF utilize the computer facilities more effectively (para 18).

16. The internal auditing system has not been effective in identifying and correcting the deficiencies of the accounting system, but the internal auditor's office has been strengthened and it perhaps has the potential to perform the necessary control functions, with appropriate guidance. The Superintendency of Banks is slow, and its reports are not readily available. In addition, its evaluation focuses mainly on compliance with banking regulations. BNF's private external auditor is the reputable Argentine firm of Harteneck, Lopez, and Co. However, the condition of the bank's accounts caused the external auditor to issue highly qualified opinions. A supplemental audit, therefore, was performed to evaluate the portfolio, the merchandise inventory, and the Government account as of July 31, 1976. The audit provides BNF with a reasonably accurate basis against which to measure future operations. The external auditor has assisted BNF in analyzing the portfolio in arrears and in preparing arrears recovery plans.

17. BNF produces few statistics, and the data which are compiled are available only after considerable delay. The bank needs a computerized system which will produce basic statistics quickly. Included should be analyses of loan commitments by term, purpose, size, size of borrower, branch, etc.; delinquent loans; and recovery rates. The consultants will help BNF install such a system (paras 18 and 19).

18. Technical Assistance. IDB is financing currently a technical assistance program (ATN/SF 1316-PR) for the reorganization of the administrative and accounting systems, revision of the organizational structure of the lending program for small- and medium-sized farmers supported by IDB, and evaluation of industrial projects. The first component is aimed primarily at the computerization of the accounting system.

19. UNDP will be financing, in conjunction with the proposed Indus- trial Credit Project, approximately eight man-years of consultant services for BNF involving some seven consultants over a two and a half year period. Emphasis will be placed on financial management, especially programming and budgeting; the accounting system, particularly the production of useful financial statements and the establishment of a cost accounting capability; personnel management, especially the formulation of a manpower development program; and agricultural credit policies and procedures. Included in the group of consultants will be two financial advisors, accounting advisors, one personnel advisor, and one agricultural credit advisor. The personnel training program which BNF has submitted for consideration of IDB (para 13) would form a component of the manpower development program. ANNEX 3 Page 5

Lending Policies and Procedures

20. General. BNF does not have any consistent set of policies and procedures. Interest rates, for example, vary according to the resources used to finance the loans, and procedures vary according to the program. M4anuals produced at the time of the bank's founding in 1961 have been superceded in the case of certain departments and certain programs but remain in effect for others. The policy statement prepared in the context of the proposed Indus- trial Credit Project will define a consistent set of policies for the bank as a whole.

21. Agriculture Department. The Agriculture Department operates basically under two sets of credit regulations. The first dates from 1967 and applies to large farmers. It is not very specific and thus leaves many points to be decided on an ad hoc basis. The second was prepared in 1975 for the lending program for small and medium farmers supported by IDB and is quite complete.

22. BNF finances all types of agricultural operations, including crops, livestock, fisheries, and forestry. It provides loans for short-term working capital needs (up to one year), for medium-term investments such as machinery and draft animals (one to five years), and long-term investments such as irrigation, pasture establishment, and farm development plans (five to 10 years). Grace periods range up to about four years. Loans to small and medium farmers (those with an agricultural net worth less than G 3,150,000 or US$25,000) may not exceed G 1,134,000 (US$9,000) and those to small and medium ranchers (those with an agricultural net worth less than G 5,670,000 or US$45,000) may not exceed G 1,890,000 (US$15,000). Loans may finance up to 100% of investment cost in exceptional cases, but normally a contribution is required of the borrower. (For the on-going rural development project, a minimum contribution of 10% is required. For other loans, the amount of the contribution varies widely.) Loans may not exceed 50% of the value of a chattel mortgage or 60% of the value of a mortgage. A chattel mortgage is required for medium-term loans and most short-term loans, and a mortgage is required for long-term loans.

23. As of September 1976, interest rates ranged from 9 to 12%, plus a flat fee of 1% of the total loan amount. A penalty rate 50% higher thas the relevant interest rate is charged on overdue amounts. Under Section 4.04 of the Project Agreement for the ongoing rural development project, BNF was to have raised the interest rate on all loans granted after May 1975 to a minimum of 12%. The bank is now adjusting all new loans to the 12% minimum rate. BNF has now agreed to raise the average yield on all new loans to a minimum of 13%.

24. Appraisal of loan applications normally is carried out on the basis of a field visit, during which the BNF technician discusses the proposal with the farmer and analyzes its technical viability. However, even though there has been substantial effort directed toward establishing a development orientation, and although there are some technicians who seem to have an under- standing of cost/benefit concepts, BNF's lending is still heavily weighted ANNEX 3 Page 6 toward commercial considerations. Thus there is an emphasis on the cost of items to be fi-prr-52 the general financial status of the applicant, and the adequacy of the security offered, rather than the likely return to the farmer and the technical assistance inputs necessary to enable him to achieve that return.

25. Appraisals generally focus on the specific items to be financed, rather than the whole farm, except in the case of livestock operations and the farm plans being financed under the on-going project. Again, except in special cases, there is no determination made of the incremental income to be produced by the investment financed and therefore no analysis of the return on investment or the relationship between the debt service and the additional income produced (para 14).

26. The quality of supervision varies widely. Normally a technician visits the borrower prior to the disbursement of the next tranche of his loan, but the frequency of the visits and the length of time that the technician can spend with the borrower are limited by the number of borrowers to be served by the technician (para 12).

27. Development Department. The Development Department provides loans for industry, agroindustry, crafts, and some livestock operations. Most of the loans are medium- or long-term, but some short-term loans are granted as complementary financing of seasonal working capital. Current interest rates are 9 to 12%. A commission ranging generally from 1 to 3% is charged on the total loan amount at the time of signing and one in the same range is charged on the outstanding balance at 3- to 12- months intervals. The average yield on new loans will be increased to a minimum of 13% in the context of the Industrial Credit Project (para 23).

28. Commercial Department. The Commercial Department is responsible for all commercial banking operations. It provides short-term loans which rarely exceed six months' maturity. Interest rates generally are at 12%, and BNF also charges a commmission ranging from 0.25 to 1.5% at three-month intervals. Effective interest rates on commercial lines of credit, rated over a three month interval, equal 20% or more per annum.

Operations

29. Agriculture Department. Loans committed by the Agricultural Depart- ment increased from G 1,193 million in 1970 to G 3,656 in 1975/76 1/, or 206%. The number of loans committed rose from 6,990 in 1970 to 8,303 in 1974/75, or 19%. Thus, the average loan size increased from G 171,000 in 1970 to G 301,000 in 1974/75, or 76%. Commitments are expected to increase about 15% per year through 1981 (about 9% per year in real terms).

1/ Agricultural year July 1 to June 30. Lending occurs primarily in the first half of the year. Thus, agricultural year 1975/76 corresponds roughly to calendar year 1975 in terms of lending. ANNEX 3 Page 7

30. The Agriculture Department grants a large number of small loans to small and medium farmers and a small number of large loans to large farmers. Of loans committed in 1975/76, G 2,252 million (62%) were for small and medium farmers, while G 1,404 million (38%) were for large farmers. Although the major proportion of loans are short-term (58% by amount in 1975/76), a substantial portion are medium- and long-term (42%). The table below shows a breakdown of loans committed in 1975/76 by term and size of borrower (amounts in G million).

Small and Medium Large Farmers Farmers Total Amount % Amount % Amount %

Short-term 1,281 60 840 40 2,121 100 Medium- and long-term 971 63 564 37 1,535 100

Total 2,252 62 1,404 38 3,656 100

31. A breakdown of short-term loans granted in 1975/76 by purpose and size of borrower is given in the table below (amounts in G million).

Small and M4edium Large Farmers Farmers Total Amount % Amount % Amount %

Labor 1,129 88 285 34 1,414 67 Seed, fertilizer, and pesticide 119 9 528 63 647 30 Other 33 3 27 3 60 3

Total 1,281 100 840 100 2,121 100

As can be seen, the major proportion of funds was granted to cover labor cost while most of the remainder was for cultivation chemicals. The proportion going to labor was substantially larger in the case of small and medium farmers than for large farmers.

32. The table below gives a breakdown of medium- and long-term loans granted in 1975/76 by purpose and size of borrower (amounts in G million). ANNEX 3 Page 8

Small and Medium Large Farmers Farmers Total Amount % Amount % Amount

Machinery 194 20 398 71 592 39 Facilities /l 290 30 63 11 353 23 Land development 449 46 103 18 552 36 Permanent crops 38 4 - - 38 2

Total 971 100 564 100 1,535 100

1/ Building and other constructions.

As indicated, the largest proportion of funds was granted for the purchase of machinery, the second largest for land development, and the third largest for facilities. These three categories accounted for 86% of the total. Facilities and land development were the largest categories for small and medium farmers while machinery accounted for the vast majority of funds for large farmers.

33. One of the most unfortunate lending programs implemented by the Agriculture Department was that undertaken in support of the Government's program to increase production of food grains, particularly wheat, which was initiated in 1966. BNF hurriedly made large loans of up to 100% of cost to mainly absentee landowners who frequently had little or no experience in grain cultivation. Appraisal of applications was minimal, wheat often was planted on unsuitable land, and there was considerable over-investment in machinery. Massive defaults resulted. In early 1973, the Government decreed that any wheat loan borrower could have his loan restructured with principal to be repaid by 1983 and interest to be paid by 1988. Some loans were restructured while others were not. Those loans which were least likely to be repaid, including some restructured loans and some non-restructured loans, were transferred to the Government account (para 48).

34. In response to a perceived scarcity of input suppliers, BNF became involved in the supply of current inputs (primarily seeds, fertilzers, and insecticides) and farm implements. However, purchases exceeded sales. As a result, the merchandise inventory increased 105% during the years 1974 and 1975 to a level of G 648 million (4% of total assets) as of December 31, 1975. BNF has sold a lot of the merchandise during 1976 although prices of some items (particularly fertilizer) fell substantially below the purchase prices and problems of deterioration affected other items. The external auditor has, therefore, recommended additional provisions to reflect these factors. In any case, this is a costly operation completely outside the scope of BNF's field of competence, and the network of private suppliers is adequate to meet the needs of producers. BNF's management is aware of the problem and is now prepared to phase out its involvement in this kind of operation. ANNEX 3 Pagc, 9

35. Development Department. In 1975, the Development Departmaent committed 163 loans for G 427 million, of which 90 (55%) for G 329 million (77%) were for industry and the remainder were for livestock and crafts. The average loan size was G 2.62 million. Among industrial loans, the wood sub- sector accounted for 59% (by amount), and wood, food, and textiles together accounted for 90%. In terms of the Development Department's portfolio at the end of 1975, 3% of the number of loans represented 60% of the amount, and 70% of the amount was for projects in Asuncion.

36. Commercial Department. The Commercial Department is responsible for all normal commercial operations. It receives demand, savings and time deposits, and makes short-term loans, primarily for commercial purposes.

Resources

37. General. At the end of 1976, BNF had total nominal resources of G 18,327 million of which G 1,321 million (7%) were in equity, G 11,885 milion (65%) were in borrowings and government counterpart contributions, G 4,348 million (24%) were in deposits, and G 773 million (4%) were in other liabilities. Among borrowings, 35% were from domestic sources and 65% were from foreign sources (see Tables 1 and 2 for historical and projected balance sheets and income statements.)

38. Equity. BNF's equity position is complicatedby the treatmentof AgricultureDepartment losses. According to BNF's founding legislation,the Government will compensate the bank for these losses. However, no timing is specified, and such payments therefore are at the discretion of the Govern- ment. The Government agreed in mid-1976 to pay off this accumulated debt of G 887 million (July 1, 1976) at the rate of G 126 million a year. For the future, however, it would be appropriate to consider AgricultureDepartment losses as a diminution of equity.

39. Operationallosses in 1976 reached a level of about G 1,072 million (US$8.5million) and may decline to about G 84 million (US$0.7million) in 1977. Thereafter,BNF is expected to operate with a small profit margin. Furthermore,the government'scommitment to make an equity contributionof about G 2,437 million (US$19.3 million) during the 1977-80period, should enable the institutionto substantiallyimprove its financinalstructure and results. Thus effective equity would increase from G 1,321 million (US$10.5 million) at the end of 1976 to about G 3,640 million (US$28.9million) at the end of 1980.

40. Borrowings. The borrowings of about G 4.0 billion as of December 31, 1976 from internal sources were provided by the Central Bank at interest rates ranging from 4% to 6%. In mid-1976, G 2,960 million of this amount was converted to long-term debt, payable over 12 years at 4% interest. The Central Bank provides some discounts, funds for livestock loans, and financing for seasonal crop loans. ANNEX 3 Page 10

41. Of the external borrowings of G 7.5 billion at December 31, 1976, 9% were short-term and 91% were medium- and long-term. The short-term financing was provided by five commercial banks in the United States and Europe. Of the medium- and long-term financing, 34% was provided by 1DB, 16% by AID, 13% by KfW, 12% by the Bank of Brazil, 8% by the Instituto di Credito per le Imprese di Publica Utilita, 6% by the National Bank of Argentina, and 10% by other sources 1includingIDA and suppliers. The maturi- ties of these borrowings range from three to 40 years and the interest rates from 0.75% on some of the AID funds to 11.5% on the financing from the Union of Swiss Banks. Funds from IDB have been used to finance loans Lo small and medium farmers and industrialists, AID funds were used primarily to finance loans to grain farmers, and most of the remaining funds have been used to finance imports from the respective countries.

42. In the future, BNF's debt resources will come primarily from the Central Bank in the case of short-term funds and from IDB, AID, and the Bank Group in the case of long-term funds. IDB is considering a continuation of its support for the financing of small and medium producers, while AID is considering a project to finance cooperatives. The Bank would provide funds under the proposed Industrial Credit and Second Rural Development Projects, in addition to the funds available under IDA Credit 509-PA.

43. Deposits. Deposits increased from G 1,184 million at the end of 1971 to G 4,348 million at the end of 1976. As of the latter date, G 1,468 million (34%) were in demand deposits, G 2,880 million (66%) were in savings deposits and time deposits. The weighted average interest paid on savings and time deposits is about 7.5%. When the legal reserve requirement of 42% on deposits is taken into consideration, the weighted average cost of all deposits is about 9%.

Use of Resources

44. Total assets grew from G 11,570 million at the end of 1971 to G 18,327 million at the end of 1976, or 58%. As of the latter date, cash and banks amounted to G 609 million (4%), legal reserve requirements G 1,721 million (9%), net loan portfolio G 12,429 million (61%), interest receivable G 1,119 million (5%), merchandise inventory G 319 million (1%), and other assets G 1,821 million (4%).

45. About 52% of BNF's loan portfolio as of December 31, 1975 was held by the head office in Asuncion, and the remaining 48% was heLd by the 38 branches. Of the head office portfolio, 35% was for the Agriculture Depart- ment, 58% for the Development Department, and 7% for the Commercial Depart- ment. Of the branch portfolio, 85% was for the Agriculture Department, 3% was for the Development Department, and 13% was for the Commercial Department. The Agriculture Department's portfolio thus was held 31% by the head office and 69% by the branches. ANNEX 3 Page 11

46. BNF's arrears are much too high. They amounted to about 22% of portfolio at the end of 1976, compared with 13% at the end of 1973. 1/ The figures were 23% for the Agriculture Department, 11% for the Development Department, and 36% for the Commercial Department. On the basis of an analysis of a portion of the portfolio in arrears, the auditor estimated that approximately half of the portfolio may be more than one year overdue. BNF has begun to computerize its information on delinquent loans and, with assistance from the Bank and IDB, is preparing recovery plans, and establishing appropriate recovery targets.

47. As of December 31, 1976 provisions for irrecoverable loans amounted to G 1,837 million, or 13% of the total outstanding portfolio.

48. Improvement in the strength of the portfolio will result from upgrading the appraisal and supervision of subprojects and the reinforcement of collection procedures. The former is being tackled at the local level through the ongoing Small Farmer Credit and Rural Development Project, and this effort would be continued in the proposed Second Rural Development Project. At the national level, the UNDP consultant team will assist in the implementation of improved appraisal and supervision techniques and procedures and will help formulate the manpower development plan to upgrade staff quality and efficiency. The Collection Office has been strengthened, and new collection procedures are being introduced. The consultant team also will assist in further improving the collection system.

Financial Position

49. BNF's financial position at the end of 1976 was extremely weak. It is expected to improve significantly as a result of the various actions to be taken. The bank's liquidity ratio (about 1.5 at the end of 1976) improved as a result of the restructuring of the major portion of its Central Bank debt in mid-year. The ratio is projected to remain at about that level through the 1980's. These figures are entirely satisfactory. BNF relies heavily on Central Bank for meeting short-term borrowing requirements.

50. The total debt/equity ratio incrased from 5.8:1 at the end of 1971 to 12.9:1 at the end of 1976. These figures demonstrate the serious under- capitalization of BNF. However, as a result of the Government's agreed to capital contributions, the ratio is expected to decline to a satisfactory level of about 6.6:1 by the end of 1977.

Results of Operations

51. BNF's income statements generally have shown a fictitious profit which amounted to G 13 million in 1971 and G 93 million in 1975. However, if the Agriculture Department losses had not been transferred to the Government

1/ BNF defines arrears as amounts overdue by more than one month. ANNEX 3 Page 12 account, BNF would have shown a loss of G 228 million for 1971 and G 316 million for 1975 and G 1,072 million in 1976 which includes the present estimate of accumulated provisions chargeable to previous years.

52. Interest and commissions received amounted to 11.2% of average outstanding portfolio in 1976, with financial expenses representing 5.9%, giving a financial spread of 5.3%. However, operating costs were 5.7% of portfolio, producing an operating loss, and the deduction of provisions resulted in a higher total loss. By 1980, interest and commissions received are expected to increase to 13.3% and financial expenses are expected to decline to 5.4%, producing a financial spread of 7.9%. Meanwhile, operating costs are expected to decrease to 5.0%, giving an operating profit of 2.9%. Provisions of 1.0% would leave a net profit of 1.9%.

53. BNF's poor profit performance has been caused by high operating costs, poor portfolio recovery, and, to a lesser extent, a low financial spread on borrowings from certain sources. Political influences contributed significantly to the impact of these individual factors. Perhaps the major cause of BNF's high operating costs is its excessive staff (para 12). Thus, while salary increases such as that which occurred at the end of 1975 may be justified in terms of the need to recruit and retain competent staff, they produce an exaggerated impact on operating costs because of the excessive number of personnel. BNF will increase the productivity of its staff through the implementation of the manpower development plan. Because of the low portfolio recovery, bad debt costs also are very high. To combat this problem, BNF strengthened its collection office and is introducing new collection procedures (para 51). Specific recovery plans have been prepared to reduce existing arrears (para 49). Certain borrowings, particularly those from the Bank of Brazil and the National Bank of Argentina, were obtained at 7% and used to finance loans at an effective rate of about 10%, thus leaving an entirely inadequate financial spread of about 3%, at least for the Agricul- ture Department.

Rehabilitation Program

54. In conjunction with thneproposed Industrial Credit Project, BNF is undertaking a rehabilitation program to increase the efficiency of its operations, improve its financial position, and earn a modest net profit. The primary targets are to raise the average yield on new loans to a minimum of 13% shortly after effectiveness of that project, lower operating costs to 5.4% of the portfolio, and reach a total debt/equity ratio of 8:1.

55. In order to help it reach these goals, BNF will establish a programming and budgeting office for the preparation and control of implementation of lending programs and financial plans. It will also revamp its accounting system to facilitate the production of more accurate financial statements on a timely basis, and the analysis of the cost of specific activities. Another element of the program is the formulation of a manpower development plan which will involve the selective increase of some categories ANNEX 3 Page 13 of staff, the decrease of others and the training of staff to perform defined functions. The eventual result will be a decrease in the number and cost of personnel,and an increase in staff efficiency. Finally, BNF will prepare and implement the debt recovery plan, which was approved by its Administrative Council in April 1977.

April 8, 1977 ANNEX 3 PARAGUAY Table 1

SECONDRURAL DEVELOPMENTPROJECT

National Development Bank

Actual (17-5 n rjce 17-1 aance Sheets-- (O million)

Average Aninual Growth (/) 1971 1972 1973 1974 1975 1976 1971-76

ASSE'S

Clsh and Deposits in Banks 263 231 277 419 645 609 18.3 Reserve Requirementa 498 674 935 1,165 1,479 1,72 28.1 Loan Portfolio: - Development Department Current 3,627 1,811 1,851 2,675 3,247 3,378 1.2 In Arrears 159 269 291 349 279 424 21.7 Outstanding 3,786 2,080 2,142 3,024 3,526 3,802 1.2 Less Provision for Bad Debt 54 97 74 76 93 160 24.3 Net Portfolio 3,732 1,983 2,216 2,948 3,433 3,642 1.7 - Agricultural Department Current 3,809 3,272 4,273 5,275 5,684 6,636 11.7 Sn Arrears 364 221 291 531 620 2,006 40.7 Outstanding 4,173 3,493 4,564 5,806 6,304 8,642 15.7 Less Provision for Bad Debt 384 403 495 445 442 1,516 31.6 Net Portfolio 3,788 3,090 4,069 5,361 5,862 7,125 13.5 Commerclal Departmenr Current 1,069 974 908 973 906 1,267 3.5 In Arrears 326 446 474 446 433 551 11.1 Outstandirg 1,395 1,420 1,382 1,419 1,339 1,818 5.4 Iess Provisions for Bad Debts 68 107 128 133 119 155 17.9 Net Portfolio 1,326 1,313 1,510 1,286 _I220 1,662 4.6

Total Net Portfolio 8,847 6,387 7,795 9,590 10,516 12,429 7.0 Interest Receiveble: - Development Department 239 295 337 277 307 383 9.9 Less Provisions 56 62 87 64 55 38 Net interest Receivable 182 233 249 213 252 345 - Agricultural Department 402 208 245 425 617 1,012 20.3 Less Provisions 43 51 62 65 79 189 Net Interest Receivable 359 157 184 360 538 824 - Commercial Department 12 13 34 26 27 30 20.1 Less Provisions ------Xet Interest Rereivable 12 13 34 26 27 30 Total Net Portfolio 552 404 467 599 817 1,199 16.8 Merchandise Inventory 189 225 332 466 668 421 17.4 Less Provisions 12 32 19 19 20 102 53.4 Net Merchandise Inventory - 176 193 313 447 648 319 12.6 Total Net Fixed Assets 216 226 243 243 240 230 1.3 Government Account (Art. 12) 209 2,086 2,042 2,181 12,17 832 31.8 Other Assets 809 862 1,059 612 1,486 989 4.1 TOTAL ASSETS 11,570 21,062 13,131 15,256 17,199 18,327 9.6 LIABILITIES

Checking Accounts 542 612 726 1,090 1,093 1,468 22.1 Savings Accounts 642 876 1,398 1,656 2,321 2,880 35.0 Total Deposits 1,184 1,488 2,124 2,746 3,414 4,348 29.7 Central Bank Debt 1,064 1,356 1,717 2,539 2,995 3,981 30.2 External Debt 6,711 5,463 6,254 6,686 7,609 7,311 1.7 Other Liabilities 630 740 923 1,050 979 773 3.5 Government Counterpart Contributions 254 307 306 335 322 593 18.5 TOTAL LIABILITIES 9,864 9,353 11,323 13356 iS319 17,006 11.5 EQULIT-Y - Development Department Paid-In Capital 576 576 576 576 576 611 1.2 Reserves 82 82 180 246 217 225 22.4 Retained Earnings 13 22 19 51 47 47 29.3 Subtotal 671 979 774 873 840 883 5.6 - Agricultural Department Paid-In Capital 700 700 700 700 700 1,196 11.3 Reserves 23 24 24 24 27 25 1.7 Retained Earnings (4) - - 25 23 J_,JQ ND Subtotal 719 724 724 749 750 94 -33.4 - Commercial Department Paid-In Capital 245 247 247 247 247 247 - Reserves 66 66 66 66 66 66 - Retained Earnings 4 (8) (3) (35) (23) 30 ND Subtotal 315 305 310 278 290 343 1.7 TOTAL EQUITY 12705 I,707 1,808 1,900 1,880 1,321 -5.0 TOTAL LIABILITIES A4NDEQUITY 11,570 11,062 23,131 15,256 17,199 18,327 9.6 Current Ratio 1.8 1.3 1.2 1.2 1.9 1.5 Long term Debt/Equity Ratio 4.6 3.0 3.0 3.4 5.6/ 69 Total Debt/Equity Ratio 5.8 5.5 6.3 7.0 8.1 12.9 I/ TakIng into account that CS rescheduled all BNF debt (July 1, 1976) and converted it into long-tern debt. SOURCE: Audited BNF Balance Sheets April 8, 1977 ANNEX 3 Table 2

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

National Development Bank

Actual (1971-75) and Projected Q976-81) Income Statements (¢ million)

Average Growth Rate (%) 1971 1972 1973 1974 1975 1976 1971-76

Financial Revenue

DD 204 251 280 291 318 333 10.3 AD 404 487 386 477 584 718 10.9 CD 204 230 255 287 298 321 9.5 Subtotal -312 9.21 I.0sq I,2fn iL3.2 Ll

Financial Expenses

DD 74 86 96 130 148 145 14.4 AD 178 200 264 323 382 446 20.2 CD 97 104 128 183 165 133 6.5 Subtotal 349 390 488 636 695 724 15.6

Financial Income (Spread)

DD 130 165 184 161 170 188 7.7 AD 226 287 122 154 202 272 3.8 CD 107 126 127 104 133 188 11.9 Subtotal 463 578 433 419 505 648 7.0

Operational Expenses

DnD 67 82 101 80 62 115 11.4 AD 214 247 300 326 406 475 17.3 CD 89 83 103 97 98 111 4.5 Subtotal 370 412 504 503 566 701 13.6

Operational Profits

DD 63 83 83 81 108 73 3.0 AD 12 40 (179) (172) (204) (203) ND CD 18 43 24 7 35 77 33.7 Subtotal 93 166 (72) (84) (61) (53) ND

Other Income

DD (1) (11) 11 24 6 - - AD (6) (8) (1) 134 81 - - CD 8 4 5 (2) 47 - - Subtotal 1 (15) 15 156 134 - -

Less Provisions

DD 49 49 75 56 32 72 8.0 AD 250 33 139 126 286 924 29.9 CD 22 58 24 37 71 24 1.8 Subtotal 321 140 238 219 389 1,020 26.0

Net Profits

DD 13 23 19 49 82 1 ND AD (244) (1) (318) (164) (409) (1,127) ND CD 3 (11) 5 (32) 11 53 ND Subtotal (228) 11 (294) (147) (316) (1,072) ND

April 8, 1977 PARAGUAY

SECOND RUJRAL DEVELOPMENT PROJECT

National Development Bank

Project Cash Flow (¢ milliorn)

------~- -- ~--- ~~'' ------~ ~ ------~~------Year -- _------1 2 3 4 5 6 7 8 9 10 11 12 13

Inflow

Bank/XfW funds I/ 163.7 370.4 281.5 ------Government contributiorrf 163.6 370.5 281.5 ------Long-tery. suLbloans Yield - 16.8 71.9 139.6 168.9 166.5 156.2 136.3 112.2 88.0 63.9 39.8 18.1 4.2 Principal repayments - - - - 37.0 121.1 185.6 185.6 185.6 185.6 185.4 148.8 64.7 Short-term subloans Yield 2/ 4.4 18.8 35.9 43.1 42.5 39.9 34.8 28.7 22.5 16.3 10.2 4.6 1.1 Principal repayments - 68.5 220.5 331.8 331.8 322.5 291.6 244.2 196.8 149.4 102.0 54.6 16.7

Total 348.5 900.1 959.0 543.8 577.8 639.7 648.3 570.7 472.9 415.2 337.4 226.1 86.7

Outflow

Long-term subloan disbursements 258.8 588.9 451.7 ------_ _ Short-term subloani disbursements 68.5 220.5 331.8 331.8 322.5 291.6 244.2 196.8 149.4 102.0 54.6 ln.7 - Administrative expenses 11.5 48.8 94.5 114.2 112.6 105.6 92.2 75.8 59.5 43.2 26.9 7.2 2.9 Bank/KfW funds Interes,j 5.7 17.4 47.2 57.1 56.2 52.8 46.1 37.9 29.8 21.6 13.5 6.1 1.4 Principal repayments - - - - 23.1 76.0 116.5 116.5 116.5 116.5 116.5 93.3 40.6

Total 344.5 875.6 925.2 503.1 514.4 526.0 499.0 427.0 355.2 283.3 211.5 123.3 44.9

Net Inflow 4.0 24.5 33.8 40.7 63.4 113.7 149.3 143.7 137.7 131.9 125.9 102.8 41.8

I/ Represents contribution by CB ar.d BNF. 2/ 13 . 3/ 7% of average subloan balances otitstanding (includes provisions). , X. 41 7%.

April 6, 1977 ANNEX 4 Page 1

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Performance Under the Small Farmer Credit and Rural Development Project

Project Description

1. The project consists of a package of investments designed to raise production and living standards in the three public settlement colonies of l4allorquin, Repatriacion, and General Stroessner in the Eastern Region of Paraguay. As appraised, it included a lending program to finance on-farm investments and incremental working capital for about 2,000 small farmers; the construction of about 60 km of all-weather roads and 250 km of earth roads, about 26 primary schools, two health centers (plus the purchase of equipment for a third), and three community centers; the purchase of some 50 vehicles for the use of the participating agencies; and the coordination of the participating agencies. It is supported by a UNDP-financed technical assistance program.

2. Project policy is established by the National Council for Social Progress (CNPS), a coordinating body at the ministerial level. Each agency is responsible for implementing the project component falling within its jurisdiction. Thus, the National Development Bank (BNF) carries out the lending program, the Ministry of Agriculture and Livestock (MAG) provides technical assistance to farmers, the Institute of Rural Welfare (IBR) is responsible for land titling, the Ministry of Public Works and Communica- tions (MOPC) is constructing the roads and community centers, the Ministry of Education is building the schools, and the Ministry of Public Health and Social Welfare (MSPBS) is constructing the health centers. The Project Coordinator is responsible for facilitating the work of these agencies.

3. Virtually all of the 5,000 rural families living in the three settlement colonies will benefit from the roads, schools, health centers, and community centers, while about 40% (2,000) will receive credit for on- farm investments and incremental working capital. Implementation of the infrastructure components is planned over a four-year period; subloans were expected to be committed over three years and disbursed over four.

Farm Credit Program

4. Farmers with 10 to 20 ha of land, of which about 5 ha are partially cleared, obtain credit to finance additional clearing, pasture establishment, purchase of draft animals and farm equipment, and construction of storage facilities. They also receive credit to finance incremental working capital needs such as seed, fertilizer, insecticides, and cultivation. ANNEX 4 Page 2

5. Terms and Conditions. Investment and incremental working capital cost is financed 10% by the farmer, 20% by the Government (through an gquity contribution to BNF), and 70% by IDA. Investment subloans have a maturity of five to 10 years including a maximum grace period of two years, and incremental working capital subloans have a maximum maturity of one year. The interest rate on all subloans is 12%, plus a service fee of 1%. Subloans are granted on the basis of farm plans prepared by the BNF technicians.

6. Commitment. The credit program has demonstrated reasonable progress after a slow start aggravated by land titling delays, management changes at BNF, and insufficient BNF technicians. At the end of February 1977, 861 long- term subloans for US$2.2 million had been committed since the beginning of the project, in comparison with the appraisal estimate of 1,200 subloans for US$3.4 million through the end of 1976. The table below compares the yearly progress of subloan commitment with that projected at appraisal (amounts in US$'000).

Appraisal Estimate Actual Year No. Amount Cum. Amount No. Amount Cum. Amount

1975 400 1,149 1,149 321 636 636 1976 800 2,298 3,447 530 1,542 2,178 1977 /1 800 2,298 5,745 10 32 2,210

Total 2,000 5,745 861 2,210

/1 The actual figures are through February 1977.

8. It is clear that the credit program is behind the appraisal estimates. The reasons for this are not yet entirely clear but various factors might have contributed to the less than expected lending volume. First, effectiveness of Credit 509-PA was delayed until April 1975, some four months later than anticipated at appraisal, and the lending program was not initiated until June of that year. Also, IBR was slow in processing land titles, although this process was expedited by the issuance of certificates beginning in September 1975 (para 17). In addition, BNF did not assign the agreed number of 15 technicians to the project area, and this problem was not resolved until more than a year after the start of implementation (September 1976). The change in BNF management at the beginning of 1976 was one of the factors delaying the assignment of technicians, and it also led to inadequate supervision of the project branches (para 27). More recently, the increase in technicians was not accompanied by an increase in administrative staff at the project branches, but this has been remedied subsequently. The heavy seasonal fluctuation of short-term lending cannot be avoided, but BNF's practice of including short-term and long-term financing in the same subloan has multiplied the impact on the peak workload. Consequently, BNF is attempt- ing to schedule the preparation of farm development plans and long-term lending for the off-season, thus spreading the workload more evenly throughout ANNEX 4 Page 3 the year. Finally, substantial farmer liquidity resulting from favorable prices in the 1975/76 crop year reduced the total demand for, and average size of, subloans, especially short-term credit.

9. Now that the project's organizational structure has been established and steps are being taken to make it more efficient, the credit program may meet the target this year. Nevertheless, there will be a carryover of the shortfalls of the first two years, and, consequently, the present alloca- tion of long-term funds probably will not be fully committed before the end of 1978, or one year later than the appraisal estimate. If short-term lending does not increase substantially, there may be an excess of funds in this category which might be used for additional long-term subloans. BNF has made adequate funds available to support the credit program, as stipulated in Section 4.02 of the Project Agreement.

10. Subloan Size. The average size of long-term subloan granted through February 1977 was about US$2,600, or about 9% less than the appraisal estimate of US$2,870, while the average size of short-term subloan granted was US$604, or over 60% less than the appraisal estimate of US$1,670. The smaller subloan may be the result of the farmers' lack of familiarity with debt financing and consequent reluctance to incur debt. In addition, short-term subloans are affected by a lower level of cash requirements than expected at appraisal, combined with the favorable crop prices which have enabled farmers to use their own funds for production requirements, relying less on borrowed funds.

11. Investment Structure. As of August 31, 1976, the structure of investments, as compared with the appraisal estimate, was as follows:

Proportion Appraisal Actual …------% …------

Land clearing 19 25 Farm equipment and storage 23 29 Pasture establishment and fending 21 18 Draft animals and livestock 37 28

Total 100 100

Favorable crop prices have encouraged farmers to increase their area of cleared land and increased the demand for equipment and storage facilities. In contrast, low meat prices have reduced the demand for pasture establishment and livestock.

12. Subproject Implementation. Implementation of farm development plans is progressing satisfactorily. Supply of current inputs and capital goods is adequate, and investments are being carried out according to the ANNEX 4 Page 4

planned schedules. Technical assistance to farmers has not been at the level anticipated, although some of the inadequacy has been met by the credit, extension, and marketing consultants. Efforts are being made to ensure that an adequate technical assistance capability is developed among the BNF and MAG technicians.

13. Technical Assistance. The technical assistance provided to project farmers by the participating agencies has not met appraisal expectations. BNF was late in assigning the full complement of technicians to the project (para 8), but they are reasonably well qualified and will improve their performance as they gain experience and strengthen their knowledge of the financial aspects of farm development. The credit consultant was performing an important training role, but he had to leave in September 1976 for health reasons and was replaced in February 1977.

14. The major weakness in the technical assistance system lies with the extensionists of MAG. They were to collaborate with the BNF technicians in providing technical assistance to farmers and were to assume much of the responsibility for the preparation of farm plans. Unfortunately, they have little capability in farm planning and have continued to focus on their traditional activities of organizing farmer associations and cooperatives. In addition, many of the extensionists have limited qualifications and their turnover is high. The consultant team will prepare a specific training program on farm planning for the extensionists which will also be open to BNF technicians. Furthermore, MAG is planning to increase compensation for extensionists in order to recruit and retain more qualified people.

15. Collection Performance. As of August 31, 1976, the repayments on project subloans received by the Caaguazu branch of BNF represented 106% of amounts falling due in 1976. The figure exceeds 100% because of prepayments on long-term subloans as a result of favorable crop prices and consequent farmer liquidity. The Mallorquin branch had a recovery of 94%, which was affected by a poor vegetable harvest. Arrears amounted to 1.2% of portfolio for Caaguazu, 4.3% for Mallorquin, and 2.2% for the project as a whole.

Land Titling Program

16. IBR has had continuing difficulties in meeting the land titling requirements of the project, some of which resulted from changing requirements for obtaining titles. Initially, titles were issued once settlers had paid 25% of the cost of the land, but because settlers had difficulty in meeting this requirement, IBR, in September 1975, agreed to issue titles after payments equal- ling 10% of the land cost had been made. Later, in August 1976, however, the requirement was raised once more to 25%. It has been agreed that the requirement will again be set at 10% for the remainder of the ongoing project and for the proposed project as well.

17. The major difficulty, however, is simply the slow rate at which IBR processes titles. Because of the extended delay involved, IBR agreed in ANNEX 4 P'age5

September 1975 to issue certificates to eligible settlers which serve as temporary titles and indicate that the final titles would be issued within a month. This mechanism at least has permitted the credit program to proceed, since BNF accepts the certificate for lending purposes. However, the final titles generally are not issued within a month, and IBR is planning to extend the validity of the certificates.

18. By the end of 1975, 360 project settlers had received titles or certificates, representing 90% of the target for the year -- 400. As of February 1977, 707 settlers had received titles, compared with the cumulative total of 1,200 projected for the end of 1976. IBR expects that 2,000 settlers would receive titles by mid-1978. In order to expedite IBR's titling effort, a work plan has been formulated and the Coordinator will supervise closely the execution of the plan.

Roads

19. The equipment package, consisting of three motorgraders, three bulldozers, six trucks, a mobile workshop, and auxiliary equipment, has been procured and is being employed in the project area. As the design phase of the project road network is being completed, the equipment is being used to make temporary improvements on existing earth tracks, permitting better market access for farmers. About 700 km of tracks have been improved in the three colonies.

20. Consultants have been retained to design the 250 km of earth roads and 60 km of all-weather roads included in the project. This work is expected to be completed by about May 1977. The earth roads are being constructed by MOPC under force account, and construction of new roads began in October 1976 and is expected to be completed by the end of 1978. Bid documents for the all-weather roads are being prepared, and it is expected that MOPC will also construct the earthworks for these roads by force account, using local contractors to install the stone paving.

Schools

21. The schools component has been reduced to the construction of 19 primary schools with 92 classrooms, as compared with the appraisal estimate of 26 schools with 102 classrooms. It was reduced because of cost overruns resulting from substantial price increases subsequent to appraisal and because it was felt that the priority demand for education could be met by the smaller component. By installing a higher number of classrooms per school, 90% of the classrooms anticipated at appraisal will be provided in 73% of the number of schools.

22. The nine schools with 48 classrooms included in the first phase were completed in December 1976 by firms operating under contract to ME. Equipment for these schools is being donated by UNICEF, and the schools began operation ANNEX 4 Page 6 operation at the start of the school year in February 1977. Prequalification of contractors has been completed for the 10 schools with 44 classrooms included in the second phase. Construction is expected to be completed to start operation in June 1978.

Health Centers

23. At appraisal, it was expected that two health centers would be constructed, one each in Repatriacion and General Stroessner, and an existing center in Mallorquin equipped. The present plan calls for the construction of an additional center in Mallorquin in order to better meet the basic medical needs of the population in that colony. Construction of the three health centers, by contract with MSPBS, was completed by December 1976, and equipment for the four is expected to be delivered by September 1977.

Community Centers

24. Bids for the three community centers, one in each of the project colonies, are expected to be called by MOPC by early 1977, and construction is scheduled for completion by December 1977.

Vehicles

25. Twenty-five vehicles have been purchased under the project, as compared with 50 contemplated at appraisal. At the beginning of project implementation, it was decided that the initial purchase would be for half the estimated requirement and that procurement of the second lot would be postponed until a more precise determination of the need could be made. Project progress has been reasonable without the additional vehicles.

Organization and Mlanagement

26. Coordinator. The project provides for a Coordinator, attached to CNPS, who has the direct responsibility for coordination of the work of the various participating agencies. Among his duties are the approval of subloans and the authorization of withdrawal requests. The Coordinator has performed well to date in a difficult role. He works well with the participating agencies and has been reasonably successful in causing them to undertake their respective programs. Although the Coordinator has not so far prepared annual work schedules for the project, as he is required to do, he has agreed to prepare them in the future, and they should enable him to maintain closer supervision of project implementation.

27. BNF. Subsequent to appraisal, a caretaker administration was installed at BNF which had little incentive to attack BNF's problems or pursue an aggressive role in project implementation. As a result, BNF's participation during the first year of project execution was weak, and various requirements under the project were not met. At the beginning of 1976, a permanent president was appointed and virtually all managers down through the department ANNEX 4 Page 7 and division levels were changed. While many of the new appointees were transferred from other posts within the bank, BNF's operating capability was impaired by those changes. Managers presently are still in the process of organizing their units and formulating new work programs.

28. BNF's financial position continues in a precarious state, with substantial losses having been incurred in recent years and very large provisions having to be made in the near future for additional, expected losses (Annex 3). Arrears amount to about 22% of portfolio. In the context of the proposed Industrial Credit Project, BNF is undertaking a rehabilitation plan desigred to achieve a reasonably sound financial status by 1979. The Government will support the plan with a program of capital contributions beyond those required under Section 3.14 of the Credit Agreement for the Small Farmer Project. UNDP also will support the plan by financing a technical assistance program involving some eight man-years of consultant assistance for BNF.

29. In spite of its organizational and financial difficulties, BNF's performance has improved during the course of project implementation. Besides assigning the required technicians, it is now providing adequate administrative support and has begun an analysis of measures to spread the workload more evenly throughout the year and increase the efficiency of its branch staff (para 8). Additional efforts will be made to increase supervision of the project and adjust the compensation of technician to prevent their flight to more lucrative jobs.

30. BNF has been slow to fulfill the covenants of the Project Agreement for the ongoing project designed to improve its general performance. Section 3.02 requires BNF to strengthen its Collections Office (Oficina de Normaliza- cion de Prestamos) to enable it to review all overdue loans and take appropriate action. The Office finally was strengthened in mid-1976, and a proposal was prepared to transfer all loans in arrears for more than a given period to the Office and to introduce a procedure for recovering the payments overdue.

31. Section 3.03 (a) of the Project Agreement stipulates that BNF recover, by September 1975, 20% of the principal of grain loans in arrears as of December 31, 1972. BNF indicated that it had recovered 17% by the end of July 1975, and this performance was deemed to be a reasonable fulfillment of the covenant. Section 3.03 (b) specifies that BNF was to furnish IDA, by September 1975, a detailed analysis of the remaining grain loans in arrears as of December 31, 1972 and a plan for their write-off or recovery, with principal to be rapaid by 1983 and interest to be paid by 1988. BNF's submission in fulfillment of this covenant, however, did not present an analysis of arrears, indicate a judgment on provisions, make meaningful recommendations on extensions, or give projections of recovery of arrears and the steps that would be taken to effect the recoveries. Section 3.03 (c) stipulates that BNF also was to furnish IDA, by September 1975, a plan for the reduction of arrears not covered by the first plan to 10% of portfolio for each department by September 1976. A submission was received by IDA in September 1976, but lacked the necessary detail, as in the case of the grain loans. Since arrears ANNEX 4 Page 8 were about 22% as of December 31, 1976, the target was not met. However, BNF retained its external auditors to assist it in reviewing its portfolio, and, with their help, a debt recovery plan was finalized in April 1977.

32. Section 4.04 of Project Agreement required BNF to raise its interest rate to a minimum of 12% on all loans granted after May 14, 1975, but some loans still were being granted at 9% as late as September 1976. BNF claimed that it was adjusting the interest rate to 12% on all new loans during October 1976. In the context of the proposed Industrial Credit Project, it has been agreed that BNF would increase the average yield on all its loans to a minimum of 13%.

33. Section 4.05 of the Project Agreement stipulates that BNF will maintain a liquidity ratio (excluding short-term financing from the Central Bank) of at least 1.1 and a medium- and long-term debt/equity ratio not exceeding 4:1. The liquidity ratio met the requirement as of August 31, 1976, but because of the long-term refinancing of BNF's debt to the Central Bank in July 1976, the debt/equity ratio was beyond the specified limit. In order to provide BNF greater flexibility in its financial arrangements while maintaining a reasonable relationship between debt and equity, the proposed Second Rural Development and Industrial Credit Projects are focussing on the single criterion of the total debt/equity ratio and requiring that this ratio reach 8:1 by the end of 1978.

34. IBR. Although IBR has a large staff of some 470, it is involved in so many activities that it does not perform any of them very well. In particular, its surveying and land titling activities have suffered as a result of its attempts to promote marketing programs, organize cooperatives, etc. The implementation of a detailed work plan under the close supervision of the Coordinator should improve IBR's titling performance (para 18).

35. MAG. As mentioned earlier, one of MAG's major difficulties is that its staff salaries are too low to attract and retain competent extensionists. Normally, MAG can recruit only those who have just completed their academic training and have little or no experience. They acquire experience working with MAG and then move on to higher-paying jobs in the private sector. Fur- thermore, the more competent graduates enter directly into the private sector. While MAG cannot hope to compete on an equal basis with private firms, it is planning to increase compensation for extensionists at least to reduce the gap which exists between the respective salary levels.

36. Technical Assistance. The project is supported by a UNDP-financed technical assistance program for which the Bank is executing agency. Three consultants in extension, credit, and marketing are provided for the three-year period 197-77 by the Society for Organization, Planning and Training (GOPA) under contract to the Bank. The consultants are assisting in the orientation of extension work in the project area; preparation of plans for the credit component; introduction of procedures for the supervision and collection ANINEX 4 Page 9 of subloans; promote the coordination of the participating agencies; helping farmers with management, marketing, and storage activities; and training counterpart staff.

37. While the work of the consultants generally has been quite effective, stronger inputs from them are required in the preparation of work programs and in training extensionists. These aspects of their work are being reinforced in the context of the mid-term review held in early 1977.

38. Auditing. All participating agencies are required to have their project accounts audited. In the case of BNF, accounts are to be audited quarterly and general accounts annually. An annual audit, which includes a review of the project accounts, is performed by a private auditor. The quarterly audit of the project accounts has not yet been undertaken, but it has been agreed that the Superintendency of Banks will perform it. The project accounts of the other participating agencies also have not yet been audited, but the Ministry of Finance will undertake this work.

Project Cost

39. The present project cost estimate of US$16.7 million is somewhat more than 5% above the appraisal cost estimate of US$15.8 million, as shown in the table below (amounts in US$'000).

Project Cost Reallocation Current % Increase Appraisal Estimate Estimate from Appraisal Component Estimate (8/76) (10/76) to Current

On-farm investment 5,754 5,754 5,754 Working capital 3,341 3,341 3,341 - Roads 5,095 4,669 5,268 3 Schools 1,087 1,548 1,600 47 Health centers 198 277 277 40 Community centers 127 124 205 61 Vehicles 198 202 202 2 Project coordinator 40 40 40 -

Total 15,840 15,955 16,687 5

The increase was caused primarily by the extraordinarily high rates of infla- tion of recent years which affected construction costs in particular. It should be noted that costs were held down in the case of roads through a shift to force account work and that the number of vehicles purchased was half of the appraisal estimate. The increase in project cost will be met by an increase in the Government's contribution. A1i4EX 4 Page 10

Evaluation

40. It is too early to determine project impact on production because of the recent initiation of the lending program and the length of the development period involved. Similarly, the infrastructure compoments are still in the construction stage. At this point, it can only be stated that the implementation of the farm development plans and the construction of infrastructure facilities are proceeding satisfactorily after a slow start. Project monitoring and evaluation has been reviewed with the Coordinator, and a system to determine project impact will be introduced in the context of the second project.

April 8, 1977 ANNEX 5 Page 1

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Description of Project Area

A. Location and Regional Framework

1. The proposed Second Rural Development Project area is located in southeastern Paraguay along the Parana river and within the administrative boundaries of the Department of Itapua. At the southern end of the Department lies its capital, Encarnacion, the second largest city of the country. Itapua is distinctly agricultural in character. Its rich soils and the growing entre- preneurial farming population in its southern half have made Itapua one of the most important agricultural regions of the country, with approximately one- fifth of Paraguay's crop output originating there. Agricultural development is nevertheless uneven. The southern part of Itapua, roughly forming a triangle between Encarnacion, San Pedro del Parana, and Pirapo, has a commercially oriented farm structure into which modern technology is rapidly being introduced, with consequent increases in productivity.

2. The main crops of this area are soybean, rice, corn, tung oil and wheat. Farms are usually medium sized and operated by the owners and their families. 1/ The project area nearest Encarnacion is designated as area A (see Map). It comprises two Institute of Rural Welfare (IBR) colonies: Colonias Unificadas, established in 1941, and part of Colonia Frederico Chavez, founded 10 years later. Total area and number of farm plots are as follows:

1/ Settlement of this area started in the 1920s, with a strong influx of European immigrants, predominantly German. The most recently established foreign colony is Pirapo, founded in the 1960s under a bilateral agreement between the Paraguayan and Japanese Governments. ANNEX 5 Page 2

Number Area of Plcts (ha)

Unificadas /1 22,925 1,137 Federico Chavez /1 53,350 647

Total 76,270 1,784

/1 A group of three colonies (Tacuaria, Parana and Doctor Esculiez), which were established separately.

The actual number of farms in these colonies, however, does not correspond to the above figures because of a gradual process of subdivision of the original plots.

3. The upper part of the Department, north of Capitan Mesa, is still mostly covered by forest. It covers an area of around 750,000 ha. Soils are of the same high fertility as in the southern part of Itapua and agriculture is slowly being established there. Area B, of the proposed second project, lies within this region, a gross area of 282,500 ha running parallel to the Parana River (see Map).

4. The agricultural potential of Itapua far exceeds its present production level. Not only are large areas still under forest, even in the more densely settled south, but on-farm productivity could be improved considerably through the adoption of modern farming techniques. Farming is carried out through small and medium-sized family enterprises dealing mostly with cash crops.

5. Itapua's location and relationships with the rest of Paraguay will change considerably within the next decade. Two major developments affecting the economic structure of the Department, and undoubtedly influencing the proposed project areas, are (a) the project completing the national road (Route 6) between Encarnacion and Pto. Pte. Stroessner, including paving of the existing Encarnacion-Pirapo segment, and construciton of the remaining section to Pto. Pte. Stroessner, and (b) construction of two large hydroelectrical plants on the Parana River--Itaipu in the north and Yacyreta-Apipe in the south.

6. When finished, the national road (Route 6) will complete the third segment of the Plan Triangulo, connecting the existing roads between Asuncion- Encarnacion, and Asuncion-Pto. Pte. Stroessner. The opening of this asphalted highway will facilitate the development of over I million ha of forest land in the Departments of Itapua, and Alto Parana, and the road's completion will provide a link to the Brazilian market via Pto. Pte. Stroessner through which output from the proposed project area would be channelled. ANNEX 5 Pnge 3

7. The two hydroelectrical plants (Itaipu and Yacyreta-Apipe) are being developed on a bilateral basis with Brazil and Argentina. The Itaipu project is now under construction and implementation of the Yacyreta-Apipe project should commence during 1977/78. Both projects would affect the second rural development project area in three main respects:

(a) the national and regional mobilization of qualified manpower and construction firms might create strong competition for the manpower in the project area, resulting in an increase in labor costs, which will affect overall project costs;

(b) the demand for peak labor on the construction site of Yacyreta- Apipe on the Paraguayan side could be as high as 5,000 workers, causing a demand for agricultural products during the construction period that might affect the farming pattern in the proposed project area; and

(c) due to the anticipated water level changes in the Parana River, as a result of the hydroelectric project in the Yacyreta-Apipe area, between 800 and 1,000 farmers on lands to be flooded will have to be resettled, and IBR intentions are to resettle them in the northern part of Itapua.

B. Physical Features

Climate

8. The climate of the project area can be classified as sub-tropical, with a strong continental influence (Table 1). Summers are hot and humid and winters are relatively dry and cool. Throughout the year, rather wide fluc- tuations in temperature are experienced as a result of the continental influence.

9. Rainfall averaged 1,648 mm per year for the 1964-70 period, ranging from 1,368 mm in a dry year, to 2,200 mm in a wet year. The wettest month is generally December (average 992 mm) and the driest, June (Average 100 mm). Rainy days are well distributed throughout the year, with an annual average total of 81, an average minimum of five days per month, and an average maximum of nine days per month. Rainfall intensity can sometimes be such that runoff causes erosion on the steeper and unprotected slopes. Intensities of 1 mm per minute for more than one hour are not unusual. Runoff has been estimated at 20% of rainfall.

10. Average temperatures range from a 160 to 17 0C low in winter (June- July-August), to a 25 to 26 C high in summer (December, January, February), ANNEX 5 Page 4

while average minimum temperatures range from 10 to 18 C for the same seasons (the absolute maximum temperature is 39 C in December, while the absolute minimum is -3 in June or July). Certain crops, mainly perennials, are adversely affected by these wide temperature ranges. The relative humidity of the air is fairly constant and only varies between 65% in summer, and 80% in winter.

11. Night frosts occur in the coldest months of the year, mainly June, July and August, and limit the possibilities for winter cropping (Table 1). However, in part of the project area, along the Parana River, the frequency of fog lengthens the frost-free period, resulting in a more favorable climate for frost-sensitive perennials such as bananas, papaya, mangoes and pineapples. Conditions are more favorable in this area for citrus fruits as well.

Soils

12. The pedological surveys undertaken for the Plan Triangula show that practically all the uplands of the project area are lalosolic. More specifically, the soils are silty clay, silty clay loam, or clay loam; over 150 cm deep; moderate permeability (2 to 6.4 cm per hour); and derived from basalt. The typical soil profile has a dusky red, friable, light clay surface soil that is moderately sticky and plastic when wet, and hard when dry. The pH ranges from 5.8 to 6.6 under forest, and from 5.4 to 6.2 in old cultivated areas. This well-drained upland soil is physically well adapted to many crops and is among the best of Paraguay. This soil unit is broken in places by similar soils with steeper slope, rarely exceeding 9%, or by narrow, wet valleys of strongly acid clays of old alluvium, or Humic Gley soils. In places, small areas are covered with reddish brown laterites.

Land Capability

13. Class II soils cover 70% of project area B, corresponding to the upland latosols described above. The narrow, wet valleys and some low areas are grouped in Class V and overlie 20% of the area. The remaining 5% fall into Class III. Compared to area B, area A has a somewhat less favorable supply of land suitable for intensive cultivation. The Colony Federico Chavez has a preponderance of steep slopes and soils unsuitable for cultivation (Classes VI and VII) that can be used only for pasture or forest.

14. Area A is already completely settled. In area B, all the Class II soils can be gradually deforested and cultivated, constituting the main area suitable for colonization. Under present conditions, Class III, IV, and V soils should not be deforested and cultivated, including the river banks, thus reducing erosion. The lowlands, with hydromorphic soils, could eventually be developed for irrigated rice with proper flood control and drainage works, but this would be costly and does not appear justified in the near future. National Development Bank (BNF) and Ministry of Agriculture and ANNEX 5 Page 5

Livestock (MAG) technicians should ensure that Class III soils and above are not developed and that a strip of protective land 15 m wide remains on each side of all rivers and streams. Land available for settlement in area B is discussed further in Annex 2.

Forest Resources and Streams

15. Covered mostly with humid, sub-tropical forest, averaging 270 trees per hectare, project area B, because of access by the Parana River, has been repeatedly and selectively logged for almost a century for its commerci '1 and exportable timber (Class A), mainly cedro (Cedrela tubiflor) and lapacho (Tabebula ipe). Due to poor forest management, however, there is now a very limited quantity of these valuable species left. Furthermore, many of the large trees still standing were obviously rejected during earlier harvests because of deformed shape or suspected internal defects and have little commercial value. Estimates of the remaining commercial timber therefore indicate that, near the Parana River, the forest has been thoroughly exploited for most of its marketable timber. If any usable timber is discovered during agricultural clearing, it should be marketed or kept for on-farm use.

Topography, Water Supply and Drainage

16. Topography. The project area, including both areas A and B, with the Parana River as its eastern boundary, consists mainly of gently undulating to rolling slopes, ranging in grade from 2% to 5%. The landscape is cut by regularly spaced narrow stream valleys, with steeper slopes up to 9% in gradient.

17. Water Supply and Drainage. The entire project area is part of the Parana River's watershed. The general direction of the Parana's flow is northeast to southwest, and its main Paraguayan tributaries are the Pirapo, Tembey, Guarapay, Yhaca-Guazu and Yacuy-Guazu in area B, all running parallel to one another in northeasterly to southwesterly direction and at fairly regular distances from each other. With the high rainfall in the area (over 1,600 mm), water supply is adequate in all areas of the proposed project. Ground- water appears to be abundant at relatively shallow depths but definitive surveys are lacking. In area B, some farm wells range in depth from 10 m to 15 m. The entire area is generally well drained through a relatively dense network of tributaries joining the main river systems.

C. Social Infrastructure

Population and Settlement

18. A farm survey carried out during February 1976 in both project areas indicated that the total farm population was approximately 50,000, 22,200 of ANNEX 5 Page 6 which were located in area A and the remainder in area B, north of Capitan Meza. This population can be regarded as the "target group" for the project. Although the reliability of the survey is not established, the Field Coor- dinator estimates that 90% of the farms in area B were covered by it. In area A, the survey covered a 10% sample of the existing farms. The above figures, however, do not include the population living in small towns within the project area, and the 1972 population census does not provide any additional information on this point.

19. In area A, there are relatively few villages within the project area. Well-established small towns in the southern part of the Department of Itapua such as Hohenau, Capitan Miranda and Jesus provide the necessary services for the farming community. Area A is relatively close to the capital of the Department, Encarnacion, and a fairly dense earth road network provides satisfactory ground communications between rural areas and the towns.

20. In area B, essentially an agricultural frontier, almost all the service centers are located along the Parana River. Communication between the the small semi-urban centers in the southern part of the area, and the south of the Department, has been facilitated over the past few years by the construction of earth roads which permit regular traffic during dry weather. The most important of these centers are Capitan Mesa, Puerto Triunfo, Edilira, Puerto Natalio--all on the Parana River--and Domingo Robledo, halfway between Capitan Mesa and the Rio Tembey. Estimates of the population in these centers vary from 8,000 to 15,000 and the number of small commercial enterprises and local civil authorities is increasing quite rapidly.

21. The large influx of settlers is causing rapid changes in the socio- economic structure of the centers as they are becoming more service-oriented. The service centers in the northern part of the project (Puerto Porvenir, Pto. San Rafael, Pto. Carlos Antonio Lopez, and Mayor Otano) are small villages with a restricted service radius and extremely primitive economic structures. They are isolated from the rest of the Department and can be reached only by boat along the Parana River. Because of their isolation, they have close links with neighboring Argentina. The city of El Dorado, across the river from Mayor Otano, acts as the regional service center for the sparse settlements along the Paraguayan side of the Parana River. Mayor Otano is the most important semi-urban center in the northern project area, with an estimated population of 2,000 to 4,000 people.

Input Availability

22. Area A, being at a more advanced stage of settlement, has a network of basic services providing inputs to farmers. The area is within easy reach of well established urban centers (Encarnacion, Hohenau, Obligados, Fram, and Capitan MIiranda), which have commercial dealers trading in seed, chemicals, farm machinery, storage and commodity processing. Little of this network is available to settlers in area B. Capitan Meza is the largest center but provides few services. In the other settlements along the river (Domingo ANNEX 5 Page 7

Robledo, Puerto Trifuno, Mayor Otano), small merchants provide some of the most essential inputs.

Institutions

23. The project area is part of the Department of Itapua, where a Governor at Encarnacion represents the Central Government and chairs a Regional Council for the Development of Itapua. The various ministries and national institutions are well represented in Encarnacion but field staff are distributed unevenly. They are particularly sparse in area B.

24. MAG has a Regional Research Center at Capitan Miranda, with provision for a sub-center in area B. There are five extension agents (one supervisor plus four technicians) in Encarnacion, and two technicians in Hohenau, all near area A. These are only two technicians in all of area B (one at Capitan Meza, and one at Puerto Triunfo).

25. IBR has four administrators in area A and four in area B, all under the authority of the Encarnacion office.

26. BNF has three branches in the project area, one at Encarnacion and one at Hohenau, both serving area A, but the Hohenau Branch has posted one technician to Capitan Meza (area B). BNF is considering a new branch, either at Capitan Meza or Domingo Robledo (both in area B), but a final decision on the location will be delayed until the Second Rural Development Project gets underway. Loans outstanding to IBR settlers as of December 31, 1975 were as follows: ANNEX 5 Page 8

Encarnacion Hohenau Total

Area A Number 650 198 848 Amount (G million) 89.5 29.7 119.2 Arrears (G million) 1.7 0.4 2.1 Total Loans outstanding 91.2 30.1 121.3 Average loan size (G '000) 140.3 152.0 143.0

Area B

Private Settlers Number of loans - 179 Amount (G million) - 30.8 Arrears (G million) - 0.4 - Total loans outstanding - 31.2 Average loan size (G '000) 174.3

IBR Settlers Number of loans - 53 - Amount (G million) - 6.4 - Arrears (G million) - 0.3 - Total loans outstanding - 6.7 - Average loan size (G '000) - 126.4 -

Average loan size, area B (G '000) - 163.4 -

The larger loan sizes in area B probably reflect the relatively large investment going into land clearing and annual cropping on the virgin and highly fertile, cleared forest land.

Infrastructure

27. Area A is serviced by a reasonably adequate basic infrastructure network. Almost all the farms are located on earth roads and there are storage and processing facilities in the nearby towns which aid the marketing process. The school system provides a fairly good coverage, and health facilities (hospitals and doctors) can be reached easily. Electricity, however, is not generally available on the farms.

28. In area B, only the southern part, between Capitan Meza and the River Tembey, has even a rudimentary road network. There are no storage or marketing facilities, and post-harvest losses can be high. Only about two- thirds of the 7,000 children of school age attend school and drop-out rates are very high. The 54 existing schools are mostly one-room, wooden structures, inadequately equipped. Health services are insufficient to deal with the rapid influx of settelrs. There are three health centers (Capitan Meza, ANNEX 5 Page 9

Domingo Robledo and Mayor Otana), all understaffed,and poorly equipped. There are three health posts providing only rudimentaryservices. The doctor-to-populationratio is 1:12,500,and hospital bed to population ratio is 1:2,000. Electricity is available only in some of the larger villages, and then for only a few hours daily.

January 31, 1977 PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Description of Project Area

Weather Data-/

J F M A M J J A S 0 N D Total

Average rainfall (mm) 152 174 162 109 104 100 107 123 137 171 117 122 1,648

Average number of rain days 7 8 7 6 5 6 5 7 9 8 6 7 81

Average temperatures ( C) 26 26 23 21 19 16 16 17 19 21 24 25 21

Average maximum temperature ( C) 32 31 29 27 24 21 21 22 24 27 29 30 26

Average minimum temperature ( C) 18 19 17 15 12 10 10 10 12 14 16 18 14

Absolute maximum temperature ( C) 37 37 37 34 32 31 31 32 34 36 37 39 39

Absolute minimum temperature (0C) 9 12 4 5 0 -3 -3 -2 0 3 4 8 -3

Average relative humidity 65 71 73 76 77 80 77 75 76 71 66 66 73

Average frequency of days with frost 0 0 0.1 0 0.7 3.3 2.6 1.7 0.7 0.1 0 0 9.2

1/ Data given in the present table are means obtained at the Capitan Miranda Meteorological Station (latitude: 270 17' 10" - longitude: 550 49' 30") for the period 1964 to 1970.

Source: FAO/CP Preparation Report, August 1976.

December 28, 1976 | ANNEX 6

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

On-farm Investments under the Project

A. Medium- and Long-term Investments

General

1. Settlers in the project area have had little access to medium- and long-term financing or technical assistance, although farmers in area A, longer established and with all-weather road access to nearby Encarnacion and Hohenau, have better access than those in area B (Annex 5). The National Development Bank (BNF) is the only credit institution providing financial assistance to the Institute of Rural Welfare (IBR) settlers in the project areas. Investment needs differ between area A and area B, primarily because of the difference in the age and development stage of the settlements.

2. Most of the small farmers cannot cultivate more than 4 or 5 ha of their 20-ha plots because of the lack of financial resources to either clear more land with the help of hired labor or machines or to destump the already cleared area and work it more efficiently with draft animals or light mechanization. Even though the settlers work hard, most of them are locked into a subsistence level farming situation unless they are given access to medium- and long-term financing to help them achieve a commercial farming level.

Cutting Forest

3. Most of the cutting is done with hand axes and saws beginning in April-May (fall) soon after harvest. After the trees and brush are cut, they are allowed a short period of time to dry before they are burned. After the first burn, the remaining smaller limbs and brush are cut and piled on the remaining trunks and stumps for additional drying and burning. This process requires about 37 man-days/ha and costs about US$110/ha. Both axe and chain- saw contractors are available to perform this work.

Destumping and Clearing

4. For the first two or three years after the forest has been cut down, it is impossible to use draft animals for tillage because of the large number of stumps and logs criss-crossing the fields. Crop residue and regrowth are cut, piled and burned in an attempt to get rid of remaining stumps and trunks. The trunks that remain are aligned with the stumps or dragged off to one side. ANNEX 6 Page 2

Such clearing is commonly accomplished by additional cutting, prying and pull- ing, using both human and animal power. The German "Cooperative Colonas Unidas Agr. L'tda" located at Hohenau now offers custom bulldozing of stumps at about US$35/hr, plus transport of equipment to and from the site. Average cost of destumping forest cut four or five years previously is US$125/ha.

Draft Animals

5. In area B of the project, the average number of hectares cleared per farm is 4.8, which is about the maximum amount of land a farm family can handle manually. There is a limited number of oxen and horses being used now but at least 60% of the farmers interviewed were interested in financing for purchase of draft animals. A good pair of oxen presently costs US$550 to US$659 per pair and horses cost US$200 to US$300 per pair. Oxen with proper care should have a working life of eight years. Sold for slaughter at the end of their working life, they would have a salvage value of about US$200 a pair. An additional investment would be required for animal-drawn tillage tools and a cart, which would amount to about US$500 per beneficiary.

Permanent Pasture

6. About I ha of permanent pasture, as well as some maize and cassava, would be required to feed the oxen properly. Fences that would be financed are normally four strands of barbed wire strung to native wood posts spaced at approximately 2-meter intervals. Cost of the fencing for I ha (400 m) would be about US$240.

Backpack Sprayers

7. Backpack sprayers, manually or motor operated, are required if the farmers are to protect their crops against attack by insects or disease and fungus. Farmers suffer reduced yields annually, and complete crop loss in some cases, because they have no way of applying, or finance to purchase, the required chemicals. There is a large demand for sprayers. A good manually operated backpack sprayer costs about US$60.

On-farm Storage

8. The largest demand voiced by the farmers in area A of the project, and to a lesser degree in area B, was for loans to build on-farm storage. Soybean prices varied from about US$100/m ton at harvest time (late April) to almost US$160/m ton in late August. Other crops which also show signs of price gain if stored are tung, maize, sunflower and peanuts. On farm storage construction costs vary from US$16 to US$20/m2. Soybeans require about 1.5 m2 of floor space per ton of storage. Some storage is also required for holding feed for draft animals and various other supplies. Average investment for storage on the 20-ha farm (paras 13, 14 and 15) is expected to he about US$180. ANNEX 6 Page 3

Alternative Investments

9. Settlers who already have draft animals or other investments depicted in the farm models (Section B) may want to substitute mobile threshers to be used with soybean, maize, sunflower and beans. These units range in cost from US$2,000 to US$3,500 and in capacity from 400 to 1,800 kg/hour. Current custom charges for threshing in the project area is US$0.015 (2 G) per kg for maize, with the farmer furnishing all the labor for feeding the machine and bagging the grain. Operational costs average US$0.0027 (0.34 G) per kg or about US$0.005 (0.650 G) per kg, including interest and depreciation, but not profit. Current custom rates for threshing are profitable and there is a real need for additional machines.

10. Some sub-borrowers may wish to finance additional cutting of forest or mechanical clearing of forest by bulldozers. Current average cost for push- ing down standing forest and windrowing the debris is US$400/ha, requiring 10 to 12 hours of bulldozer work. Interest was also shown in borrowing for additional fencing and pasture establishment for milk cows and swine rearing.

Tractors

11. Medium-size farmers (40 ha) in both areas A and B, who average about 8 to 12 ha of land cleared of the forest, find that they are unable to double- crop or increase their cultivated land area without additional farm power. They have also found that, during the critical harvest period for wheat and sunflower and during preparation of that same land for soybeans, labor is in short supply, thereby curtailing the amount of land that can be double-cropped. Some farmers in area A have access to custom-hire tractors but they have experienced delays in getting work completed on a timely basis during critical periods. Current custom rates range from US$9 to US$10 per hour for plowing or discing. Most prospective sub-borrowers expressed their desire to purchase 45- to 65-hp diesel tractors equipped with tillage tools, planter, cultivator, sprayer and trailer. The current prices for tractors of this size in Paraguay range from US$11,000 to US$13,000, and matching equipment costs about US$9,000 to US$10,500 additional. Operating costs, including labor, range from US$5.50 to US$6.50 per hour. Diesel fuel is expensive in the project area, costing about US$0.23 per liter.

Operating Costs

12. In the first year of investment, incremental operating costs are included in the farm loan to insure that the sub-borrower uses good quality seed and the required pesticides, as well as other good cultural and post- harvest practices, incuding the holding of crops for later marketing. ANNEX 6 Page 4

B. Farm Models

Model I (Small Farmers, 20 ha)

13. This farm model is based on land ownership of 20 ha, with an average of 4.8 ha 1/ partially cleared and farmed and the remainder in heavy forest. Seventy percent of the farmers in area B fall into this category. Of the land in forest, 10.2 ha could be cleared for farming, but the rest is considered to be better left to forest because of slope, marshy condition or other adverse physical characteristics. Over 50% of the cultivated area is in subsistence crops of maize, cassava and beans, while soybean makes up about 75% of the gross cash income for these farmers. Yields are low because from 15 to 25% of the land is occupied by stumps and logs, poor quality seed is used, weed infes- tation is severe, and practically no fertilizer, pesticide or other soil amend- ments are applied. After investment, the farm would move up to 6.8 ha in production, with 1 ha in pasture and 5.8 ha in crops. Oxen would be used to till 4.8 destumped ha of which 2.5 ha would be double-cropped, giving a total area cropped of 7.3 ha. Two additional ha of newly cut forest, with a large amount of down timber, would be cultivated manually. Sub-borrowers would be required to purchase good quality seed and would be provided with funds for fertilizers, pesticides or herbicides, as conditions dictate.

14. The farm model includes maize, cassava, beans, soybean, sunflower and permanent pasture, but the sub-borrower would choose those which he felt best qualified to produce and which seemed profitable under changing market conditions.

15. The overall average investment is expected to be about US$2,520 for land improvement and equipment, with US$564 for incremental operating costs, making a total of US$3,084 per sub-borrower. Full development income is not expected until the fourth year because experience with the use of pesticides, animal power, storage and marketing would have to be gained to realize full benefits. The financial rate of return on this model has been estimated at 28.8% over a 12-year period (Tables 1 and 2).

Model II (Medium Farmers, 40 ha)

16. This farm model is based on land ownership of 40 ha, with an average of 8 ha cleared of stumps and 6 ha cut but with stumps, making a total of 14 ha farmed. The remaining 26 ha are generally covered with heavy forest, but 16 ha are considered as potential farm land. About 10% of the farms in the project area are established as 40-ha farm units but IBR intends to allocate more farmers of this size to encourage mechanization. Draft animals and

1/ Taken from the information in the farm survey carried out jointly by MAG, BNF and IBR during February 1976 at the request of the Bank. ANNEX 6 Page 5 family labor represent the major source of farm power at present. About 25 to 30% of land is in subsistence crops, with a larger, proportional area under cash crops, compared with the previous model. Yields remain low on these farms because of shortage of financial assistance to the farmer to purchase proper inputs. With such assistance, these farmers would destump the 6 ha of uncleared cut forest and secure a tractor and equipment, which would enable them to double-crop 10 ha of cash crops and produce 4 ha of subsistence crops, giving a total annual cropped area of 24 ha.

17. Crops in the farm model include cassava, maize, beans, soybean, wheat and tung, but sub-borrowers would be free to select the crops they wished to grow, based on experience and market outlook. Financing would cover stump clearing costs and tractor purchases as well as incremental operating expenses for the first year. Included in the financing would be funds for good quality seed, fertilizer, pesticide, herbicide, custom combine harvesting, fuel and repair, as well as other minor inputs.

18. The overall average investment is about US$7,567, based on one-third of the cost of a 45-hp tractor, with matching equipment, and the destumping of 6 ha of land, with incremental perating costs of US$2,439. There are alter- natives for tractor ownership since most farmers do not have enough land cleared to fully utilize available tractors. Three or more farmers could join together to purchase a tractor, or one farmer could utilize surplus tractor capacity by doing custom work for neighbors. Indications are that the latter is already the practice in parts of area A and is likely to spread into area B with the availability of appropriate finance. The overall investment would average about US$10,006 per farm, as depicted in the model. Full production would be achieved in the third year, one year earlier than in the previous model, as these farmers are already oriented toward commercial agriculture. The financial rate of return has been estimated at 19.3% over a 12-year period (Tables 3 and 4).

Foreign Exchange

19. Investment items for areas A and B, with their respective foreign exchange components, are compared in Table 5.

January 31, 1977 ANNEX 6 Table 1 PARAGUAY

SECONDRURAL DEVELOPMENTPROJECT

On-tarm Investments under the Project

Model I: Crop Farming - 20-ha Farm with 4.8 ha Partly Cleared. Remainder Heavy Forest (Us$)

---- _---_------Year ------1 2 3 4 5 6 7 8 9 10 11 12

Ivestment Costs

Destump and clearing 4.8 ha_/ 660 ------Cut forest, burn, stack and burn-2 220 - One pair oxen 660 ------660 Farm equipment for osen 500 ------500 Fencing (400 m) 240 - He ,d sprayer 60 - - - 60 - - - 60 - - - O-fars storage (10 n2) 180 - ______

Subtotal 2,520 - - - 60 - - 660 60 500

Operational Costs

SetuP/ 84 84 84 84 84 84 84 84 84 84 84 84 Pesticide 55 55 55 55 55 55 55 55 55 55 55 55 Mechanization4/ 228 228 228 228 228 228 228 228 228 228 228 228 Sacks 110 110 110 110 110 110 110 110 110 110 110 110 Labor5/ 679 679 679 679 679 679 679 679 679 679 679 679 Oxen (feed and equipment repair) 37 37 37 37 37 37 37 37 37 37 37 37

Subtotal 1,193 1,193 1,193 1,193 1,193 1,193 1,193 1,193 1,193 1,193 1,193 1,193

Total costs 3,713 1,193 1,193 1,193 1,253 1,193 1,193 1,853 1,253 1,693 1,193 1,193

Costs without project 629 629 629 629 629 629 629 629 629 629 629 629 Is-re-ntal operationul costs6/ 5t4 564 564 564 564 564 564 564 564 564 564 504

Sales/' 1,466 1,707 1,957 2,241 2,362 2,374 2,440 2,506 2,506 2,506 2,506 2,506 Sale of oli usen and equipment ------200 - 50 Residual value of ineentment-/ - - - 780

Total income 1,466 1,707 1,957 2,241 2,362 2,374 2,440 2,706 2,506 2.556 2,506

Income withbot project 759 771 784 804 825 846 866 887 887 887 887 887 Incr- ental project income 707 936 1,173 1,437 1,537 1,528 1,574 1,619 1,619 1,619 1,619 1,619 Net incremental benefit (loss) due (2,377) 372 609 873 913 964 1,010 595 995 605 1,055 1,835 to project

Financial rate of ret-ro: 28.8%

Cash Fluw

"srt:Investment 2,520 - - - 60 - - 660 60 500 - Operational 1,215 1,215 1,215 1,215 1,215 1,215 1,215 1,215 1,215 1,215 1,215 1,215 Interest/Annuity Investment loan-_/ 295 295 295 513 513 513 513 513 513 513 - - Operational loam-)L 66 ------In- Sales-crops 1,466 1,707 1,957 2,241 2,362 2,374 2,440 2,506 2,506 2,506 2,506 2,506 -equipmen t ------200 - 50 - Luans-investmetll// 2,268 -operutionalll 508 Surplos (deficit) 146 197 447 513 574 646 712 318 718 328 1,291 1,291

1/ Destumping and clearing by contract. 2i Cutting of forest, burning, stacking and burning by contract and/or family labor. 3/ The purchase of seed from the National Seed Service is required of borrowers to ensure good quality. 4/ Mechanical thrashing by contract. 5/ Family labor. 6/ Incremental operating costs in Year 1 allowed as investment. 7/ Refer to Table 2 for yield and price assamptions at full development. Sales reach 707. year 1, 80% year 2, 907 year 3, and 100l of potential year 4 onward. Future prices are adjusted according to Bank projections for soybean. Maine and wheat are primarily consumed internally, as is cassava. 8/ Remaining value of oxen, equipment and storage. 9/ Interest 13%, three years grace with seven-year repayment period. 10/ Interest 13%, repayable at the end of year one. 11/ 90A of investment and incremental operational costs in first year. Incremental operational family labor (4%.) partly covers farmer,.s investment 9cntribution of 00%.

Deceber 17, 1976 PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

On-farm Investments under the Project

Model I: Assumptions and Enterprise Net Margins

1976 Area Yield Price l/ Gross Input Labor Net 3/ Gross Margin (h) mt/ha US$/mt- Income Cost Cost 2/ Income- per ha ------US$ - - - -_

Without Project

Cassava 0.5 12.0 15.9 95.2 0.0 63.0 32.2 32.2 Maize 1.5 1.6 55.0 132.0 0.8 163.0 (31.8) (21.2) Beans 0.5 0.9 150.8 67.8 9.2 107.0 (48.4) (96.8) Soybean 1.8 1.6 111.1 320.0 60.7 167.4 91.9 51.0 Sunflower 0.5 1.2 100.0 60.0 5.2 52.8 2.0 4.0

Totals 4.8 (farmed) 675.0 75.9 553.2 45.9

With Project

Cassava 0.5 16.0 18.0 144.0 41.2 86.0 16.8 33.6 Maize 1.0 2.0 63.5 127.0 49.9 56.5 20.6 20.6 Beans 0.5 1.0 167.0 83.5 7.0 67.0 9.5 19.0 Soybean 3.8 2.0 135.0 1,026.0 295.4 316.7 413.9 108.9 Sunflower (double cropped with soybean) 2.5 1.5 119.0 446.4 120.7 152.5 173.2 69.3 Pasture 1.0 ------

Totals 6.8 (farmed) 1,826.9 514.2 678.7 634.0

With double cropped area 9.5

1/ With project prices reflect impact of on-farm storage investment, as well as reduced transport costs due to improved roads. 2/ Family labor or traded labor without project, family labor with project. 3/ Negative net incomes without the project show that farmers receive less than the estimated wage of G 395/day (US$2.98) for their labor. Very little labor is hired for cash in area B.

February 18, 1977 ANNEX 6 Table 3 PARAGUAY

SECOND RURAL DEVELCF9ENT PROJECT

On-farm Investments under the Project

Mode' i:i Mceohnized Crop Farming - tO-ha Fsar with 5 ha Fully Cleared, 6 ha with Stumps, Remainder Heavy Forest (us$)

------_------Year ------1 2 3 4 5 6 7 8 9 10 11 12

Investment Cosrs

Dest-mping and clearing 6 ha 900 ------Tractor!/ 45 hp 3,667 ------3,667 - Implements 3,000 ------3,000 - -

Subtotal 7,567 - - - - 6,667 -

Ope-ational Costs

Seel 577 577 577 577 577 577 577 577 577 577 577 577 Pest'iide 638 638 638 638 638 638 638 638 638 638 638 638 M-chan-aiti,, 1,862 1,862 1,862 1,862 1,862 1,862 1,862 1,862 1,862 1,862 1,862 1,862 S,,ks 158 158 158 158 158 158 158 158 158 158 158 158 Labor/ 622 622 622 622 622 622 622 622 622 622 622 622

Subtotal 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857

Total costs 11,424 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 10,524 3,857 3,857

Costs without Project 1,418 1,418 1,418 1,418 1,418 1,418 1,418 1,418 1,418 1,418 1,418 1,418 1 Incremental operational csts-r 2,439 2,439 2,439 2,439 2,439 2,439 2,439 2,439 2,439 2,439 2,439 2,439

Income

Soles-/ 5,268 6,023 6,806 6,991 7,176 7,360 7,545 7,730 7,730 7,730 7,730 7,730 Sale of ooen and e.e,lipmerlt 550 ------Machinery trade-in raise ------1,000 - - Machinery residoal valo - - - - 4,500

Total income 5,818 6,023 6,806 6,991 7,176 7,360 7,545 7,730 7,730 8,730 7,730 12,230

Income without project 2,671 2,721 2,775 2,862 2,950 3,037 3,124 3,212 3,212 3,212 3,212 3,212 Incremental project income 3,147 3,302 4,031 4,129 4,226 4,323 4,421 4,518 4,518 5,518 4,518 9,018 Net incremental benefit (loss) due to project (6,859) 863 1,592 1,690 1,787 1,884 1,982 2,079 2,079 (3,588) 2,079 6,579

Financial rate of return: 19,3%

Cash Flow

Out: Issestment 7,567 ------6,667 - - Operational 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 Interest/Annuity Invesrment loan-5 885 885 1,540 1,540 1,540 1,540 1,540 1,540 1,540 - - - Operational lona6/ 285 ------r: Sales-crops 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 3,857 -equipment 550 ------1,000 - - Loans-investment7/ 6,810 -operational7/ 2,195 Surplus (deficit 2,229 1,281 1,409 1,594 1,779 1,963 2,148 2,333 2,333 (1,794) 3,873 3,873

1/ One-third (US$6,667) of the tractor and equipment costs of US$20,000 is used in the model. The one-third represents all the use that the farmer has for the tractor on his farm Additional h-ours would be ssed for custom work or by other farmers who have shared the purchase of the tractor asd equipment Farmers -who have cut and cleared more area may be able to utilize the full capacity of the tractor and equipment. 2/ Family labor. 3/ Incremental operating costs in year I allowed as investment. 4/ Refer to Table 4 for yield and price assumptions at full development. Sales reach 80% year 1, 90I.year 2, and 100% of potentiat in year 3 onward. Future prices are adjusted according to Bank projections for soybeans. Maize and wheat are primarily consumed internally as are cossava and beans. The price of wheat is set by Government. Tung oil is exported. 5/ Interest 13%, two years grace with seven-year repayment period. 6/ Inter-st 13%, repayable at the endi of year one. 7/ 90% of investment and incremental operational costs in first year. Labor roats are reduced with the proj ect due to mechanization.

December 13, 1976 _NNEX 6 PARAGUAY Table 4

SECONDRURAL DEVELOPMENTPR03ECT

On-farm Investments under the Project

Model II: Assumptions and Enterprise Net Margins 1/

1976 Area Yield Price 1/ Gross Input Labor Net Gross Margin (ha) mt/ha US$/mt Income Cost Cost 2/ Income per ha _

Without Project ------US$------

Cassava 1.0 12.0 16.7 200.4 7.7 86.3 106.4 106.4 Maize 1.5 1.6 63.5 152.4 44.1 84.8 23.5 15.7 Beans 0.5 0.9 167.0 75.1 4.8 49.1 21.2 42.4 Soybean (destumped land) 4.0 1.7 135.0 918.0 155.3 309.6 453.1 113.3 Soybean (land with stumps) 2.0 1.6 135.0 432.0 70.4 223.2 138.4 69.2 Tung 2.0 4.0 40.0 320.0 25.4 165.5 129.1 64.5 Wheat (double cropped with soybean) 1.5 0.9 162.7 219.6 75.8 116.0 27.8 18.5 Pasture 3.0 - - - - -

Totals 14.0 (farmed) 3/ 2,317.5 383.5 1,034.5 899.5 With double cropped area 15.5

With Project

Cassava 0.5 16.0 18.3 146.4 34.3 34.3 77.8 155.6 Maize 1.0 2.0 68.0 136.0 84.1 30.5 21.4 21.4 Beans 0.5 1.2 167.0 100.2 33.3 26.8 40.1 80.2 Soybean 10.0 2.0 142.8 2,857.0 1,341.0 329.9 1,186.1 118.6 Tung 2.0 4.0 40.0 320.0 67.3 63.4 189.3 94.6 Wheat (double cropped with soybean) 10.0 1.4 162.7 2,277.8 1,675.4 137.0 465.4 46.5

Totals 14.0 (farmed)4/ 5,837.4 3,235.4 621.9 1,980.1 With double cropped area 24.0

1/ With project prices reflect impact of on-farm storage investment, as well as reduced transport costs due to improved roads. 2/ Family labor with and without project. 3/ 8 ha cleared, 6 ha with stumps. 4/ All cleared of stumps. ANNEX 6 Table 5

PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

On-Farm Investments under the Project

Analysis of On-Farm Investment Costs - Areas A and B (us$ million)

Foreign Foreign Area. A Exchange Area B Exchange 7;) (%)

Investment Oxen 0.24 0.0 1.77 0.0 Oxen equipment 0.19 65.0 1.34 65.0 Storage 0.07 15.0 o.48 15.0 Land Clearing 0.53 45.0 2.61 45.0 Fencing 0.09 45.0 o.65 45.0 Tractors and equipment 1.53 60.0 1.77 60.0 Spray Equipment 0.02 65.0 0.16 65.0

Sub-Total 2.67 50.0 8.78 41.0

Operational Seed 0.15 15.0 0.33 15.0 Feed (oxen) 0.01 0.0 0.09 0.0 Labor (0-05) 15.0 0.23 15.0 Mechanization o.45 65.0 0.95 65.0 Pesticides 0.16 65.0 0.31 65.0 Sacks 0.05 65.0 0.25 65.0

Sub-Total 0.77 58.0 2.16 49.o

Total Baseline Costs 3.44 52.0 10.94 42.0

Total (A + B) 14.38 4s.o

February 24, 1977 ANNEX 7 Page 1

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investments under the Project

A. Introduction

1. In the older settlements of Colonies Federico Chaves and Unificadas (project area A), there is reasonably adequate infrastructure and much of the land has been overworked. However, the strip of land about 100 km long, bounded by the Parana River to the southeast and lying between the Manduviyu River to the southwest and the Yacuyguazu River to the northeast (project area B), is still for the most part covered with original forest and has only the most rudimentary infrastructure. As the land is rainfed and very fertile, it would be advisable to concentrate the finance available for infrastructure investment in a part of this area rather than dissipate it over the two areas, or even over the whole of area B, which contains in total about 520,000 ha. The infrastructural component of the project would therefore be confined to some 240,000 ha in area B along the Parana River and extending roughly 35 km inland as far as the Tembey River, and 18 km to 19 km inland beyond it. This limitation would tend to concentrate development and new settlement within the southwestern part of area B, but it is not intended to restrict credit and technical services to this smaller area only. Within the infrastructural area, almost every farm would be brought within about 5 km of part of the road network; elsewhere access would be by existing tracks, which would be improved by equipment provided under the project. ANNEX 7 Page 2

2. Area B has been subdivided into three zones:

Name and Limits Approximate Total Approximate Area to be /2 of Zone Land Area-/ Provided with Infrastructure

Southwest Zone 260,000 ha, penetrating 135,000 ha, penetrating from about 60 km from Parana 15 to 35 km from Parana SW - Manduviyu River River River SE - Parana River NE - Tembey River

Central Zone 110,000 ha, penetrating 44,000 ha, penetrating about about 50 km from Parana 19 km from Parana River SW - Tembey River River SE - Parana River NE - Guarapay River

Northeast Zone 150,000 ha, penetrating 61,000 ha, penetrating about about 40 km from Parana 18 km from Parana River SW - Guarapay River River SE - Parana River NE - Yacuyguazu River

Total areas: 520,000 ha 240,000 ha

/1 The width of area B, as now designated by Government to be developed by the Institute of Rural Welfare (IBR), is about 60 km at the southwest boundary and 40 km at the northeast. Assuming about 25% of the total area to be unsuitable for cropping, the long-term potential for agricultural development in the whole area would be some 390,000 ha. /2 Available farm land within the infrastructural area is about 180,000 ha.

B. Roads

Present Situation

3. Until timber operations started some 20 years ago, area B was completely isolated. The Parana River remained the only means of access until the 1960s, when an earth road was built to Capitan Meza, but most of the area north of the Tembey River is still accessible only by river craft to the small settlements along the Parana, and then by logging tracks 1/ that penetrate

1/ For classification adopted in this report, see Appendix 1. ANNEX 7 Page 3

from 20 km to 75 km into the forest. There are upwards of 16 riverside villages but none have even rudimentary port facilities. 1/

4. The existing tracks fall into two categories: (a) logging routes, extending roughly northwestwards from the Parana River; and (b) other tracks which have been developed by local farmers and which meander haphazardly but predomominantly in a southwesterly to northeasterly direction. The general alignment of the first category is, for the most part, good, but that of the second is variable. Those in category (a) are distributed at intervals of from 4 km to 12 km throughout the area while most of those in (b) are concentrated in the Southwest Zone and, to a lesser extent, close to the river elsewhere. Except where farm land has been cleared alongside tracks of both categories, forest clearing has been minimal and seldom exceeds the width of the track.

5. The southwest boundary of area B is about 84 km distant from Encarnacion by earth roads, paved with stone in some sections, while vehicular access to the northeastern corner is just possible in dry weather by an earth track from Puerto Presidente Stroessner, about 100 km to the north. This track is intended to be improved by army engineers but only to earth standards, and several rivers will remain unbridged.

6. By early 1978, the realignment and asphalt paving of Route 6 from Encarnacion to a point near Pirapo 2/ will bring the national highway system to within 14 km of the southwest boundary of area B. Route 6 is eventually to be extended from this point to join Route 7 at a point 37 km west of Puerto Presidente Stroessner but no timescale or source of funds has yet been determined. However, a study funded by the Government of Brazil, which includes aerial photography, is currently being undertaken to finalize the alignment for this highway. As the Government of Paraguay has limited the choice of route to a 15-km-wide strip, parallel to the Parana River and about 37 km distant from it, this highway will run through the entire length of area B and provide good access to that part of it which is now virtually uninhabited and inaccessible (see Project Map).

Works Proposed

7. The project would provide a basic network of roads along the full length of the southeastern part of area B (Map 12550). Financing under this component would be provided for:

1/ The only important commodity handled was logs, rolled into the river and formed into rafts.

2/ Bank Loan 532a-PA, 1974. ANNEX 7 Page 4

(a) construction of 99 km of all-weather stone paved road, including minor structures, to give direct access to the whole length of area B from the termination of the realigned and asphalted highway and running roughly parallel to the Parana River at a distance of from 10 km to 12 km from it;

(b) construction of eight major bridges on the all-weather road;

Length of Proposed Roads On River Side of On Inland Side of Zone All-weather Road All-weather Road ------(km)------

Southwest 82 78 Central 21 Northeast 57

Total 160 78

(d) procurement of an earthworks unit to be allocated to the Road Maintenance Department of the Highways Authority (DGV) to perform two specific tasks:

(i) build and maintain the new earth road network; and

(ii) improve selected existing tracks which are not being adopted as part of the network, but which, by improvement, would supplement it; and

(e) recruitment of the services of a firm of consulting engineers acceptable to the Bank to supervise the construction of items (a) and (b) by contractors and to assist DGV with planning and organizing the work of items (c) and (d) ti) above, and with route selection and planning and organizing the work of item (d) (ii).

Priorities

8. To provide basic infrastructure to the largest number of farmers in the project area as quickly as practicable, proposed development efforts would be concentrated in those parts of area B where the greatest amount of forest clearing has already taken place. The following priorities for the construction program have therefore been set (see Project Map): ANNEX 7 Page 5

Project Year Item of Construction

A. All-weather stone paved road and structures:

(i) first 40 km (from end of asphalted Route 6), including three major bridges 1 (ii) next 40 km, including three major bridges 2 (iii) final 19 km, including two major bridges 3

B. Earth roads and structures:

(i) 100 km in Southwest Zone: 82 km between item A(i) and the Parana River and 18 km west of A(i) (ii) 60 km in Southwest Zone west of item AM) 2 (iii) 40 km in Northeast Zone 2 (iv) 17 km to complete Northeast Zone 3 (v) 21 km to complete Central Zone 3

Criteria and Standards

9. Criteria for project road route selection would call for:

(a) making maximum use of existing routes where such selection would not conflict with other criteria;

(b) providing a basic network of stone paved and earth roads which would result in almost every farm in the area being within about 5 km of some section of the network;

(d) adopting minimal engineering and geometric standards compatible with adequate performance for the anticipated traffic and with the need to avoid excessive subsequent maintenance.

10. Selection of tracks for improvement should be made on criteria similar to those for project road selection but with one important addition: the amount of improvement work carried out must be restricted to what can be achieved by efficient use of the equipment without hindering the more important maintenance task. Improvement works should therefore be planned to start as soon as the equipment has been received and a program worked out which would ensure commencement of proper maintenance of each section of the new project road network as soon as construction has been completed. The standards that would be adopted for project construction are in line with current practices in Paraguay and are acceptable to the Bank. Full details are given in Appendix 1. ANNEX 7 Page 6

Management and Implementation

11. DGV is not organized to cope with major construction works by force account and is therefore forced to depend on consultants appointed for specific construction projects. Collaboration between DGV and the consultants for the on-going Credit 509-PA road program is excellent, the principal reason probably being the fact that the consultancy selected is a consortium of one foreign and two local firms, thus combining advanced technology with essential local knowledge and acceptability. The appointment of consultants of equivalent caliber is considered a prerequisite for this project and, as in the case of Credit 509-PA, assistance from the consultants with planning and organizing construction by force account on a small scale would enable DGV to gain valuable experience in this field.

12. Construction of all-weather roads and structures for the project road network would thus be undertaken by contractors selected by international competitive bidding while the construction of earth roads, and the improvement of existing tracks to supplement this network, could be carried out by force account. Consulting engineers would provide DGV with a complete service for route selection, design, planning, costing and supervision of new construction and advise and assist with improvement and maintenance programs. Final route selection would be subject to approval by DGV and the National Council for Social Progress (CNPS).

13. Existing communications in the area are so difficult that road construction would have to commence immediately after the effective date of the project to allow implementation of other project components. Consulting engineers would therefore be recruited early in 1977 so that sufficient route selection, design and contract document preparation could be completed as soon after loan effectiveness as possible. In order to facilitate this, the engineers' task would be handled under two separate contracts:

(a) The Design Contract for US$0.73 million, to be funded from the Bank's Preinvestment Studies Project (587-PA); and

(b) The Supervision Contract for US$0.82 million, to be funded by the project (Table 3).

As continuity in execution and technical responsibility is essential, the requirements of both contracts would be combined into a single Terms of Reference document, as outlined in Appendix 2.

Road Maintenance

14. Construction contracts would also provide for normal maintenance by the contractors until the final handover of each section of the works to DGV. By DGV estimates, the current cost of maintaining earth roads varies widely from US$237 to US$620/km, according to traffic density. An amount of US$0.58 million has been provided for earth road maintenance under the project. ANNEX 7 Page 7

Costs and Disbursements

15. The estimated baseline project cost of the road component at September 1976 prices is US$12.6 million, including road maintenance. Assuming adequate preinvestment design work and contract preparation, the construction program would be completed within three years (Tables 1, 2, 3, 13, and 14).

C. Community Centers

Present Situation

16. A small community service center operates at Domingo Robledo in the southwest of area B, about 10 km from the Parana River. Other population centers that have survived the decline of logging activities in area B are located close to the river. Until preparation of the project began, Govern- ment activity had been minimal and, consequently, departmental infrastructure is lacking. Since officials are understandably reluctant to work in this frontier area at all in its present undeveloped state, provision of basic facilities and living accommodation would be essential to project implementation.

Proposed Works

17. The project would provide two community centers in Zone B adjacent to the proposed all weather road. The first and principal center would be located roughly at km 38 1/ (i.e., at Domingo Robledo) and the second, near km 98 (in the Otano area). Both would need to be built in the first year of the project in order to facilitate implementation. Each center would have office accommodation, conference room, warehouse, and vehicle maintenance workshop, with power and water supply, basic office equipment, furniture, and a radio link. Some staff housing and rest house type accommodation would also be provided. These facilities are intended for the use of project staff during implementation and for Government and local officials after project completion. Project personnel, except for the Coordinator who will reside in Asuncion and have an office in CNPS, will have offices in the two community centers. Housing for the additional staff will also have to be provided,

1/ Km 0 would be about 78 km from Encarnacion on the realigned Route 6. ANNEX 7 Page 8 since this is a remote area. Most of the staff can be accommodated in two rest house type facilities associated with the two community centers but senior staff, including the Deputy Coordinator and the MAG and IBR Chiefs, together with married staff, will require houses. A rest house at the main community center would contain a flat (for visiting personnel) and 26-bed accommodation unit, with food and recreational facilities. Fourteen houses would be provided with this center. The second center would comprise one flat and 13-bed accommodation unit, with food and recreational facilities, together with five houses (Table 4).

18. So as to facilitate an early start on construction, the consulting engineers, to be appointed by DGV for road design and contract preparation, would also assist DGV with design of the community centers. The estimated cost (US$0.69 million) for this assistance would be paid under the Bank's Preinvestment Studies Project (587-PA). Construction would be by contractors selected under local competitive bidding and supervised by DGV.

Costs

19. The estimated baseline cost of the community centers is US$0.8 million, at September 1976 prices, and total disbursement is planned during the first year of the project (Tables 4, 5, 13 and 14).

D. Project Coordination

20. CNPS would coordinate the various institutions involved both at the national and project levels. CNPS--an interministerial organization in which IBR and BNF are also represented--was established by Presidential Decree in 1967, but did not have its own executive office until 1972. Since that date, it has been responsible for planning and supervising the execution of an integrated program of rural development in 23 public colonies in the Eje Norte and also for supervising the execution of the IDA-assisted First Rural Development Project. The performance of CNPS under the first project, as well as its interministerial character, makes CNPS the most suitable Government coordinating agency for the project. CNPS would appoint a Project Coordinator, acceptable to the Bank, who would be stationed in Asuncion and would be responsible for overall project coordination and implementation. In addition, a Deputy Coordinator would be stationed in project area B and would be responsible for coordination and supervision at the field level. He would also be appointed with Bank approval and would report directly to the Project Coor- dinator in Asuncion. Both coordinators would work full time on the project (terms of reference in Appendix 3). The Bank would provide assistance for office equipment and furniture, as well as operating costs, including vehicle maintenance and operation, for both the Coordinator and Deputy Coordinator, and the Farm Management Adviser, amounting to US$0.6 million (Table 6 and 13). Part of this amount would be used for project monitoring. ANNEX 7 Page 9

E. Vehicles

21. Vehicles, mostly four-wheel drive jeeps, would be provided for all staff to facilitate their work. A few van type vehicles would be included for transporting small groups. Purchases would be made according to the following schedule:

Project Years Vehicles 1 2 3 Total

Main Community Center 11 15 3 29 Second Center 7 3 - 10

Overall Total 18 18 3 39

Baseline costs, including purchase and oepration over three years, amount to US$0.6 million (Tables 6, 7 and 13). The community centers would be provided with an equipped service workshop, together with fuel outlets, and electrical generating plant. The service facility would be leased, on a private contractual basis, during the disbursement phase of the project. Subsequently, it may be sold as a commercial garage.

F. Personnel

22. As area A is established and close to the city of Encarnacion, only 4 additional technicians , 2 each for BNF and MAG, are required to service this area. It is considered that the existing staff is sufficient to carry out most of the additional works generated by the farm credit component for this area.

23. Additional staff would be required for area B, since it is a newly developing area and has insufficient available staff to meet present and future demands for services. Provision has been made under the project to provide 62 additional personnel costing US$0.5 million in salaries over the three years (Tables 6, 7 and 13). It is expected that one full-time expatriate would be required for the duration of the project to advise on farm management, farm planning and financial analysis and the Government is seeking finance for this appointment from UNDP (Table 6), as under the first project agreement. Specialized equipment for IBR and MAG has also been provided under the project (Table 7). ANNEX 7 Page 10

G. Health

Introduction

24. According to the health status and resources in project area B, a rural health system would be implemented to provide personal and environmental health services to approximately 54,000 rural people within three years of commencement of the project (see Map). The proposed rural health system is based on previous experiences in several Latin American countries, 1/ especially the program carried out by the Centro de Investigaciones Multidiscip- linarias en Desarrollo Rural (CIMDER) in Colombia. Implementation of such a system involves the development of methodologies in community organization, health, manpower recruitment, training, and supervision, as well as implementation of environmental sanitation technology and its evaluation. The five elements considered within the proposed rural health system are:

(a) community organization;

(b) personal health services;

(d) supervision; and

(e) evaluation.

Community Organization

25. In Paraguay, as in many Latin American countries, "mingas" 2/ build homes and public service and agricultural works. This traditional activity is a positive factor in area B for organizing "family health units" as the core community organizations for the rural health system.

26. The main functions of a "family health unit" should be to:

(a) raise funds for co-financing, with Government, the delivery of health services and to improve food availability for member families; and

1/ Guatemala, Venezuela, Colombia.

2/ Minga: A task force informally organized at the request of a settler to carry out a defined job. Usually the initiator provides food or other compensation during the work time. ANNEX 7 Page 11

(b) participate in community health activities such as: (i) identifying malnourished children, (ii) collecting children for mass immunizations, (iii) constructing wells and latrines, and (iv) providing primary health care by members, assisted by a trained "rural health promoter" (RHP) or an "auxiliary rural obstetrician" (ARO) (para 37).

Personal Health Services

27. Diagnoses of diseases at health posts or health centers show that about 70% could be recognized by the patient himself and could be treated simply, safely and easily. In addition, there are highly effective disease preventive measures that can be used by non-professional personnel through systematic home visits.

28. The proposed rural system would stress the delivery of personal health services by auxiliary personnel, especially at the primary health care level, including: family planning; prenatal care; child delivery care; post- natal care; child growth and development; nutrition and dental hygiene; control of well-known local diseases such as anclostomiasis, anemia, diarrhea, malaria, venereal diseases, and skin infections; first aid for burns, injuries, poison- ings, fractures, hemorrhages, and shocks; and dental treatment, including tooth extractions and fillings.

29. Organization. The quality of roads and distances involved are key elements in the organization of personal health services in rural areas. A scattered rural population is already in place so the health service network must be designed for both scattered and semi-clustered patterns, as well as future clustered patterns. This network comprises a human resource--RHPs and AROs--and a physical resource--health posts and health centers. Manpower in area B would be distributed as follows:

(a) An RHP for every 120 to 160 clustered rural families within any area with a radius of 2 km;

(b) An RHP for every 60 to 100 scattered families within any area with a radius of 3 km;

(d) One health post managed by the ARO for every 3,500 to 6,000 people;

(e) Special service for clustered areas with more than 160 families within any area with a 2-km radius and to families living more than 10 km away from any other family; ANNEX 7 Page 12

(f) For any village with not less than 5,000 people (or a potential grnwth to 5,000 or more in four years), a six-bed health center type D. This center would influence not less than 10,000 people, and it would be staffed with 1.5 doctors, one general or obstetrical nurse, four auxiliary nurses, one dental technician, one sanitary promoter, one statistical clerk-pharmacist, one driver, one laundryman, and one janitor-cleaner.

(g) For a rural population of not less than 15,000 people, but not more than 30,000, a 10-bed health center type C strategically located within the populated area. The staffing pattern of this health facility would be two doctors, one general or obstetrical nurse, six auxiliary nurses, one dental technician, one laboratory and x-ray technician, one pharmacy clerk, one statistical clerk-accounting, three sanitary promoters, one cook, one laundryman, one driver, one janitor, and one cleaner.

30. The western end of area B, from the western boundary to the Tembey River, contains 87% of the area's total population. On the basis of the above criteria, the following network of health services would be established (Table 8):

(a) One 10-bed health center type C, located at Domingo Robledo, which is the most active village and 8 km away from the proposed all-weather road. It is possible that the first community center would also be located in this village;

(b) One six-bed health center type D, located at Capitan Meza, which is a river port. The present timber building would be better equipped so it could continue to function for the next three years, by which time it would be replaced;

(c) Three existing posts, at Puerto Triunfo, km 1; Triunfo, km 30; and Yatytay, km 16, conveniently located near the future health center type C at Domingo Robledo. These health posts would be fully equipped for delivering primary health care. Besides the standard furniture provided to health posts, basic medical and simple laboratory equipment would be provided by the project and there would be an ARO in each health post who would be in charge of managing it, delivering primary health care and coordinating and supervising the RHPs;

(d) Three new health posts. These would be constructed, one at Edelira, km 3; one at Edelira, km 26; and one at Capitan tleza, km 28. They would be fully equipped (furniture and medical equipment) by the project; and

(e) One or more RHPs in each population cluster in the western end of area B. ANNEX 7 Page 13

31. The northeastern end of area B, between the Tembey and Yacuy Rivers, is less populated (7,583 inhabitants) than the western end, especially between the Tembey and Guarapay Rivers, where there are no health facilities at the present time. The proposed network of health services for this part of area B includes (Table 9):

(a) The existing health center type D at Mayor Otano, which would be upgraded to type C in 1981 with a capacity of 10 beds and would serve as the referral place for the northeastern part of area B. It would serve the people of the Mayor Otano and Repatriacion colonies with primary health care through its outpatient department. Six RHPs would be supervised by the center's nursing staff. The upgrading of a type D to a type C center implies additional construction and equipment as well as new staff (Table 10);

(b) A new health center type D to be associated with the second community unit near the Guarapay River on the all-weather road to be constructed by 1981, if the incoming population between the Tembey and Guarapay rivers reaches 10,000 people or more by 1980; and

(c) Five new health posts, which would be located within the northeast end according to the settlement pattern for the first two years of the project. It is probable that three of the posts would be located at Pto. Sn. Rafael, Ape Aime, and C/A/ Lopez. Location of the other two would be decided in the second year of the project. However, the population clusters already formed in this area would have RHPs.

32. Levels of Health Care. The health services network would provide primary and secondary health care at the following levels:

(a) Home Level. Each rural family would have access to primary health care through periodic visits by the RHP to perform preventive and curative treatments according to the program. Local healers would continue providing traditional health care, but, hopefully, contact with the RHP would lead to their involvement with the health team. Subsequently, a short training course would be used to consolidate their role in the health system;

(b) Farm Group Level. Latrines and well construction, cooperation in immunization campaigns, as well as development of farming activities, would be the main focus of "family health units" working in close coordination with health personnel; and ANNEX 7 Page 14

(c) Health Post or Center Level. The rural health posts and centers types D and C provide primary and secondary health care by AROs, licensed nurses, and doctors, who would attend those cases referred by RHPs for special treatment. Health centers types D and C would provide hospital care for referred patients.

Environmental Sanitation

33. Excretion Disposal. Rural people in Paraguay and in other countries give lower priority to building latrines than wells. For health reasons-- protection of the domestic water supply--it would be logical to make the construction of a latrine a prerequisite for farm credit. The idea has been accepted by IBR and BNF. Two types could be considered: a pit privy with concrete or wood slab, at estimated costs of US$3.96 and US$3.00, respectively, with a wooden shelter hut, costing an additional US$12.30, or a bone hole latrine with a larger pit and slab made of wood, at a cost of US$1.60. The shelter hut should cost about the same as the pit privy. Wood is more available than concrete but has a shorter life.

34. Water Supply. BNF farm loans can include finance for a well, when the farmer can afford it. The method of building wells in the project area needs to be improved to avoid contamination with surface water. A concrete watertight cover with over 3 meters of brick wall at the top greatly decreases water contamination but the additional cost may preclude its construction.

35. Another alternative for clustered populations is community water- piped fountains with "fordillas" (self-regulated faucets). Since each health post would be fully equipped with a water-piped well, it would be feasible to install a distribution tank to extend the water supply to neighbors, serving up to 75 families from each faucet. The estimated cost for such a community supply is an additional US$1,500, serving an average of 450 people.

36. Health Education. The potential risk of schistosomiasis and chagas disease in area B calls for a strong health education campaign. Avoidance of cracks in the construction of houses, periodic use of insecticides (DDT or clordane), and mosquito nets for sleeping are basic vector control measures. For schistosomiasis control, creek or lake water should be avoided where the infected snail has been sighted.

Manpower Development

37. Although the proposed services require professional health personnel, the main effort would be aimed at developing auxiliary personnel, such as AROs and RHPs as well as "family health units," as follows: ANNEX 7 Page 15

(a) Auxiliary Rural Obstetrician (ARO). This is a person residing in a rural area, between 18 and 35 years old, with six years or more of schooling, who has been chosen by the community to be trained to provide primary health care at the health posts or at homes. A 23-week training program has already been proposed by the Ministry of Public Health in Asuncion and includes community development, environmental sanitation, maternal and child health, communicable diseases, and simplified medicine.

(b) Rural Health Promoter (RHP). The Department of Rural Health has begun to recruit and train malaria volunteer workers, midwives, dental trainees, and young rural leaders for the role. A proposed training program based on present experience in Paraguay and other Latin American countries is described later.

38. Criteria for recruiting, selecting and training AROs would be the same as those used by the National Training Center for Auxiliary Nurses (CENFAE) except that: (a) the candidate should be proposed by community groups, instead of political leaders, in order to increase his acceptance; and (b) the training program would be carried out locally instead of in Asuncion. The project would finance the following basic teaching equipment: two slide projectors; a movie projector; and office equipment, including furniture and one typewriter. The remaining teaching aids should be provided by the Ministry of Public Health and Social Welfare (MSPBS).

39. RHPs would be trained at field level. This means that they would be brought to health posts or health centers only for specific training that could not be given directly in the field. The contents of their training would be divided into four main segments over 12 weeks, including community organization, primary health care, health education, and activity programming.

40. Relevant teaching material has been developed in other countries and is available, with necessary adjustments, for transfer to Paraguay. This means that some topics like chagas disease prevention should be added and some local idiom used in the presentation of the material. Each RHP would have a "health bag," equipped with basic equipment for providing primary health care. He would also teach the family health units how to provide first aid and treat the most common ailments in the community. Both the ARO and the RHP would be paid a salary. The former would be paid by the MSPBS, while the latter would be paid partially by family health units and partially by the MSPBS in the ratio of about 1:4. P, 6

Supervision

41. Ihis part of the rural health system is crucial since it maintains standards for the health services. Based on the RHPs and the ARO job descrip- tions, the licensed nurses from the health centers would be responsible "or implementing a work supervision plan based on the following criteria:

(a) an ARO would supervise four to seven RHPs, while one nurse would supervise three to six AROs;

(b) supervision would take place four times per year;

(d) a written report would be prepared for each supervision.

A "master kit" has been developed overseas 1/ that not only allows for activity programming by the RHP but also provides the key for supervising his activities and for evaluating health status changes. The ARO and the nurse would be provided with transport so they could reach all the supervised personnel; there would be a jeep at each health center. A horse or a bicycle could be used for family "field level" supervision.

Evaluation

42. The use of resources for delivering health services (efficiency) and the achievement of results according to objectives (effectiveness) are the two basic aspects of the evaluation process. There is special interest in evaluating training, contents, and methodologies, as well as the supervision plan. Evaluation would be financed directly by Government. In order to get reliable information for evaluation, an information schedule (like the "master kit" above) should be created, with emphasis on simplicity and clarity.

Management

43. The health system component of the project would be implemented by MSPBS, in cooperation with CENFAE, and the Food and Nutrition Education Program (PAEN). The Regional Director for MSPBS in Encarnacion would be directly responsible for the health program, in association with the project's two Coordinators. He would draw on the Sanitary Engineer, the Nursing Chief, the General Manager from his office, and the Directors of the health centers in the project area for guidance, supervision, and evaluation of the programs. He would also set up an implementation schedule for the project.

1/ By CIMDER, Colombia. ANNEX 7 Page 17

Cost Estimates

44. Investment costs in Paraguay are high, 5omparedwith other Latin American countries. For instance, the cost per m of construction in Colombia is about US$97.00, whereas in Paraguay it is about US$206.00. In checking itemized construction costs obtained from the Paraguay Chamber of Commerce and comparing them with commercial prices in Colombia, the following differences were found:

1976 1976 Construction Item Paraguay Colombia -_-----(US$)-

1. Bricks (1,000) 47.62 27.78 2. Cement (50 kg) 3.57 1.40 3. Tiles (1,000) 71.43 38.88 4. Glazed tiles (m2) 13.04 3.05 5. Sand (m3) 3.97 0.74 6. White cement (50 kg) 27.28 6.94 7. Paint (lt) 2.19 1.98 8. Gravel (ton) 2 8.33 5.00 9. Plain glass (mi) 10.16 6.45 10. Minimum salary/hour 0.40 0.26

187.99 92.48

Timber appears to be cheap in Paraguay. However, a door made to the same specifications (Puerta de madera con tablero de 2x6 - 0.8 x 2.10 m) costs US$74.94 in Paraguay and US$27.75 in Colombia, a difference factor of 2.7.

45. Investment Costs of Area B Health Facilities. In summary, the health system network for project area B includes a total of eight new health posts, one new health center type D, an existing health center at Capitan Meza upgraded to type D standard, and two health centers upgraded from type D to type C (one at Domingo Robledo and the other at Mayor Otano) (see Map). The estimated cost of the total building program is US$0.64 million (Table 11). Equipment for the health facilities would include (a) that for upgrading two upgraded health centers from type D to C, at an estimated cost of US$85,200; (b) that for the two new health centers (type D), at an estimated cost of US$79,400; and (c) that for three existing health posts and eight new ones, at a cost of US$78,500. The total investment costs for the health system network amounts to US$0.88 million.

46. The cost of design and contract preparation is estimated at US$64,000 and would be paid under the Bank's Preinvestment Studies Project (587-PA). Construction would be by contractors selected under local competitive bidding and supervised by MSPBS. ANNEX 7 Page 18

47. Operating and Training Costs of Health Services. Operating costs for the health services have been calculated for the project's first three years and they amount to US$0.21 million (Tables 11 and 12). The Government would be required to assume these costs in the fourth year. Staff costs are based on the proposed staffing patterns and monthly salaries outlined (Table 10). Salary costs include the proportion of salary paid by the MSPBS to the RHPs, assuming that this proportion is 80% of a minimum monthly salary of G 4,500. The remaining 20% would be financed through funds raised by activities of the "family health units," or by a monthly per capita contribution by families served by the RHP, at a rate of G 5/family/month. Cost estimates for drugs have been based on the assumption that up to 20% of hospital costs are for drugs. The established pattern at the Encarnacion health center is that the patient is charged approximately half of the hospital costs. 1/ This means that at least 10% of the project's total operating costs should be allocated for drugs. The proposed health system would expend US$2.75 per capita on operational costs, compared with present expenditures of US$1.03 per capita, in the rural area of Itapua. The training component for the proposed rural health system, including technical assistance from overseas and teaching material equipment ("health bags" and "master kits"), is estimated to cost US$41,500 (Table 11).

48. The "health bag" would contain equipment for first aid, baby delivery, and reactive strips for simple laboratory tests (urine biochemical analysis, urine culture, and glucose tests). The "master kit" contains registration forms, maps, pencils and guidelines for primary health care. One training course for 25 RHPs in the second year is proposed. Overseas assistance would be provided by two professionals for two weeks at the beginning of the project, to explain the details of the rural health system to the Project Coordinators and the MSPBS Regional Director. Another two professionals would be provided during the training course for a period of two weeks to provide the necessary technical assistance to the team in charge of developing the training. During the second year of the project, two additional trips by two professionals from overseas are planned during the training courses. Technical assistance in training new candidates and supervising those already working would be provided. During the third year, one trip per year for two professionals is planned for supervision, adjustments to the program, and evaluation of the rural health system.

49. The overall baseline cost of the health system component is estimated to be US$1.1 million (Tables 8, 9, 10, 11, 12, 13, and 14).

January 21, 1977

1/ In practice, the effective payments cover about 33%. ANNEX 7 Appendix 1 Page 1

Road Classifications and Standards

Classifications

1. The following road classifications have been adopted for this project:

(a) "highway" means an asphalted paved trunk road;

(b) "stone paved road" means an all-weather engineered road with hand placed stone pavement to the specification locally known as "empedrado";

(d) "track" means any other form of road access and includes all existing roads in area B.

Standards

2. The following standards, which have been agreed with DGV, would be adopted for all project roads:

Type of Roads Item Unit Earth Stone Paved

Right-of-way m 30 30 Design speed km/h 40 50 Embankment width m 7 7 Minimum embankment height m 0.3 /1 0.3 /1 Maximum embankment side slopes ratio 1:1 1:1 Minimum cross-section gradient % 2 2 Maximum longitudinal gradients: unrestricted % 5 5 Not exceeding 500 m long % 6 6 Not exceeding 300 m long % 7 /2 7 Not exceeding 200 m long % 8 /2 8 Mlinimum "empedrado" stone pavement thickness m 0.18 /2 0.18 Minimum radius of curves m 30 30 Culverts Precast concrete pipes Structures (AASHO loading HS-20-456) Vented "Irish" crossings or timber bridges, 4 m wide.

/1 0.5 m over culverts. /2 Gradients over 6% on earth roads to be stone paved. ANNEX 7 Appendix 1 Page 2

3. Culverts are to have headwalls and special attention must be given to all aspects of drainage and erosion prevention. Continuous side drains must be constructed wherever unrestricted natural drainage is lacking and must be provided with adequate turn-out drains. In most sections, it should be possible to obtain sufficient fill material for the embankment from the side drain excavations, thus minimizing the cost of earthworks; in such cases, the side drains would have a wide shallow "V" cross-section. Where borrowpits are required, these should be as shallow as possible and must be drained.

4. Stream crossing would be either vented "Irish" fords (i.e., low level mass concrete or masonry structures vented with one or more openings to carry the normal water flow) or 4-m-wide single lane timber bridges, according to site conditions. Major river crossings would be 4-m-wide single lane bridges built to the most economical design applicable to the site, using local hardwoods or concrete or a combination of both.

December 17, 1976 ANNEX 7 Appendix 2 Page 1

Terms of Reference for Consulting Engineers

General Conditions

1. DGV would appoint a firm of consulting engineers, acceptable to the Bank (hereafter referred to as "the engineers"), to be responsible to the Ministry for the design and planning of project roads, bridges and administrative centers. Fees for this task would be paid from the Bank's Preinvestment Studies Project (587-PA). The firm selected must be of good standing in Lhe fields of design, construction and maintenance of roads, bridges and buildings and must also possess an intimate knowledge of conditions in Paraguay. The staff employed to work on the project would be proficient in Spanish. Experi- ence in a similar project being executed under IDA Credit 509-PA confirms that best results can be achieved if a consortium of foreign and local consultancy firms is appointed; therefore, such a consortium should be used for this project. Supervision of the construction would also be undertaken by a consultancy consortium of a caliber equivalent to that of the firm selected for the design task but this service would be provided from project funds.

2. It is good standard practice for the consultancy responsible for engineering design to also undertake supervision of the construction. There- fore, as the two elements of the overall task would, in this case, form separate contracts, it would be a condition of acceptance of bids for the design element that bidders provide a written statement that they would, if required to do so by DGV, enter into a second contract with DGV for a fair and reasonable fee to carry out the supervision of all the works designed under the first contract.

3. Bidders would also enclose the following information with their bids:

(a) an outline program for the execution of the task based on the information given in Appendix 1;

(b) a brief outline of the methods proposed for execution of the task and the management structure of the consortium; 1/

1/ The policy adopted by the consortium responsible for the 509-PA project is that the foreign member firm is responsible for the design element and the local organization for supervision of the work. This clear-cut division of responsibility within the consortium is strongly recommended for adoption in the new project. ANNEX 7 Appendix 2 Page 2

(c) a schedule showing the minimum number of staff to be employed by the bidder (by categories) (a) in the field, and (b) in the office; and

(d) a schedule listing the minimum equipment, vehicles, site office accommodation, and such to be provided by the bidder.

4. Every effort must be made by the engineers to achieve early completion of the contract documents for the first works to be executed so that construction can start immediately after the effective date for the project, hopefully about September 1977.

The Design Task

5. DGV would supply the following documents to the engineers at the time of their appointment:

(a) one complete set of 1:50,000 scale maps of the project area (based on 1965 aerial photography);

(b) any more recent relevant aerial photography of the area which may be available (e.g., from an aerial survey for Route 6 in 1976 or from other sources);

(d) any other relevant official documents that would assist the engineers in the performance of their task.

6. Terms of reference for the engineers would require that they:

(a) study all the available documents and familiarize themselves with the project area by site inspections;

(b) undertake preliminary survey of the best routes for the project roads, following the approximate alignments indicated in the appraisal report, and come to agreement with DGV, CNPS and IBR on final selection;

(c) undertake the minimum amount of soils investigation necessary to satisfy the design requirements and establish the most economic sources of road stone for the all-weather road;

1/ To be issued to DGV by the Bank (at yellow cover stage). ANNEX 7 Appendix 2 Page 3

(d) complete survey, design, specifications, working drawings, schedule, and cost estimates for the road, culvert, and bridgeworks;

(e) select and come to agreement with DGV, CNPS and IBR on sites for both administrative centers;

(f) carry out surveys of the selected sites and assist DGV with the designs, specifications, and costing of these facilities in any way necessary to ensure that construction of both centers (at km 38 and km 98) can be commenced immediately after the project becomes effective;

(g) prepare all necessary documents to enable DGV to call for international competitive bids for the construction of bridges, culverts, and roads and similar documents for the construction of administrative centers by local contract and assist DGV with bid evaluation and contractor selection for all these works;

(h) prepare time and expenditure schedules for the execution of the construction program;

(i) assist the Road Maintenance Department of DGV with the preparation and execution of an improvement program for existing earth roads in the project area, with particular attention to (a) priorities, (b) the need to ensure that the work undertaken under this program supplements but does not conflict with the proposed project road network, and (c) the capacity of the department to undertake this program without reducing its capability to properly maintain the new road network as it is completed; and

(j) prepare quarterly progress reports to be submitted to DGV, the Project Coordinator, and the Bank, the first report being due three months after appointment of the engineers. These reports should be brief but comprehensive and must include (i) itemized physical progress to date, (ii) updated time schedule for completion of task, (iii) particulars of any changes to the project which have been made or are being proposed, and (iv) comment on any problems identified or foreseen.

The Supervision Task

7. Terms of reference for engineers performing supervision would require them to: ANNEX 7 Appendix 2 Page 4

(a) supoly to DGV and to appointed contractors throughout the construction and maintenance periods such additional specifications, drawings, schedules and instructions as may be necessary for the proper execution of the works;

(b) ensure that contractors employed on works comply with the specifications and conditions of contract in all respects but particularly with regard to the quality of workmanship and materials used;

(c) assist DGV and contractors to plan the work efficiently, with special reference to the objects and priorities of the program;

(d) check all claims for payment made by contractors and certify the correctness of each claim with regard to both quantity and value of work done;

(e) certify satisfactory completion of each section of work as it occurs and arrange for the proper handover of completed work by the contractors to the responsible Ministry or authiority;

(f) prepare a road maintenance program for the new road network and assist the Maintenance Department to organize effective implementation;

(g) continue to assist DGV with the improvement of other roads in the project area; and

(h) prepare quarterly progress reports to be submitted to DGV, to the Project Coordinator, and to the Bank, the first report being due three months after apointment of the engineers. These reports would be brief but comprehensive and include (i) itemized physical progress and expenditures to date, (ii) updated time and expenditure schedules for program completion, (iii) particulars of any changes to the project content which have been made or are being proposed, (iv) comments on any problems identified or foreseen, and (v) comments on the performance of contractors.

December 17, 1976 ANNEX 7 Appendix 3 Page 1

Term of Reference

The Project Coordinator and Deputy Coordinator

Project Coordinator

1. The main responsibilities of the Project Coordinator would be the following:

(a) prepare overall outlines for annual programs of project implementation and direct the participating agencies to prepare such programs;

(b) submit detailed annual programs to CNPS for approval and to the Bank for information;

(d) ensure that BNF and IBR make separate and identifiable financial allocations to cover the agreed total cost of their contributions in each year of project execution, including operational and maintenance costs, and coordinate all action to be taken on behalf of the Ministry of Agricul- ture and Livestock, MSPBS, and MOPC to ensure such appropriate financial allocations are made in their annual expenditure budgets;

(e) Coordinate the execution of Section 4.02 of the Loan Agreement and Sections 4.01 and 4.02 of the Project Agreement;

(f) keep CNPS and the Bank informed on (d) hereof;

(g) countersign all expenditures eligible for reimbursement out of the loan;

(h) Prepare quarterly progress reports for the information of CNPS and the Bank;

(i) act as the channel of communication with the Bank; and

(j) supervise activities of the Deputy Coordinator. ANNEX 7 Appendix 3 Page 2

Deputy Coordinator

2. The main responsibilitiesof the Deputy Coordinatorwould be the following:

(a) ensure coordinationamong participatingagencies at the project field level during implementationof the annual programs, including supervisionof all activitiesat the two new community centers;

(b) act as liaison between the Project Coordinatorand the field staff of participatingagencies;

(d) carry out such functionsas are delegated by the Project Coordinator.

April 11, 1977 ANNEX 7 Table 1

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investments under the Project

Roads Equipment Schedule

Item Unit Cost Quantity Amount ($'000) ($'000)

Bulldozer, 200 hp, with hydraulic angle dozing equipment 115 4 460 Motorgraders, 140 hp 106 3 318 Backhoe/shovel, 175 67 1 67 Backhoe/shovel, 100 38 1 38 Dump trucks, 6 m3 24 8 24 Water trucks, 9,000 1 34 1 34 Mobile workshop, fully equipped 53 1 53 Grease truck 24 1 24 Jeeps 9 3 27 Compactors with tractor 21 3 63

Sub-total 1,108 Spare Parts (20%) 222 Baseline Cost 1,330

April 4, 1977 ANNEX7 PARAGUAY Table 2

SECONDRURAL DEVELOPMENT PROJECT

Rural Infrastriwrtiirp Ana Spriicp Tnp7PqtmTP-ntS iinir thb Project

Roads Cost Estimates-/

Quantity Unit Rate Amount Item & Unit ……(US$)------

1. Clear and destump" 3 ha 603 1,809 2. Earthworks,including 3 side drains 6,000 m 2.06 12,360 3. Drainage and anti-erosion L.S. 1,000 4. Culverts with headwalls 2 1/2 No. 2,275 5,688 5. Minor bridges, timber construction, 4 m wide 2 1/2 m 660 1,650 6. "Empedrado"stone paving 2 5 m wide x 0.18 m thick 500 m 4.93 2,465

Average Baseline Cost per km of Earth Road 24,972 Say US$25,000 per km 7. Add for all-weatherroad 2 "Empedrado" as item 6 4,500 m 4.93 22,185

Average Baseline Cost per km of Stone Paved Road 47,157 Say US$47,200 per km 8. Design cost- 7 1/2% on items 1 to 6 only for all roads equivalent to US$1,875 per km

9. SupervisionCosts: (a) Earth roads, 7 1/2% on items 1 to 6 equivalent to US$ 1,875 per km (b) Stone paved Roads, 7 1/2% on items 1 to 7 equivalent to US$5,400 per km

1/ Agreed with DGV during mission; Government land available at no cost; no fencing required. 2/ Substantialsavings are not anticipated from the adoption of existing routes. However, an allowance of 140 ha of clearing has been deducted from the project cost estimate in Table 3. - Design costs excluded from project,

December 18, 1976 PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investments under the Project

Road Component - Project Costs and Disbursements (US$'000)

Preinvestment Funds Project Funds Pre- Civil Works Project Year 1 Total Year 1 Year 2 Year 3 Total

Design and contract preparation (consultants) 385.0 345.0 730.0 - - - - Civil works - - - 3,529.0 4,429.0 1,878.0 9,836.0 Supervision (consultants) - - - 337.0 337.0 142.0 816.0

Subtotal 385.0 345.0 730.0 3,866.0 4,766.0 2,020.0 10,652.0

Equipt-- - - 1,330.0 - - 1,330.0 Maintenance - - - 194.0 194.0 194.0 582.0

Baseline Cost 385.0 345.0 730.0 5,390.0 4,960.0 2,214.0 12,564.0

January 21, 1977 ANNEX 7 Table 4

PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Rural Infrastructure and Service Investments under the Project

Community Centers - Schedule of Accommodation

Item Main Center at Center near Domingo Robledo Otanio (m2 ( 2

Offices for:

Coordinator and expatriate 50 BNF 120 50 IBR 120 50 MAG 120 50 Conference room 50 50 Sanitary services 30 20

Total Offices 490 220

Access verandah to offices 130 50

Houses 2 480 Four houses of 120 m4 14 houses of 70 m2 980 Fivehoues f 7 2 350 Five housesof 70 m __350

Total Houses 1,460 350

Rest Houses comprising:

One 3-room flat 60 60 26 single rooms 416 - 13 single rooms - 208 Communal area 60 60 Sanitary services 50 32

Total Accommodation 586 360

Access verandah to resthouse 130 70 Vehicle workshoD Warehouse 100 60

Total Workshop and Storage 280 140

December 18, 1976 ANNEX 7 Table 5 PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Rural Infrastructure and Service Investments under the Project

Community Centers Cost Estimates

Main Center at Center near Unit Rate Domingo Robledo Otafio Item per m2 Quantity Amount Quantity Amount US$ (m2) (US$) (m2) (US$)

A. Civil Works

Office and residence building 145 2,536 367,700 930 134,800 Access verandahs 70 260 18,200 120 8,400 Workshops and stores 95 280 26,600 140 13,300 Sports ground 500 500 Water supply and electrical services and installations L.S. 81,000 36,000

Baseline Cost 494,000 193,000

B. Equipment

Workshop equipment 47,000 10,000 Electric generator 14,000 10,000 Radio 6,000 6,000 Office equipment 21,500 8,500

Baseline Cost 88,500 34,500

Project Cost Summary (US ' 000)

Preinvestment Year 1

A. Civil works 68.7 687.0

B. Equipment - 123.0

Project cost 68.7 810.0

December 18, 1976 PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investments under the Project

Coordination Agency's Costs

Year 1 Year 2 Year 3 Amount Cumulative Amount Cumulative Amount Cumulative (US$'000) Total (US$'000) Total (US$'000) Total Total

Personnel

Coordinator 15.0 1 15.0 1 15.0 1 45.0 Deputy Coordinator 1/ 14.0 1 14.0 1 14.0 1 42.0 Farm Management Adviser- - 1 - 1 - 1 _ Secretaries at US$2,000 p.a. each 6.0 3 6.0 3 6.0 3 18.C Clerks at US$1,800 p.a. each 3.6 2 3.6 2 3.6 2 10.

Sub-total 38.6 38.6 38.6 115.

Vehicles

Purchase at US$8,000 each 24.0 3 - 3 - 3 24.0 Operational at US$3,000 p.a. each 9.0 3 9.0 3 9.0 3 27.0

Equipment

Typewriters at US$1,200 each 1.4 2 - 2 - 2 1.1 Calculator, print out 0.4 1 - I - 1 0.4 Calculator, desks 0.1 1 - 1 - 1 0.1 Office Furniture 0.3 - - - - - 0 . Desks with chairs at US$300 each 0.6 3 - 3 - 3 0.6 Tables with chairs at US$100 each 0.3 3 - 3 - 3 0,3 Books, technical 0.4 - - - - - 0.4 Telephone (extension) 0.2 - - - - - 0.2 Office suppliI7 at US$50 per mo. 0.6 - 0.6 - 0.6 - 1.8 Miscellaneous- 3.9 - 1.8 - 1.8 - 7.

Sub-total 8.2 2.4 2.4 13.0

79.8 50.0 50.0 179.8

1/ Government to request UNDP financing at US$55,000 p.a. (1978 estimate). 2/ To be allocated to project at Coordinators' discretion.

4/6/7 7 , 1x ANNEX 7 Table 7

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investnents under the Pruject

Inple.ontig Agencies' Costs

Year I Year 2 Year 3 Post-project p.a. Amount Cumulative Amount Cumulative Amount Cumulative Amount Total US5 '000 Total US$ '000 Total S$ '000 Total Total US$ '000 Number

Area A Per-o--l >LASt 2, BiIF 2) 13.2 4 13.2 4 - 39.6 13.2 4 VethicLs - p-rchase 32.0 4 - 4 - 32.0 - 4 - operational 12.0 4 12.0 4 - - 36.0 12.0 4

Blselice ('Oct 57.2 25.2 107.6 25.2

PersonnelI Chicf 7.0 1 7.0 1 7.0 1 21.0 7.0 1 Technicians 1. US03,300 p.a. each 19.8 6 42.9 13 46.2 14 108.9 46.2 14 Secretaries 13US52,000 p.a. each 2.0 1 6.0 3 8.0 4 16.0 8.0 4

Perso-eel Sub-total 28.8 55.9 61.2 145.9 61.2

VoI-cees Psrchas- (3 USS8,000 each 56.0 7 56.0 14 8.0 15 120.0 - 15 O perational (a US$3,000 p.a. each 21.0 7 42.0 14 45.0 15 108.0 45.0 15

Eqsipet Theodolites, Wild @ US$3,600 each 21.6 6 25.2 13 3.6 14 50.4 - 14 Lecels, Wild 2] US02,000 each 2.0 1 2,0 2 - 2 4.0 - 2 cticks. 2.5 m @ US$16 each 0.6 40 0.3 60 0.2 75 1.1 _ 75 KiLa!, 50 -. la US$100 each 2.0 20 2.0 40 1.0 50 5.0 - 50 Cal-eot-ors, desk @ US$250 each 0.7 3 0.7 6 - 6 1.4 - 6 Colcolators, pucket @ US$25 each 0.1 3 0.1 6 _ 6 0.2 - 6 Map cops eahine 6.0 1 - I - 1 6.0 - Tvpe-riters @ Us$1,000 each 2.0 2 2.0 4 - 4 4.0 - 4 Topographv -achines @ US$1,200 each 1.2 1 1.2 2 2 2.4 - 2 Lhtocopier 2.3 1 - I - 1 2.3 - I '''- individual 9 US$160 each 1.0 6 1.1 13 0.1 14 2.2 - 14 Drafting tables @ us$312.50 each 1.2 4 0.6 6 0.6 8 2.4 - 8 Paotographs 9 US$2.000 each 2.0 1 2.0 2 - 2 4.0 - 2 Furniture and Utensils 5.0 - 5.0 - 2.5 - 12.5 - Too way radius @ US0 100 each 0.6 6 0.7 13 0.1 14 1.4 - 14 M-scellana.us 3.2 - 5.1 - 29.8 - 38.1 - -

Equipment Sob-total 51.5 48.0 37.9 137.4

Baselise Cost 157.3 201.9 152.1 511.3 106.2

FNAG

Per sonnelI Chief 7.0 1 7.0 1 7.0 1 21.0 7.0 1 Technicians @ US$3,300 p.a. ouch 16.5 5 39.6 12 46.2 14 102.3 46.2 14 Secretaries 1$US52,000 p.a. each 2.0 1 6.0 3 8.0 4 16.0 8.0 4

Personnel Sub-total 25.5 52.6 61.2 139.3 61.2

Vehicles Purchase (a USS8,000 each 48.0 6 56.0 13 16.0 15 120.0 - 15 Operational e USS3,000 p.a. each 18.0 6 39.0 13 45.0 15 102.0 45.0 15

Egoip-ent Uotension materials, visual aids, field trial and demonstration requisites. seinars, workshops., printing and publications 10.0 - 15.0 - 25.0 - 50.0 -

Baseline Cost 101.5 162.6 147.2 411.3 106.2

BNF

Personnel Tcchbicians Ca US$3,300 p.a. sach 19.8 6 46.2 14 46.2 14 112.2 46.2 14 Secretaries 3 US$2,000 p... each 2.0 1 10.0 5 10.0 5 22.0 10.0 5

Personnel Sub-total 21.8 56.2 56.2 134.2 56.2

Vehicles Purchase loUS$8,000 each 16.0 2 32.0 6 - 6 48.0 - 6 Operational (a US$3,000 p.a. each 6.0 2 18.0 6 18.0 6 42.0 18.0 6

Baseline Cost 43.8 106.2 74.2 224.2 74.2

April 5, 1977 PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investments under the Project Rural Health Promoters, Location and Referral Facilities - Western End, Area B

Number of Number of Families Rural Health Estimate Promoters Reference Reference 1976 1981 1976 1981 Health Post Health Center Cap. Meza Km 40 la. linea 37 70 one two Cap. Meza Km 28 H.C. Cap. Cap. Meza Km 40 Meza or 105 200 H.C. Domingo Edeliva Km 40 Robledo 37 70 - one Edeliva Km 26 Cap. Meza Km 28 110 200 one two Cap. Meza Km 28 Carlota Cue 43 80 - one Cap. Meza Km 28 Colonia Nueve (Km 16) U 125 240 one two Cap. Meza Km 28 Edeliva-i (Km 1) 162 300 one - Edeliva Km 3 Colonia Edeliva (Km 3) 254 500 two five Edeliva Km 3 Edeliva Km 12 18 35 - - Edeliva Km 3 Edeliva Km 16 107 200 one - Edeliva Km 26 Edeliva Km 16, 2da. linea 56 110 one three Edeliva Km 26 Paso Carreta 14 30 - - Edeliva Km 26 Edeliva Km 26 144 300 one two Edeliva Km 26 Edeliva Km 35 81 160 one one Edeliva Km 26 Yaguarazapa 83 160 one one Cap. Meza Km 28 Edeliva la. y 2da. linea 133 270 one two Edeliva Km 3 Paloma 215 400 ) two three Referal only to Domingo Robledo Pto. Paloma 24 50 ) H.C. Domingo R. Domingo Robledo Pto. Natalio 45 90 Served by - - - Domingo Robledo D. Robledo Colonia Sta. Rosa 233 460 two three Pto. Triunfo Km 1 Domingo Robledo Pto. Maindemby 79 160 one one Pto. Triunfo Km I Domingo Robledo Triunfo Km 25 206 410 two three Triunfo Km 30 Domingo Robledo Triunfo Km 30 115 225 ) two three Triunfo Km 30 Domingo Robledo Triunfo Km 40 87 180 ) Triunfo Km 30 Domingo Robledo Triunfo Km 16 112 225 ) two three Yatytary Km 16 Domingo Robledo Teurbey Km 20 196 180 ) Colonia Tembey 138 280 one two Either to Yalytan or Pto. Triunfo Km 1 Domingo Tres de Mayo 42 Robledo 85 _ one Pto. Triunfo Km 1 Domingo Robledo Pto. Porvenir 34 70 ) one two Colonia Porvenir 29 60 ) _ - Total 3,064 6,000 25 43

December 21, 1976 PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Rural Infrastructure and Service Investments under the Project

Rural Health Promoters, Location and Referral Facilities - Northeastern End, Area B

Number of Number of Families Rural Health Estimate Promoters Reference Reference 1976 1981 1976 1981 Health Post Health Center

Pto. San Lorenzo 110 220 one two Pto. San Lorenzo Mayor Otano (by 1980) Pto. C.A. Lopez 113 240 one two C.A. Lopez by 1979 Mayor Otano Colonia C.A. Lopez 175 320 one two Referral to M.Otano Mayor Otano 15 de Agosto 102 200 one two Ape Aime by 1980 Adm. Center No. 2 Colonia Ape Aime 189 380 two three Ape Aime by 1980 Adm. Center No. 2 Col. Repatriacion la.linea 14 30 ) two three Orly to M. Otano Mayor Otano Col. Repatriacion 2da. linea 38 75 ) Orly to M. Otano Mayor Otano Col. Repatriacion 3ra.linea 38 75 ) Orly to M. Otano Mayor Otano Col. N. Otano lra.linea 130 260 Served by HC at Orly to M. Otano Mayor Otano Col. N. Otano 2da.linea 45 90 M. Otano where Orly to M. Otano Mayor Otano Col. N. Otano 3ra.linea 98 195 four rural Orly to M. Otano Mayor Otano Col. N. Otano 4ta.linea 784 780 health promoters Orly to M. Otano Mayor Otano San Juan 84 170 will be added Yacuy 24 50 Orly to M. Otano Mayor Otano 12 25 ) one one Orly to M. Otano Mayor Otano 33 65 ) Orly to M. Otano Mayor Otano

Total 1,394 3,198 14 22

FD2

December 21, 1976 @> ANNEX 7 PARAGUAY Table 10

SECOND RURAL DEVELOPMENTPROJECT

Rural Infrastructure and Service Investments under the Project

Staff for the Rural Health System Units

Health Personnel Health Post Health Center Health Center Per Capita Type D Type C Monthly (10 beds) (6 beds) Salary (G)

Physician 1.5 2 37,400 Nurse (obstetrical or general) 1 1 14,520 Aux. obstetricia rural 1 - 9,000 Auxiliary nurse 4 6 9,000 Dental technician - 1 1 9,400 Sanitary promoter - 1 3 9,400 Stat. clerk pharmacist 1 - 9,500 Lab. and x-ray technician - 1 9,500 Pharmacy clerk - 1 9,000 Stat clerk accountant - 1 9,500 Cook - 1 3,800 Laundryman 1 1 3,800 Driver 1 1 9,000 Janitor cleaner 1 - 3,500 Janitor - 1 3,000 Cleaner - 1 3,000

1 12.5 21

December 22, 1976 ANNEX 7 Table 11 PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investments under the Project

Health Component - Project Costs and Disbursements (US$'000)

Pre-Investment Funds Project Funds Pre-Project Year 1 Year 2 Total Year 1 Year 2 Year 3 Total

Construction _ Design and contract preparation 15.5 19.4 29.1 64.0 - Health posts - Health centers - - 138.0 - Upgraded, type D to C ------Robledo - - - - 69.0 - Domingo 69.0 - Mayor Otano ------273.0 New, type D ------136.5 - - Capitan Meza ------136.5 - Community center - - - - - 85.8(3) 57.2(2) 85.8(3) 228.8 Health posts!' _ - - - 291.3 639.8 Subtotal 15.5 19.4 29.1 64.0 154.8 193.7

Equipment

Health centers 85.2 Type C - Domingo Robledo - - - - 42.6 - 42.6 - Mayor Otano _- _ - - - - 79.4 Type D - - - - _ 39.7 - - Capitan Meza - - _ _ 39.7 - Community center ------

Health posts 21.4(3) - - 21.4 Existing - - - - 21.4(3) 14.3(2) 21.4(3) 57.1 New - - - - 103.7 243.1 Subtotal - - - - 85.4 54.0

Operational

'Aealthcenters Type C 11.0 22.2 22.2 55.4 Domingo Robledo - - - - - 11.0 11.0 Mayor Otano - - - - Type D 17.3 34.6 51.9 Capitan Meza ------17.3 17.3 Community center - - - - - 3.3 9.1 14.8 27.2 Health posts - - - - 4.3 15.4 22.3 42.0 Rural health promoters_ - - - - 64.0 122.2 204.8 Subtotal - - - - 18.6

Training and Technical Assistance

Scholarships - three months for trainees 4.3(40) - 7.0 MSP y BS - - - - 2.7(25) 3.0 - - 3.0 Teaching aids (Encarnacion MSP yBS) - - - - 0.8 1.2 - 2.0 Teachingmaterials (Project) - - - - 1.8 2.8 - 4.6 Health bags (Project) - - - - 0.6 - 1.0 Master kit (Project) - - - - 0.4 1.1 1.4 0.4 2.9 Transport (MSP y BS) - - - - Technical assistance 2.8 2.8 1.6 7.2 Air tickets - - _ 2.4 2.4 1.4 6.2 Travel expenses - - - - 3.0 3.0 1.6 7.6 Fees - - - - 18.5 5.0 41.5 Subtotal - - - - 18.0

276.8 330.2 522.0 1,129.2 Overall Baseline Cost 13.5 19.4 29.1 64.0

area, in years 2 and 3 in the northeast area. - Health posts in year 1 will be constructed in the western

February 21, 1977 ANNEX 7 Tsb1e 12

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investments under the Project

Health Component - Operating Costs (US$ per annum)

Health Health Center Center Health Population Type C Type D Post Clusters

Staffing 22,383 14,402 857 2,0561/ Basic services 1,033 643 133 -

Food 2,976 2,342 - -

Pharmacy 3,543 1,976 659 -

Miscellaneous 2,206 1,175 294 -

Maintenance and transport 2,460 1,653 325 -

Total 34,601 22,191 2,268 2,056

1/ Rural health promoters.

December 16, 1976 PARAGUAY ANNEX 7 Table 13 SECOND RURAL DEVELOPMENT PROJECT

Rural Infrastructure and Service Investments under the Project

Foreign Exchange Component - Area B (US$ million) Baseline Cost With 10% Phy- Foreign Exchange Financed by sical Contin- the Bank Category Baseline Cost gency added % Amount % Amount

I. Civil Works

Roads 9.84 10.83 70.0 7.58 Health 0.64 0.70 65.0 0.45 Community Centers 0.69 0.76 65.0 0.49

Sub-total 11.17 12.29 69.3 8.52 66 8.0

II. Vehicles and Equipment Roads Equipment 1.33 1.46 90.0 1.31 Health Equipment 0.24 0.27 80.0 0.22 Vehicles Purchase 0.31 0.34 90.0 0.31 Community Center Equipment 0.12 0.13 75.0 0.10 Coordination Equipment 0.01 0.01 80.0 0.01 IBR Equipment 0.14 0.15 80.0 0.12 MAG Equipment 0.05 0.06 50.0 0.03 Sub-total 2.20 2.42 86.8 2.10 100 2.1

III. Consulting Services Road Network Supervisers 0.82 0.90 75.0 0.67 Health Systems Advisers 0.02 0.02 100.0 0.02 Personnel - Farm Management Adviser ______Sub-total 0.84 0.92 75.0 0.69 100 0.7

IV. Training, Administration Operation and Maintenance Road Maintenance 0.58 0.64 70.0 0.45 Health Operational 0.21 0.23 20.0 0.05 Training 0.02 0.02 39.0 0.01 Personnel 0.53 0.58 0.0 0.0

Vehicles Operational 0.31 0.34 70.0 0.24 __ Sub-total 1.65 1.81 41.4 0.75 66 1.2

V. Credit - Small Farmers 8.30 9.13 36.9 3.37 - Medium and Larger Farmers 2.65 2.92 59.5 1.74 -2/ Sub-total 10.95 12.05 42.4 5.11 47 5.1

VI. Unallocated (Price Contingency) 8.35 58.2 4.86 4.9 Overall Total 26.81 37.84 58.2 22.03 22.0

1/ Weighted average between categories I and IV. 2/ 42,%0of Bank and Government Contributions (90%D). April 5, 1977 ANNEX 7 Table 14

PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Summary of Project Preinvestment Costs for Civil Works 1/ (us$'ooo)

Pre-Project Year 1 Year 2 Total Category

Roads 385.0 345.0 - 730.0 Community Centers 68.7 - - 68.7 Health 15.5 19.4 29.1 64.0

Baseline Cost 469.2 364.4 29.1 862.7 Physicial Contingency (10%) 46.9 36.4 2.9 86.2 Price Contingency 2/ 49.0 77.6 9.6 136.2

Totals 565.1 478.4 41.6 i.o85.1

1/ To be financed from the Bank's Preinvestment Studies Project (587-PA). 2/ At the Civil Works rates of 9.5%, 9.0% and 9.0% for the Pre-Project year, Year 1 and Year 2, respectively.

March 3, 1977 ANNEX 8 Table 1

PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Estimated Disbursement Schedule 1/- Area A (us$ million)

Bank Fiscal Year and Cumulative Quarter Amount Disbursed Balance of Loan

FY 1978 2/ 2.50

3rd quarter 0.19 2.31 4th quarter 0.38 2.12

FY 1979

1st quarter 0.57 1.93 2nd quarter 0.76 1.74 3rd quarter 1.13 1.37 4th quarter 1.50 1.00

FY 1980

1st quarter 1.87 0.63 2nd quarter 2.24 0.26 3rd quarter 2.36 0.14 4th quarter 2.50

1/ Under the assumption that the loan would become effective by the end of 1977.

2/ July 1, 1977 - June 30, 1978.

March 3, 1977 ANNEX 8 Table 2

PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Estimated Disbursement Schedule 1/ - Area B (us$ million)

Bank Fiscal Year and Cumulative Quarter Amount Disbursed Balance of Loan

FY 1978 2/

3rd quarter 1.50 20.50 4th quarter 3.00 19.00

FY 1979

1st quarter 4.50 17.50 2nd quarter 6.oo 16.00 3rd quarter 7.87 14.13 4th quarter 9.74 12.26

FY 1980

1st quarter 11.61 10.39 2nd quarter 13.48 8.52 3rd quarter 15.10 6.90 4th quarter 16.72 5.28

FY 1981

1st quarter 18.34 3.66 2nd quarter 19.96 2.04 3rd quarter 20.96 1.04 4th quarter 22.00

1/ Under the assumption that the loan would become effective by the end of 1977. 2/ July 1, 1977 - June 30, 1978.

March 3, 1977 ANNEX 9 Page 1

PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Production, Prices and Marketing of Farm Commodities under the Project

General

1. The proposed project would improve existing roads and construct new ones to benefit some 5,000 farm families already living in project area B. In addition, improved access would spur rapid settlement in presently isolated tracts (mostly north of the Tembey River). The number of families settled would increase about 2,800 by 1989 and incremental production generated from the new farms would be mainly annual crops. By year 12, this increased production would reach an estimated 12,000 tons of cassava, 6,000 tons of soybeans, 5,000 tons of maize, 1,000 tons of sunflower, and 1,000 tons of beans.

2. About 2,700 small (20 ha) and 270 medium (40 ha) farmers in area B and 370 small and 230 medium farmers in area A would receive additional benefits from credit for on-farm investments and incremental working capital. Incremental production generated from these investments would also be mainly from soybeans (19,000 tons), sunflower (10,000 tons), wheat (6,000 tons), cassava (3,000 tons), and beans (300 tons).

3. In addition, all farmers affected by the project would produce some tung, tobacco, vegetables, rice, cotton and linseed under the project. Incre- mental production as a percent of national output in 1975 would be about 10% soybeans, 2% maize, 1% cassava, 2% beans and 24% wheat, valued at US$6.6 million at present prices. Soybeans, tung, linseed and tobacco would be mostly for export, while production of other commodities would be mainly for domestic consumption.

Crops

4. Commodities appearing in the farm models are cassava, maize, beans, soybeans, sunflower, wheat and tung, but others such as groundnuts, rice, oranges, tobacco and vegetables would also be produced. Present yields are low for all crops in the project area, considering the fertility of the soil and the high rainfall, the main reasons being the poor quality of seed used; the low level use of pesticides, herbicides, fertilizer and other soil amend- ments; and the inability of the farm family to perform necessary cultural practices in a timely fashion, as well as the farmers' general lack of knowledge of modern farming practices. ANNEX 9 Page 2

Production and Prices

5. Cassava. Cassava is grown principally as a subsistence crop in the project area. The annual consumption per farm family is estimated at 400 kg annually, and, where oxen are owned, another 1,400 kg per pair is required. Cassava is usually planted in late August or September, using pieces of plants from the farmer's own carryover. Yields range from 12 to 14 tons/ha over a nine- to 12-month growing period, but they could reach over 20 tons/ha if tubers were left in the ground through two growing seasons. Digging, however, starts early to meet family and farm needs. Farmgate prices range from US$15.80 to US$8.30/m ton. Additional annual production from the project at full production would be about 14,000 tons, of which approximately 7,000 tons would be used for farm family and livestock consumption.

6. Maize. Maize is the second most important food crop after cassava, with more than 90% of the annual production consumed on the farm. It is estimated that a farm family eats about 360 kg annually and a pair of oxen, another 360 kg. The 10% that is exported goes to Brazil as Argentina is now closed to most of Paraguay's agricultural products. Yields range from 1 to 1.8 m tons/ha and farmgate prices are between US$50 and US$68/ton. Prices improve rapidly two or three months after harvest but are never high enough to cover full production costs. Maize production would go down on farms receiving credit under the project, as land would be put into cash crops that would give the farmer a better return for his labor, space and investment; nevertheless, overall project production of maize would increase to 5,000 tons by year 12.

7. Beans. The bean is another of the three basic subsistence crops, with family consumption estimated at 360 kg annually. Beans can be grown in at least two different periods and can be used as a short season, double crop with msot of the others raised in Paraguay. Yields range from 0.8 to 1.2 m tons/ha. With improved seeds for the local brown bean, the Brazilian feijao, or black beans, higher yields than those projected, should be easily obtained. Because of export demand in other South American countries, the short growing season required, and the potential for high yields, beans should be encouraged under the project as another cash crop. Current farmgate prices range from US$150 to US$167/m ton.

8. Soybeans. Soybeans are the most important cash crop in Paraguay and national production has almost doubled since the on-going Small Farmer Credit and Rural Development Project (509-PA) was appraised in 1973. Annual production from 150,200 ha reached 220,000 tons in 1975, with the national average yield reaching 1,465 kg/ha. The best planting time for soybeans is the last half of November and the first half of December, with harvest in late March and April. The crop is harvested by hand and threshed by portable engine- driven machines. The Galaxia variety (120-day cycle) produced between 3,000 and 3,500 kg/ha in the Japanese research station at Pirapo, while the longer maturing varieties such as Santa Rosa and Visoja (150-day cycle) already average 3,000 kg/ha on the better farms under favorable climatic conditions. ANNEX 9 Page 3

9. The additional annual yield at full production under the proposed project is expected to be 18,000 tons, or a 9% increase over the 1975 figures, with beneficiaries required to purchase good quality seed and innoculant for the seed. Farmgate prices in 1976 ranged from US$111/ton at harvest (late April) to US$135/m tons for on-farm stored soybeans sold in late August. Paraguay prices for soybeans closely parallel world market prices and Bank projections indicate a steady rise in the world market. The corresponding Paraguay farmgate price for soybeans in 1985, using Bank projections, would be US$225 per ton.

10. Sunflower. Sunflower as a commercial crop is relatively new to Paraguay, with most production in the Department of Itapua where the project would be located. Planting have increased from 1,000 ha in 1972 to 2,500 ha in 1975 and yields range from I to 2 tons/ha. The supply of seed has been limited and much of the increase has come from farmers holding back some of their produce each year for planting. As a result, yields vary considerably and some farmers have reported complete crop failures because of poor germi- nation. Most farmers plant sunflowers as a single annual crop because it helps spread peak labor demand and generates produce marketable in January, some three or four months ahead of soybeans. Sunflowers can be planted during July and in the first two weeks of August for harvest from mid-November to mid-December. Farmers with adequate farm power are achieving good results from double-cropping sunflowers with soybeans. Farmgate prices in 1976 ranged from US$90 to US$100 per ton in project area B. At full production, the project would yield an additional 7,700 tons of sunflower seeds, with an expected farmgate price of US$119/ton.

11. Wheat. As wheat accounts for the largest volume of food imports into Paraguay the Ministry of Agriculture and Livestock (MAG) for several years has promoted increased production of the crop. Yields are affected by weather conditions, particularly those conducive to the spread of fungus and other diseases and production has ranged from 45,500 tons in 1971 to 13,000 tons in 1973, to 20,000 tons in 1975. National yields have varied from 551 tons/ha to 1,200 tons/ha. The variety El Pato averages 2,000 to 2,200 kg/ha at the pirapo research station, and at the Capitan Miranda Experiment station a program is under way to select and breed the varieties best suited for conditions in southern Paraguay. The most promising are Itapua 1, yielding just under 2,500 kg/ha, and Itapua 2, yielding about 3,000 kg/ha. Under the project, the increase at full production in 1984 would be about 4,200 tons. The Government set the price in 1976 at US$162.70 per ton.

Marketing

12. Farmers in Paraguay sell their produce mainly to intermediary buyers and, to a lesser extent, to cooperatives and Government agencies. In the project area, produce is sold primarily to merchants or truckers, who come to ANNEX 9 Page 4 the farm to buy directly from the producers. Most of the production is sold at harvest time as the farmer needs the money and has little or no storage capacity. Occasionally, farmers who have excess storage will buy from neighbors. Also, a few local merchants will give merchandise in kind for crops such as soybeans, sunflower, beans, peanuts or tung. The merchant and the farmer then arrange for transportation to Encarnacion when they have enough for a load, or sell to higher volume merchants who come to the area.

13. Marketing conditions in project areas A and B differ considerably because of the proximity of area A to, and the remoteness of area B from, Encarnacion, the principal trade center for the region. In addition, area A is adjacent to an all-weather road, while the southern end of area B has 60 to 100 km of dirt roads that are impassable in wet weather. As a result, farmgate prices received by producers in the southern part of area B are US$15 to US$17.50/ton lower than in area A. The middle and northern parts of area B do not have any road access to Encarnacion so the farmers there must send their products by boat, which requires considerable handling and, again, reduced revenues. This situation has made it difficult to interest farmers in planting cash crops such as soybeans and sunflowers.

14. With more and better roads in area B, transportation would be less expensive and buyers would have better access to producers, resulting in higher farmgate prices because of the reduced transport cost and increased competition among buyers. In addition, on-farm storage financed under the project would help to reduce after-harvest losses and enable producers to wait for better post-harvest prices.

15. No marketing problems are expected for cassava, maize, beans and other domestically consumed crops since project output would represent only a relatively small proportion of projected 1990 demand. Production of soybeans, tung, and sunflower would find outlets in world markets. No marketing problems are envisaged for these crops also because of projected favorable world market demand for these commodities, and the country's comparatively low cost of production.

January 21, 1977 ANNEX 10 Page 1

PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Economic Rates of Return

1. While an overall economic rate of return was calculated for the project, individual economic rates of return were also estimated for the overall sub-project in area A, the overall sub-project in area B, and both credit components of the project. Key assumptions and adjustments which were used in calculating these rates of return follow:

Overall Project

(a) Taxes, in all cases, are considered as transfer payments and are, therefore, excluded in the economic rate of return calculations. No Government subsidies are involved under the project;

(b) Since no shadow rate of exchange has been calculated for Paraguay, the official commercial selling rate of the dollar for new guaranies is used;

(d) Administrative, technical assistance, and health services costs, as well as pre-investment costs, are charged to the project; and

(e) Savings in transport costs have been considered in estimating project benefits.

Credit Component

(a) The prices of all investment and operating cost items in constant guaranies converted into dollars in September 1976 prices would remain unchanged throughout the life of the project; and

(b) The prices of sunflower seed, beans and cassava in constant guaranies converted into dollars in September 1976 prices would remain unchanged throughout the life of the project, while the prices of wheat, maize, and soybean are assumed to follow the projections given by the Bank's Commodities and Export Projections Division. ANNEX 10 Page 2

2. The farm credit component and overall sub-project rates of return were tested for their sentisitivity to changes in crop yields and produce prices, as well as civil works and equipment costs, in the areas of influence (Tables 1 to 4). The economic rates of return under these assumptions are summarized below:

Economic Rates of Return

Medium Overall Small Farmer and Large Farmer Overall Assumptions Project Credit Component Credit Component Sub-project Area A+ Area A Area B Area A Area B Area A Area B Area B ------(Number of Farms------(9,600) (230) (265) (370) (2,690) (600) (9,000)

Best Estimate 14 28 19 24 19 26 14

Benefits decrease by 10% 10 21 14 16 12 18 8

Invetment Costs increase by 10% 10 22 15 16 12 18 8 PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Economic Rate of Return Calculations

Model 1 - Crop Farmin& r 20 ha Farm with 4.8 ha Partly Cleared, Remainder Heav Forest (US$6)

------Year ------AREA A - 1 2 3 4 5 6 7 8 9 10 11 12

With the Project

Value of Production 1,466 1,707 1,957 2,241 2,362 2,374 2,440 2,706 2,506 2,556 2,506 3,286 Investments Excluding Taxeal" 2,415 49 660 49 481 Operating Costs Excluding Taxes2/ 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 Project Services and Administration3/ 170 64 64 64 64 64 64 64 64 64 64 64

Total Costs: 3.736 1,215 1,215 1,215 264 1215215 1 1.875 1.264 1696 1,215 1.215

Without the Project

Value of Production 759 771 784 804 825 846 866 887 887 887 887 887 Operating Costs Excluding Taxes 2/ 624 624 624 624 624 624 624 624 624 624 624 624

Net Incremental Flow

Net Incremental Income 707 936 1,173 1,437 1,537 1,528 1,574 1,819 1,619 1,669 1,619 2,399 Net Incremental Costs 3,112 591 591 591 640 591 591 1,251 640 1,072 591 591 Net Incremental Benefits (2,405) 345 582 846 897 937 983 568 979 597 1,028 1,808 Economic Rate of Return: 28%

AREA B -

With the Project

Value of Production 1,466 1,707 1,957 2,241 2,362 2,374 2,440 2,706 2,506 2,556 2,506 3,286 Investments Excluding Taxes 1/ 2,415 49 660 49 481 Operating Costs Excluding Taxes 2/ 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 1,151 Project Services and Administration 3/ 852 556 306 95 95 95 95 95 95 95 95 95

Total Costs 4,418 1,797 1.457 1.246 11,246 1,246 1.246 1,242 1.246 1 1.246 1,24

Without the Project

Value of Production 759 771 784 804 825 846 866 887 887 887 887 887 Operating Costs Excluding Taxes 2/ 624 624 624 624 624 624 624 624 624 624 624 624

Net lncremental Flow

Net Incremental Income 707 936 1,173 1,437 1,537 1,528 1,574 1,819 1,619 1,669 1,619 2,399 Net Incremental Costs 3,794 1,083 833 622 622 622 622 622 622 622 622 622 Net Incremental Benefits (3,087) (147) 340 815 915 906 952 1,197 997 997 997 1,777

Economic Rate of Return, 19°/

1/ Excluding import duties. X Z 2/ Excluding import duties and land taxes. _ 15 3/ Includes investment costs tor roaes, community centers, health centers and vehicles; maintenance costs for roads; operating costs for health centers and vehicles; project personnel costs. I

March 3, 1977 PARAGUAY

SECOND RllRAL DEVELOPMENT PROJECT

Economic Rate of Return Calculations

Model II - Mechanized Crop Farming - 40 ha Farm with 8 ha Fully Cleared, 6 ha with Stumps, Remainder Heavy Forest (US$)

------Year ------1 2 3 4 5 6 7 AREA A - 8 9 10 11 12

With the Project

Value of Productior 5,818 6,023 6,806 6,991 7,176 7,360 7,545 7,730 7,730 8,730 Investments Excluding Taxes 1/ 6,805 7,730 12,230 Operating Costs Excluding Taxes 2/ 3,628 3,628 5,967 3,628 3,628 3,628 3,628 3,628 3,628 Project Services and Administration 3,628 3,628 3,628 3,628 3/ 317 101 101 101 101 101 101 101 101 101 101 101 Total Costs 10,750 3.729 3,729 3,729 3,729 3 3 729 3,7 3129 9,696 3,729 3,729 Without the Project

Value of Production 2,671 2,721 2,775 2,862 2,950 3,037 3,124 Operating Costs Excluding 3,212 3,212 3,212 3,212 3,212 Taxes 2/ 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 Net Incremental Flow

Net Incremenital Income 3,147 3,302 4,031 4,129 4,226 4,323 4,421 4,518 4,518 Net Incremental Costs 9,358 5,518 4,518 9,018 2,337 2,337 2,337 2,337 2,337 2,337 Net Incremental Benefits 2,337 2,337 8,304 2,337 2,337 (6,211) 965 1,694 1,792 1,889 1,986 2,084 2,181 2,181 (2,786) 2,181 6,681 Economic Rate of Return: 24%1

AREA B -

With the Project

Value of Production 5,818 6,023 6,806 6,991 7,176 7,360 7,545 7,730 7,730 8,730 Investments Excluding Taxes 1/ 6,805 7,730 12,230 Operating 5,967 Costs Excluding Taxes 2/ 3,628 3,628 3,628 3,628 3,628 3,628 3,628 3,628 3,628 Project Services and Administration 3/ 3,628 3,628 3,628 961 628 345 108 108 108 108 108 108 108 108 108 fotal Costs 11,394 4,256 3,973 3,736 3,736 3,736 3.736 3,736 3.736 9.703 3,736 3,736 Without the Project

Value of Production 2,671 2,721 2,775 2,862 2,950 3,037 3,124 3,212 3,212 Operating Costs Excluding Taxes 2/ 3,212 3,212 3,212 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 1,392 Net Incremental Flow

Net Incremental Income 3,147 3,302 4,031 4,129 4,226 4,323 4,421 4,518 Net Incremental Costs 10,002 4,518 5,518 4,518 9,018 2,864 2,581 2,344 2,344 2,344 2,344 Net Incremental Benefits 2,344 2,344 8,311 2,344 2,344 (6,855) 438 1,450 1,785 1,882 1,979 2,077 2,174 2,174 (2,793) 2,174 6,674 Economic Rate of Return: 19'b

1/ Excluding import duties. 2/ Excluding import duties and land taxes. 3/ Includes investment costs for roads, community centers, health centers and vehicles; maintenance costs for roads; operating costs for health centers and vehicles; and project personnel costs.

March 3, 1977 PARAGUAY

SECOND RURAL DEVELOPMENT PROJECT

Economic Rate of Return Calculations

Overall Sub-Project - Area A

------Year ------1 2 3 4 5 6 7 8 9 10 11 12

With the Project

Value of Production 670.6 1,930.7 2,114.6 2,344.0 2,468.9 2,540.9 2,595.2 2,690.2 2,751.1 2,712.1 2,716.6 3,174.3 Investments Excluding Taxes 1/ 882.5 1,576.3 6.9 11.3 84.0 144.9 556.0 1,005.7 Operating Costs Excluding Taxes 2/ 451.2 1,260.3 1,260.3 1,260.3 1,260.3 1,260.3 1,260.3 1,260.3 1,260.3 1,260.3 1,260.3 1,260.3 Project Services and Administration 3/ 57.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2

Total Costs 1,390.9 2,861.8 1,285.5 1,285.5 1.292.4 1,296.8 1.285.5 1,369.5 1,430.4 1,841.5 1,285.5 2,291.2

Without the Project

Value of Production 320.0 900.9 917.3 938.2 965.7 993.8 1,021.3 1,049.0 1,053.8 1,053.8 1,053.8 1,053.8 Operating Costs Excluding Taxes 2/ 198.8 551.1 551.1 551.1 551.1 551.1 551.1 551.1 551.1 551.1 551.1 551.1

Net Incremental Flow

Net Incremental Income 350.6 1,029.8 1,197.3 1,405.8 1,503.2 1,547.1 1,573.9 1,641.2 1,697.3 1,658.3 1,662.8 2,120.5 Net Incremental Costs 1,192.1 2,310.7 734.4 734.4 741.3 745.7 734.4 818.4 879.3 1,290.4 734.4 1,740.1 Net Incremental Benefit (841.5) (1,280.9) 462.9 671.4 761.9 801.4 839.5 822.8 818.0 367.9 928.4 380.4

Economic Rate of Return- 26%

1/ Excluding import duties. m 2/ Excluding import duties and land taxes. 3/ Includes investment costs for roads, community centers, health centers and vehicles; maintenance costs for roads; operating costs for health centers and vehicles; and project personnel costs.

March 3, 1977 PARAGUAY

SECOND RURAL DEVELOPMENTPROJECT

Economic Rate of Return Calculations

Overall Sub-Project - Area B

1 2 3 4 5 6 7 8 9 10' 11 12

With the Project

Value of Production 5,795.0 8,653.6 12,109.4 12,895.3 13,674.9 14,218.7 14,607.4 15,371.9 14,874.6 15,076.3 14,996.8 17,317.5 Investments Excluding Taxes 1/ 8,501.0 8,446.4 6,201.9 - 19.1 52.9 59.8 234.0 667.1 972.5 - 847.8 Operating Costs Excluding Taxes 2/ 4,186.9 6,269.5 8,527.7 8,512.7 8,512.7 8,512.7 8,512.7 8,512.7 8,512.7 8,512.7 8,512.7 8,512.7 Personnel Costs 171.1 259.7 273.6 273.6 273.6 273.6 273.6 273.6 273.6 273.6 273.6 273.6

Total Costs 12,859.O 14,975.6 15,003.2 8.786.3 8,805.4 8.839.2 8,846.1 9.020.3 9.453.4 9,758.8 8,786.3 9,634.1

Without the Project

Value of Production 2,894.0 2,948.6 2,949.4 2,967.4 2,967.4 2,967.4 2,967.4 2,967.4 3,087.6 3,087.6 3,087.6 3,087.6 Operating Costs Excluding Taxes 2/ 2,070.8 2,109.0 2,109.6 2,122.2 2,122.2 2,122.2 2,122.2 2,122.2 2,206.3 2,206.3 2,206.3 2,206.3

Net Incremental Flow

Net Incremental Income 2.,>1.U 5,705.0 9,160.0 9,92Y.9 10,707.5 11,251.3 ll,b4U.0 12,404.5 11,767.0 U,vb.7 11,909.2 14,229.9 Net Incremental Costs 10,788.2 12,866.6 12,893.6 6,664.1 6,683.2 6,717.0 6,723.9 6,898.1 7,247.1 7,552.5 6,580.0 7,427.8 Net Incremental Benefit (7,887.2) (7,161.6) (3,733.6) 3,263.8 4.024.3 4,534.3 4.916.1 5,506.4 4,539.9 4,436.2 5,329.2 6,802.1

Economic Rate of Return: 14%

C-3>

1/ Excluding import duties. jo 2/ Excluding import duties and land taxes.

March 3, 1977 IBRD 12550

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