Document of The WorldBankea

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 3869b-BR

STAFF APPRAISAL REPORT

BRAZIL Public Disclosure Authorized

AMAZONAS AGRICULTURAL DEVELOPMENT PROJECT Public Disclosure Authorized May 10, 1982

Projects Department Latin America and the Caribbean Region Office Public Disclosure Authorized

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

Currency Unit Brazilian Cruzeiro (Cr$) US$1.00 = Cr$114.26 (November 1, 1981)1/ Cr$1.00 = US$.00875 Cr$1 million = US$8,750

Average Exchange Rates: 1977 1978 1979 1980 1981

14.138 18.317 27.581 52.699 94.750

GOVERNMENT OF BRAZIL FISCAL YEAR

January 1 to December 31

PROJECT'S FISCAL YEAR

April 1 to March 31

WEIGHT AND MEASURES

The metric system is used throughout the report.

/ At time of appraisal. Exchange rate as of April 30, 1982 was Cr$ 154.84 = US$1. FOR OFFICIAL USE ONLY

BASA Banco da Amazonia, S.A. (Bank of Amazonia)

BB Banco do Brasil (Bank of Brazil)

BEA Banco do Estado de Amazonas (Amazonas State Bank)

BNCC Banco Nacional de Credito Cooperativo (National Cooperative Credit Bank)

CEASA-AM Centrais de Abastecimento de Amazonas, S.A. (Central Marketing Organization for Amazonas)

CEPA-AM Comissao Estadual de Planejamento Agricola de Amazonas (State Commission for Agricultural Planning)

CFP Comissao de Financiamento da Producao (Federal Commission for Financing of Produce, Minimum Price Program)

CIBRAZEM Companhia Brasileira de Armazenamento (Brazilian Storage Company)

CNPSD Centro Nacional de Pesquisas da Seringueira e Dende (National Center for Rubber and Oil Palm Research, part of EMBRAPA)

COBAL Companhia Brasileira de Alimentos (Brazilian Food Company)

CODEAGRO Companhia de Desenvolvimento Agropecuario (State Agricultural Development Company)

CODEAMA Centro de Desenvolvimento, Pesquisa e Tecnologia do Estado de Amazonas (State Center for Development, Research and Technology)

COSAMA Companhia de Saneamento de Amazonas (State Water Supply Company)

CPATU Centro de Pesquisas Agropecuarias do Tropico Humido (Research Center for Agriculture in the Humid Tropics, part of EMBRAPA)

DER-AM Departamento de Estradas de Rodagem de Amazonas (State Highway Department)

EMADE Empresa Amazonense de Dende (Amazonas Oil Palm Company)

EMATER-AM Empresa de Assistencia Tecnica e Extensao Rural do Estado de Amazonas (State Rural Extension Company)

EMBRAPA Empresa Brasileira de Pesquisas Agropecuarias (Brazilian Agency for Agricultural Research) ffb Fresh Fruit Bunch

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii -

GLOSSARY OF ACRONYMS (Continued)

FUNEDE Fundo Estadual de Desenvolvimento Economico (State Fund for Economic Development)

FIBGE Fundacao Instituto Brasileiro de Geografia e Estadistica (Brazilian Institute of Geography and Statistics)

FSESP Fundacao de Servico Especial de Saude Publica (Foundation for Special Public Health Services)

IBDF Instituto Brasileiro de Desenvolvimento Florestal (Brazilian Institute for Forestry Development)

INCRA Instituto Nacional de Colonizacao e Reforma Agraria (National Institute for Colonization and Agrarian Reform)

INPA Instituto Nacional de Pesquisas da Amazonia (National Institute for Amazon Research)

ITERAM Instituto de Terras do Estado de Amazonas (State Land Institute)

ORTN Obrigacoes Reajustaveis de Tesouro Nacional (National Treasury Bond Price Index)

PDRI-AM Projeto de Desenvolvimento Rural Integrado (Amazonas Agricultural Development Project)

PIASS Programa de Interiorizacao das Acoes de Saude e Saneamento (Program for the Extension of Health and Sanitation Activities)

POLAMAZONIA Programa dos Polos Agrominerais, Agropecuarios, e Florestais da Amazonia (Special Program for Development of the Amazon Region)

PROBOR Programa de Incentivo a Producao de Borracha Natural (Incentive Program for the Production of Natural Rubber)

PRORURAL State of Amazonas Rural Development Program

SEDUC Secretaria de Educacao do Estado de Amazonas (State Secretariat for Education and Culture)

SEMA Secretaria Especial do Meio Ambiente do Ministerio do Interior (Special Secretariat for the Environment of the Ministry of the Interior)

SEPLAN-AM Secretaria de Planejamento do Estado de Amazonas (State Secretariat of Planning)

SEPROR Secretaria de Producao Rural do Estado de Amazonas (State Secretariat of Rural Production) - iii -

GLOSSARY OF ACRONYMS (Continued)

SESAU Secretaria de Saude do Estado de Amazonas (State Secretariat for Health)

SETRAN Secretaria de Transportes do Estado de Amazonas (State Secretariat for Transport)

SIMA Servico de Informacao Agricola (Agricultural Market Information Service)

SNLCS Servico Nacional de Levantamento e de Conservacao de Solos (National Soil Conservation Service, part of EMBRAPA)

SUCAM Superintendencia de Campanhas de Saude Publica (National Superintendency of Health Campaigns)

SUDAM Superintendencia de Desenvolvimento da Amazonia (Superintendency for the Development of the Amazon)

SUDHEVEA Superintendencia da Borracha (Superintendency for Rubber, part of the Ministry for Industry and Trade)

SUFRAMA Superintendencia da Zona Franca de Manaus (Superintendency for the Free Zone of Manaus)

TELEAMAZON Telecommunication Company of the State of Amazonas

UEPAE-AM Unidade Estadual de Pesquisas Agropecuarias no Estado de Amazonas (Agricultural Research Unit in the State of Amazonas, part of EMBRAPA)

- iv -

BRAZIL

AMAZONAS AGRICULTURAL DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. THE AGRICULTURAL SECTOR

A. Agriculture in the Economy ...... 1 B. Government Agricultural Policies ...... 2 C. Bank Involvement in the Agricultural Sector ...... 3

II. THE STATE OF AMAZONAS AND THE PROJECT AREA

A. The State ...... 3 B. The Project Area ...... 7

III. THE EXECUTING AGENCIES

A. State Framework for Coordinating Rural Development Programs ...... 11 B. Institutions Engaged in Rural Development in the Project Area ...... 11

IV. THE PROJECT

A. General Description ...... 12 Origin and Status ...... 12 Design ...... 12 Application of Lessons from Other Projects ...... 13 Objectives and Target Group ...... 14 Brief Description ...... 14 B. Detailed Description ...... 15 Agricultural Support Services ...... 15 Studies of Natural Resources ...... 15 Land Tenure Regularization ...... 16 Adaptive Agricultural Research ...... 17 Rural Extension ...... 18 Improved Seed Supply ...... 19 Marketing Services ...... 19 Transport ...... 20 Telecommunications ...... 22

The report is based on findings of an appraisal mission which visited Brazil during October 20, 1981 to November 11, 1981. The mission comprised Messrs. E. Los, J.P. Delsalle, J. Cellier, P. Ram and Ms. B. Insel (Bank) and Messrs. E. Velez-Koppel, F. Yepes, A. Garaud and A. Apodaca (Consultants). v

Table of Contents (Continued)

Page No.

Small Holder Oil Palm Program ...... 23 Social Services ...... 25 Education ...... 25 Health, Sanitation and Water Supply ...... 26 Community Development Fund ...... 27 Project Management ...... 27 Parallel Activities ...... 28

V. PROJECT COSTS AND FINANCING

A. Cost Estimates ...... 28 B. Financing ...... 30 C. Procurement ...... 30 D. Disbursement ...... 31 E. Accounts and Auditing ...... 32

VI. PROJECT IMPLEMENTATION

A. Organization and Management ...... 32 B. Project Coordinating Unit ...... 32 C. Operating Agreements and Procedures ...... 33 D. Monitoring and Evaluation ...... 34

VII. PRODUCTION, DEMAND, MARKETING AND PRICES

A. Production ...... 36 B. Demand, Marketing and Prices ...... 37 C. Marketing Channels ...... 38

VIII. FINANCIAL ANALYSIS

Illustrative Farm Types ...... 39 On-farm Operation ...... 39 Oil Palm Cultivation Program ...... 40 Producer Income ...... 40 Fiscal Impact and Cost Recovery ...... 41

IX. ECONOMIC BENEFITS AND JUSTIFICATIONS

Economic Rate of Return ...... 41 Employment ...... 43 Environmental Impact ...... 44 Project Risks ...... 44

X. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION ...... 47

APPENDIX: List of Working Papers and Key Documents in Project File 50

MAP: Project Area IBRD 16251 - vi -

BRAZIL

AMAZONAS AGRICULTURAL DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

VOLUME II - TECHNICAL ANNEXES, CHARTS AND MAPS *

Table of Contents

Page No.

ANNEXES

1. Supporting Tables ...... 1

2. Agricultural Planning, Technical Coefficients and Illustrative Farm Models ...... 10

3. List of Executing and Collaborating Agencies ...... 30

4. Project Organization Charts ...... 31

5. Structure of the Marketing Component ...... 34

6. Transport Infrastructure Improvement Program ...... 44

7. Smallholder Oil Palm Component...... 49

8. Assistance to Communities Under the Project ...... 70

9. Annual Phasing of Project Costs ...... 73

10. Estimated Schedule of Bank Disbursements ...... 78

11. Project Implementation Schedules...... 79

12. Key Indicators for Monitoring and Evaluation ...... 83

13. Estimated Incremental Annual Production and Economic Value at Full Development ...... 89

14. Cost and Revenue Stream for Economic Analysis...... 90

MAPS

- Smallholder Oil Palm Program IBRD 16250 - Municipalities of Urucara, Barreirinha and Parintins IBRD 16252 - Municipalities of Manacapuru and Careiro IBRD 16253

* Available upon request.

BRAZIL

AMAZONAS AGRICULTURAL DEVELOPMENT PROJECT

I. THE AGRICULTURAL SECTOR

A. Agriculture in the Economy

1.01 The national territory of Brazil covers 8.5 million km2, of which 36% is registered as being in agricultural properties. The same share of Brazil's 119 million population in 1980 lived in rural areas (down from 44% in 1970), and agriculture employees 36% of the country's labor force (indus- try, 23%; services, 41%). There are wide variations in population density among regions, from 1.7 inhabitants per km2 in the north to 56.3 in the southeast (1980 data). Of the 306 million ha in agricultural properties, 42 million ha (13.8%) are in either annual or perennial cropping use, 166 mil- lion ha (54.1%) are used for livestock, 68 million ha (22.1%) are in extrac- tive or planted forestry operations and the remaining 31 million ha (10.0%) are considered as productive agricultural land not currently utilized. With large areas of undeveloped land, Brazil has traditionally relied on an expan- sion of its development frontiers to increase its agricultural production. During the 1981-1985 period, in part because of the rapid expansion of sugar- cane for the Alcohol for Fuel Program, it is estimated that up to 2.5 million ha of new land will be put into cultivation annually.

1.02 During the last five years, agriculture has maintained its relative importance within domestic production (between 10.5% and 12.4%) in spite of several years of weather-related poor harvests; the sector, however, expe- rienced a drop in its share of exports (to 47%, with a total value of US$9.5 billion, in 1980, down from its 57% share in 1975). The applicable rate of growth in agriculture has resulted for the most part from increased area under cultivation (mainly for soybeans, fruits and vegetables) rather than improved yields. In fact, rain-fed rice, beans, maize and cassava--all of which are major domestic food crops--have experienced erratic and slightly decreasing yields over the last 30 years. The major export crops are coffee, sugarcane, soybeans, cocoa, oranges, cotton and tobacco, a list greatly diversified in comparison to the mid-sixties when coffee accounted for 45% of total export earnings. By 1975 coffee's share had dropped to 11%, replaced by soybeans and soybean products as the country's largest foreign exchange earner. Despite highly favorable ecological conditions, plantation produc- tion of African oil palm has been only recently introduced into the Amazon region. The Brazilian cattle population had reached 89 million head by 1979, with some 38 million pigs, 310 million chickens and considerable numbers of horses, goats and sheep. The 1980 milk production was estimated at around 10 million tons, after a rapid growth period between 1972 and 1976. Some 10.7 million cattle were slaughtered in 1980 and the poultry industry has been growing extremely rapidly. Wheat has recently accounted for one-third of the value of Brazil's agricultural imports (3.8 million tons of wheat imported in 1979). Other principal agricultural import commodities include natural rubber, live animals for breeding, temperate zone fruits, milk and certain meats, vegetables and seeds. Poor crop years result in periodic importation of basic food crops such as maize, rice and beans (US$1 billion in 1980). - 2 -

B. Government Agricultural Policies

1.03 Agricultural development has been assigned a high priority in Brazil's 1980-1985 development plan. The sector's development is expected to (a) help dampen inflation through expanded food production; and (b) help alleviate the balance of payments constraints through increased production of export crops and energy substitutes. To help achieve these objectives the Government has reinforced its support of special regional programs. Nonethe- less, due to the high inflation rate and the public sector deficits, the Government is restraining public expenditure, has increased nominal interest rates for all agricultural credits, as well as reduced eligibility of larger scale farmers and specific end-users for subsidized funding, and has indicated that it intends to continue reducing these subsidies over time. Regionally, credit use is relatively concentrated in the more modern agriculture in the south. Also, about 80% of crop-specific credit has gone to six crops (soybeans, wheat, rice, maize, coffee and sugarcane), which account for 60% of gross agricultural production.

1.04 For the past several years, the minimum price program has set guaranteed floor prices of 42 commodities to: (a) help farmers make planting decisions; (b) provide for the establishment of Government regulatory stocks; and (c) ensure stable feed prices to livestock producers. Although minimum prices are periodically adjusted upward in real terms, they remain below market prices prevailing at harvest. Also, due to administrative and logistical constraints, the program only reaches a low percentage of the small-scale farmers, who in many regions are the major source of such crops as beans and cassava.

1.05 Provision of fertilizers and other inputs and implements is usually done by the private sector, except in more remote areas where it is handled, often poorly, by state enterprises. The use of improved seeds, fertilizers and other agricultural chemicals remains concentrated in the southern half of Brazil. National consumption of fertilizers increased at a rate of 16% per year between 1972 and 1978 and is now slightly above 3 million tons per annum. Some 40% of nitrogen fertilizers and 70% of phosphoric components are domestically produced. All potassium fertilizer is imported. Fertilizer is mainly used for soybeans (21%), followed by sugarcane, wheat, coffee, rice and maize, which account together for another 54%.

1.06 The principal regional development programs, largely devoted to providing agricultural services and infrastructure, comprise: (a) the Development Program for Integrated Areas in the Northeast (POLONORDESTE), aimed at the rural poor in priority areas of that region; (b) Special Program for the Development of the Amazon Region (POLAMAZONIA) to help promote investment for the development of areas of the "Legal Amazon" 1/ selected for their potential; (c) the Development Program for Central Areas (POLOCENTRO), to help bring the vast "cerrado" or Savannah lands into agricultural production; and (d) the recently established Northwest Region

1/ Which comprises Rondonia; Mato Grosso; Para; Amazonas; Acre; the federal territories of Amapa and Roraima; and parts of the states of Maranhao and Goias. - 3-

Integrated Development Program (POLONOROESTE), to help guide settlement and assure a reasonably equitable, environmentally safe development of the Amazonian areas of Rondonia and Mato Grosso.

C. Bank Involvement in the Agricultural Sector

1.07 The Bank has so far made 23 loans, totaling US$895 million, for agriculture and rural development in Brazil. These include two, amounting to US$119.2 million, for agro-industries; two, totaling US$60.5 million, for livestock development; one for US$18.2 million for grain storage; two, amounting to US$100 million for agricultural research; one for US$100 million to improve agricultural extension services; and 15 totaling US$497.1 million, for various settlement, irrigation and rural development projects, 11 of which are located in the Northeast, two in the State of Minas Gerais, one in the territory of Rondonia and one in the State of Mato Grosso, the latter two as part of the POLONOROESTE Program in the Northwest. In addition, there have been three loans totaling US$196 million for fertilizer production; a loan of US$19 million for a nutrition research and development project; a loan of US$32 million for a Northeast basic education project; and two loans, totaling US$165 million for secondary and feeder roads. A rural development project in the Northeast State of Maranhao is scheduled to be presented to the Bank's Executive Directors during FY82. A reforestation project in Minas Gerais, a further settlement project in Northwest Brazil and a second rural development project in the State of Bahia are in advanced stages of preparation. Additional agricultural and rural development projects are also under consideration for possible Bank financing. Completion and Project Performance Audit Reports have been issued for the grain storage and the two livestock development projects. In all of these projects, significant differences developed between the Government and the Bank regarding interest rate policy, leading to partial cancellation and/or early repayments of the loans. Project Completion Reports have been prepared also for an agro- industries credit project, which was subject to some of the same problems as the three above-mentioned projects, and for the Alto Turi Land Settlement Project. While the settlement project experienced various start-up and execution difficulties, its estimated economic return was only slightly below expectation. Various of the lessons learned from that project were incorporated in comparable activities in the proposed project.

II. THE STATE OF AMAZONAS AND THE PROJECT AREA

A. The State

Location and Natural Features

2.01 The State of Amazonas is located in the northern part of Brazil, bordering Venezuela, Colombia and Peru, and the States of Para, Mato Grosso, Rondonia and Acre in Brazil. It covers an area of 1,564,445 km2 , or just over 18% of Brazilian territory and about 40% of the Brazilian Amazon basin. It contains five great rivers flowing into the Rio Negro and Rio Solimoes, which in turn join into the Medio-Amazonas. The Solimoes and Amazon rivers - 4 - from west to east form, in the State, an almost 2,000 km waterway, navigable for ocean freighters. The climate is warm, with an average temperature of 25°C, and humid, with an average relative humidity of 83%. Having a high annual rainfall between 2,000 and 3,000 mm, the climate is also characterized with a high annual insolation (about 2,000 hours). The state's land area is divided into floodlands (or varzeas) on about 100,000 km2 (6.4% of the state); uplands (or terra firme) on 1,270,000 km2 (81.4%); and about 190,000 km2 (12.2%) of permanent lakes, rivers and marshes.

Socio-Economic Conditions

2.02 According to preliminary 1980 census data, the State has 1.45 million inhabitants. (Due to the difficult accessibility, however, popula- tion data vary by source, and data from the National Superintendency of Health Campaigns SUCAM, which visits even the most isolated areas, suggest that the population could be as much as 1.9 million.) About half of the population is rural. Some 635,000 (44% of the state's population) live in the state capital, Manaus. The state is divided into 44 municipalities, with municipal centers usually having less than 20,000 inhabitants. The seven municipalities of the Medio-Amazonas (including Manaus) have the highest demographic density, about 13.7 persons/km2, compared to 0.9 for the state and 13.6 for Brazil. Population has increased (mainly in the urban centers) over the last 20 years at around 3.5% annually. The sources of the state's GDP have changed in recent years. Over the last 20 years, the share of agriculture slipped from 23% to 21%, that of industry declined from 23% to 16%, and the service sector's share increased from 54% to 63%. In volume, however, agriculture and industry increased considerably, and the main developments occurred in the Medio-Amazonas area, which contributes about 83% to the state's GDP. Preliminary data from 1980 indicate that the agricultural share of the state's GDP remained fairly stable since 1970. Also, a majority, though declining share, of the economically active population still works in agriculture (70% in 1960, 60% in 1970 and about 52% in 1980). The development of the Superintendency for the Free Zone of Manaus (SUFRAMA), created in 1967, and consecutive high floods between 1971 and 1976 contributed to this trend.

2.03 The state's transport infrastructure consists of about 5,900 km of federal roads (about 1,000 km paved), 600 km of state roads (about 200 km paved), and 1,200 km of municipal roads and, during the flood season, around 20,000 km of navigable waterways. The transport system is mainly operated by the private sector, with regular boat services on the main rivers and regular flights between Manaus and five municipal centers. The electric power net- work is restricted to urban areas, with some 75% of the houses having elec- tric power in the main cities. Water supply systems are also restricted to urban areas, serving about 535,000 inhabitants (or 75% of the urban popula- tion). Most municipal centers have radio or telephone communication with Manaus.

2.04 Health services are inadequate, with about 1.6 hospital beds per 1,000 inhabitants, of which 70% are located in Manaus. There is about one practicing medical doctor for each 4,000 inhabitants, but 75% of these doctors are living in the capital, so that the ratio for the rural areas is about 1 to 17,000. The educational services are equally concentrated in urban areas, and those existing in rural areas are poorly supervised and served by mostly unqualified, underpaid teachers. The ratio of children enrolled was only about 25% in 1977, but is now increasing rapidly. However, school attendance drops sharply after the first two years. Secondary educa- tion is provided in 57 schools attended by about 30,000 students, and educa- tion at university level was only recently reactivated.

2.05 Little is known about average incomes. A recent survey (July 1980) for project preparation purposes indicated per capita income levels in the project area varying for less-than-100 ha farms between US$150 on smaller farms (up to 10 ha) located on poor uplands to US$900 on larger farms (from 50 to 100 ha) containing varzeas, compared to the estimated relative rural poverty income level for Brazil of US$330.

Land Distribution

2.06 About 6% of farms have a definite land title and about 80% of farmers possess only a right of occupation. Usually, only a small part of the land occupied is actually cultivated, and the productively used area is limited by available labor, traction and the ease of access. According to the 1975 Agricultural Census, a total of 92,741 farms occupied 6.5 million ha (or 3% of the state's total area) distributed as shown below:

Total of Over All Farms 0 - 10 ha 10 - 100 ha 100 ha in State

Number of farms 57,499 31,717 3,525 92,741 Total farm area (ha) 207,910 805,652 5,483,637 6,497,199 Average farm size (ha) 3.6 25.4 1,555.6 70.0

Area under forest 1/ or tree crops (%) 60.0 89.4 96.0 93.3 Area under pasture (%) 5.5 2.4 2.8 3.0 Area cropped (%) 34.5 8.2 1.2 3.7

1/ Only a small area was under tree crops by 1975. This area is now probably increasing, in part, due to the Incentive Program for the Production of Natural Rubber (PROBOR).

A 1980 field survey by the state's agricultural planning commission (CEPA-AM) in the Medio Amazonas suggested that: (a) the average farm sizes and cultiv- ated area encountered were somewhat larger than noted above; and (b) farms on uplands are about double the size of those in floodlands.

Agricultural Production

2.07 Besides extraction activities, producing mostly timber, rubber, fish and nuts, the state's main agricultural products are fiber, maize, rice, beans, cassava and beef, while the production of eggs, bananas and vegetables is steadily increasing. However, production does not suffice to supply the local population, and the state is dependent on food imports from other states in Brazil. Until 1979, the imports for most products varied from 80 to 100% of the total consumed. The most recent figures show a marked change for some products, e.g., only about 70% of maize, 50% of the rice, and 60% of the beans, vegetables and fruits are now imported from other states. The State has become almost self sufficient for eggs and has reduced its depen- dency on imports for beef and milk from 100% to 80%. Given the huge distance food has had to be transported in the past, and the production potential existing in Amazonas (particularly on the varzea lands), considerable further import substitution could be economically pursued.

Agricultural Development Policies and Programs

2.08 The northern region of Brazil has been viewed by Goverment as an area of considerable development potential. A Superintendency for the Development of the Amazon (SUDAM) was established to help develop the "Legal Amazon, including the State of Amazonas. The POLAMAZONIA special program was was set up to provide various fiscal incentives and the National Integration Program (PIN) was used to fund several major development efforts. One of these was the construction of the Trans Amazon Highway and related, though largely unsuccessful, settlement efforts. Another has been the establishment of the Free Trade Zone in Manaus which increased substan- tially trade activities and employment opportunitites in the capital. Unfor- tunately, Manaus has had considerable difficulty in trying to provide for all the social infrastructure and service needs resulting from the related, intensified urban growth. Also, the expected development of ancillary industries or agricultural activities related to the Free Zone has been slower than hoped. At present, SUDAM finances a host of smaller projects (industrial and agricultural) scattered over the Amazon area but without a specific unifying development strategy.

2.09 SUFRAMA-promoted agricultural development on the available 600,000 ha triangle north of Manaus has been hampered by the fact that most of the area is of poor upland soils. However, the State Government developed a strategy in 1979 to reinforce efforts elsewhere, where soils permit the gradual complementing of the traditional extractive activities with a broader agricultural development. To achieve this goal, the state has started to improve the executive capabilities of its local institutions. It has created new institutions such as the State Land Institute (ITERAM). As a first step, ITERAM is trying to consolidate all activities in the state related to con- firmation of land ownership and to land use planning, as well as to collaborate in new agricultural development efforts. Various special development programs are underway, such as PROBOR, promoting rubber planting; CEPLAC, initiating cocoa cultivation; PROMAM, a SUDAM-supported program to develop infrastructure in the Medio-Amazonas (mainly in municipal centers); and PROVARZEAS, a national special program administered by the Ministry of Agriculture, providing special credits for improvements on varzea lands. Most of the programs have been developed independently and in 1980 the State Government, in an effort to provide a better overall strategy and organizational framework for these activities, established PRORURAL (State Program for Rural Development) which would promote and coordinate all development efforts in rural areas.

Previous Bank Financing in Amazonas State

2.10 To date, several Bank-financed projects have in part benefited the State of Amazonas. An education project (Loan 1067-BR) financed secondary school facilities in the city of Humaita, in the south of Amazonas; the National Extension Project (Loan 1568-BR) provided funds to the State Rural Extension Company (EMATER-AM) to construct its central office and a training center in Manaus, both serving the proposed project area. Two agricultural research projects (Loans 1249-BR and 2016-BR) are helping finance rubber and oil palm research activities of the National Center for Rubber and Oil Palm Research (CNPSD) managed by the Brazilian Agency for Agricultural Research (EMBRAPA) as well as some adaptive research on farming systems.

B. The Project Area

Location

2.11 The proposed project would be carried out in parts of six munici- palities bordering the Solimoes and Amazon rivers; the project area of about 16,000 km2 would, however, cover only 10% of the vast extension of the muni- cipalities (map IBRD 16251). It is divided into three main areas. The western municipality of Tefe (600 km upstream from Manaus), which borders the Solimoes river, would be the site of the proposed pilot oil palm development. The two other development foci would be located in the so-called Medio-Amazonas with the municipalities of Careiro and Manacapuru, lying opposite Manaus (map IBRD 16253); and Urucara, Barreirinha and Parintins, about 350 km downstream from Manaus (map IBRD 16252).

Natural Features and Climate

2.12 The project area has a warm, humid climate, with the Medio-Amazonas having a short drier period with moderate water deficit and the Tefe area having evenly distributed rainfall without water deficit. The annual rainfall varies between 2,000 and 2,500 mm and average temperature ranges between 22°C and 31.6°C. The altitude runs from about 40 m above sea level in Parintins to 100 m in Tefe. Some 14% of the area is periodically flooded lowland (varzeas). The lowlands can be divided into the low varzeas, which are flooded annually (five to six months) and the high varzeas, which are flooded around once every five years for one to two months. The uplands are flat, red-yellow latosols and podzols of low fertility derived from a range of tertiary and quaternary parent material and of different texture. Some of the generally well-drained soils could be used for tree crop cultivation or small-scale planted grasslands under appropriate soil management. Favorable combinations of climatic and soil factors, particularly suitable for high yielding oil palm cultivation, are found in the municipality of Tefe (Annex 1, Table 9). The lowland soils are mostly of good quality, as a result of the Solimoes River sediment added annually or periodically. Excluding too sandy parts, or heavy clays, and areas with a high water table, the varzeas can be readily used for annual cropping. Further data are given in Annex 1, Table 1, and Annex 2.

2.13 In general, the lowlands cannot be economically protected against the floods, and the farming systems have to be adapted to periodic flooding. The Amazon and its tributaries begin to rise in November and by February the low varzeas are under water. The floods generally reach their peak in June, and waters fall to their lowest level at the end of October. The low varzeas have an effective growing season of five to six months, and the high varzeas - 8 - of 12 months in regular years and nine to ten months in high flood years. The time of the flood peak is rather constant (70% probability), and the main variables are the flood levels (with a annual variation averaging about 10 m, but usually between 5 m and 14 m). The crest of the flood takes about five to six weeks to travel downstream to the Medio-Amazonas and the increase in river level varies from 1 to 6 cm/day before peak months. (More data are given in Annex 1, Table 2).

Socio-Economic Conditions

2.14 The population of the project area (including the municipal centers) is estimated at about 140,000, of which about 65% reside in about 150 communities in rural areas. Each community has an average of about 57 families or 400 persons each (Annex 1, Table 3). The varzeas and bordering lands have been partially occupied for generations, with frequent demographic changes under the influence of outside factors, such as high floods, economic changes (e.g., high or low product prices) and government programs e.g., port construction). The average population density is about 9.5/km , compared to the state average of 0.9. After the high floods of 1974 and 1976, many people fled to the urban centers, mainly Manaus, and the State Government for a time favored resettlement on the uplands. Recently, however, there has been a drift back to the lowlands due to increased unemployment in Manaus. The main economic activity in the project areas is agriculture, with industry limited to sawmills (four) and jute packing plants (two).

Land Distribution

2.15 Since the influx of settlers early in the century, at the time of the native rubber boom, land rights have been distributed by the Government. However, land titling administration has been poor, and the legitimacy of various land ownership claims is confused. Since 1979, ITERAM has been actively registering and checking titles and claims, with a view to clarifying the land-ownership situation, including claims in water areas for fishing rights. Available data on land ownership and on the areas falling under the respective juridictions of federal (39%), state (43%) and municipal (18%) authorities are given in Annex 1, Table 4. An estimated 23% of project area farms are of up to 10 ha (covering about 2% of the total farm area), 72% are 10 to 100 ha (covering about 58% of the farm area), and 5% are over 100 ha (covering some 40% of the farm area).

Agricultural Land Use and Production

2.16 The Medio-Amazonas, which includes five of the project municipali- ties, as well as two others (Manaus and Itacoatiara) not covered by the project, accounts for about 80% of the state's agricultural production. The Parintins area is a major producer of cattle and fibers, while Manacapuru is developing as the state's prime vegetable production center. About 14% of the total project area are floodlands, 9% waterways or lakes, and 77% uplands. From 40 to 80% of the lowlands are annually inundated, and 10 to 20% have a permanent high watertable. Of the area's uplands, about 30 to 50% are potentially suitable for tree crop cultivation. In practice, however, only about 4% of total project area is occupied by farms, which are only partially cultivated (15 to 35% of farm area). The main crops cultivated are - 9 - fibers (mainly jute and malva), rice, corn, cassava and vegetables on the floodlands and cassava with some fruit crops and guarana on the uplands, where the cultivation of rubber has also recently been promoted and begun. Cattle are raised mainly by medium-sized farmers. The prevailing low agri- cultural and livestock production levels reflect the lack of infrastructure and public services and the low level of technology employed. However, the ecological conditions are in many respects favorable for greater production and there is a distinct margin for agricultural development, under appro- priate management. Further details of existing production are given in Annex 1, Table 5, and cultivation practices and land use are discussed in Annex 2.

Agricultural Services

2.17 Agricultural and natural resource research is being carried out by CNPSD of EMBRAPA, and by the National Institute for Amazon Research (INPA). The Agricultural Research Unit in the State of Amazonas (UEPAE-AM) of EMBRAPA has developed the main base so far for applied agricultural research. The programs, carried out on the stations near Manaus and Maues, still need to be broadened, however, to enable closer reflection of farmers' practical needs, sufficient local testing and fuller integration with extension work. Other agricultural services, however, are at even earlier stages of development and their operation suffers from the difficult access to the area and also from weak administrative structures and inexperience. Most still concentrate their attention to the areas very near urban centers. EMATER-AM has been able to establish six offices in the project area with a total of only 18 extension officers servicing the rural population of over 90,000. There is a high turnover in field staff, and farmers are rarely visited on the farm. Until recently, the state had virtually no capability to produce improved seeds and depended nearly totally on imports from other states, with supply proving highly unreliable due to transport difficulties and lack of proper storage facilities. The state decided to develop its own production capacity for certified improved seeds suitable for local conditions, and recently appointed the State Agricultural Development Company (CODEAGRO) as executing agency for this program.

2.18 Only very limited marketing services are available to small-scale farmers in the project area. CODEAGRO, established in 1979, sells farm inputs through its stores (one per municipality) but its stocks are limited and little technical advice is provided. CODEAGRO also helps execute the federal system for marketing loans or crop purchase against the minimum price. However, the system is barely accessible to small-scale farmers because of the relatively complex regulations, obvious logistical problems and high transaction costs. The four cooperatives in the project area (three in the Medio-Amazonas and one in Tefe) also sell inputs and some consumer goods and provide preliminary processing of some crops (fiber, rice and cassava), limited transport services and onlending of institutional credit. All four would require management and marketing advice. Only about 15% of the project area small-scale farmers are receiving institutional credit, channelled principally through the official banks, of which only 10 branches are operating in the Medio-Amazonas municipalities and three in Tefe. Most farmers are dependent upon the traditional intermediary system (so-called aviamento) for input and consumer good supply and marketing of production. While official credit interest rates range from 12% to 35%, intermediary - 10 - rates range from 65% upward. By obligating the farmer's crop at far below market prices and limiting his cash resources, this system has pre-empted farm investment financed either through savings or through financial institutions which would require the crop as collateral. Lacking access to alternative means of cargo transport and lacking cash as a result of an essentially barter system, the farmer is unable to seek competing services. While the intermediary system has been essential to the small-scale farmer survival, it has also tended to constrain his development beyond the subsistence stage. Almost no marketing services, formal or informal (except the Manaus fair), are available for fruit and vegetable production in the project area, largely because many intermediaries prefer the easier and cheaper alternative of importing in bulk from out of state through established channels.

Physical Infrastructure

2.19 There are about 120 km of paved federal roads (BR-319) in Careiro, linked with the BR-364 in Rondonia, 138 km of municipal feeder roads and some 19 floating mooring sites in the project area. The farm communities located in the uplands (some 30 such communities in the project area) are served, albeit poorly, by farm tracks, some roads and river branches. The other 120 main communities are located on the borders of rivers or river branches or on bordering uplands. Most of the river transport facilities are centralized in Manaus, Itacoatiara and Parintins, and owned by intermediaries or private transport companies, transporting cargo and passengers at the same time with barges with a capacity varying between 5 and 60 tons and 20 to 60 passengers. Small-scale producers often possess canoes, mainly for fishing purposes, and there are few community-owned barges. Most municipal centers have energy and water supply systems, but only three of the six project municipalities have the interurban telephone system. Most rural houses obtain their water from the river or private wells, and use kerosene lamps. Battery-operated radios are a common source of communication of news.

Social Services

2.20 Social services are inadequate, and the related institutions are generally weak and urban oriented. Although there are 245 schools registered in the municipalities of the project area, most are poorly supervised and served by unqualified teachers. About 45% of the school age children in the project area are enrolled, and attendance drops quickly after the second school year. Health services are even more disappointing. Although the municipal centers do have reasonable hospital installations, the rural popu- lation receives little service due to transport and communication problems. The existing health posts are often in disrepair and many are closed for lack of staff, and the few health attendants working in the rural communities are poorly trained and not supervised. Available data indicate an infant mortality of 88 per 1,000 live births. In reality, the figures for the rural areas are probably under-reported and much higher. Malaria is not common in the project area except for the municipality of Parintins. Schistosomiasis has not been reported so far, and only one case of Chagas disease was recent- ly registered in the state. The State Government is taking steps to prevent entrance and spread of these diseases. More details about the project area's physical and social infrastructure are given in Annex 1, Table 6. - 11 -

III. THE EXECUTING AGENCIES

A. State Framework for Coordinating Rural Development Programs

3.01 The State has begun to organize all its rural and agricultural development activities under an umbrella program called PRORURAL (para 2.09) in order to better promote and coordinate the application of scarce human and financial resources. PRORURAL is directed by a Council for Rural Development consisting of the State Secretaries of Planning (SEPLAN), Special Affairs (SEAE), Rural Production (SEPROR), Transport (SETRAN), Energy, Housing and Sanitation, Industry and Trade, Education and Culture (SEDUC) and Health (SESAU), and representatives of the Delegation of the Ministry of Agriculture in the State of Amazonas, SUDAM, SUFRAMA, SUDHEVEA (Superintendency for Rubber Cultivation), BB (Bank of Brazil), BASA (the Bank of Amazonia), BEA (the State Bank of Amazonas) and BNCC (the National Cooperative Credit Bank) The council is chaired by the State Governor. The council, a deliberative body, delegates general administrative functions for each project to an Executive Committee, consisting, in the case of the proposed project, of the Secretaries of Rural Production (Chairman), Special Affairs and Planning and the Coordinator of CEPA-AM (the State Commission for Agricultural Planning within SEPROR). The council approves the annual working plans of the rural programs upon the recommendation of the respective Committees. The programs currently comprise the proposed Amazonas Agricultural Development Project (PDRI-AM), a Fishery Development Project (with support of the National Economic Development Bank, BNDE), PROMAM and PROVARZEAS (para 2.09).

B. Institutions Engaged in Rural Development in the Project Area

3.02 The Secretariat of Rural Production (SEPROR) carries out its execu- tive and coordinating task through a group of state institutions under its control, consisting of EMATER-AiM; ITERAM; CODEAGRO; CEPA-AM and the Amazonas Oil Palm Company (EMADE). Other agencies with existing or planned activities in rural areas include the State Highway Department (DER-AM); the State Secretariats of Education and Culture (SEDUC) and Health (SESAU); FSESP (Foundation for Special Public Health Services) and SUCAM (National Super- intendency of Health Campaigns); the research units of EMBRAPA (CNPSD and UEPAE-AM); the Bank of Brazil, Bank of Amazonia and Amazonas State Bank; the State Company for Telecommications (TELEAMAZON); and the State Water Supply Company (COSAMA). These agencies would collaborate closely in the proposed project. Further support for rural development initiatives comes from a wide range of federal and public agencies, institutions and programs such as the National Institute for Amazon Research (INPA); the National Institute for Space Research (INPE); the National Department for Water and Energy (DNAEE); EMBRAPA's Research Center for Agriculture in the Humid Tropics at Belem (CPATU); the Federal Commission for Research of Mineral Reserves (CPRM); the National Institute for Colonization and Agrarian Reform (INCRA); the Brazilian Food Company (COBAL); the Central Marketing Organization for Amazonas (CEASA-AM); the Intermunicipal Technical Cooperation Institute (ICOTI); cooperative organizations, such as the Central Cooperative of the North (CENTRALNORTE); and the local rural training center for Urucara (CETRU), sponsored by religious groups. Though exceptions exist, the overall effectiveness of these various agencies in rural areas has been generally - 12 - hampered by limited resources, the difficulty of Amazonian conditions, quick turnover of personnel and weak interagency cooperation. Since 1979 the state has made concerted efforts to strengthen state institutions, especially through the training of a more permanent staff from Amazonas, and by reinforcing the capabilities of the key planning institutions (SEPLAN-AM and CEPA-AM).

IV. THE PROJECT

A. General Description

Origin and Status

4.01 The state assigns high priority to agricultural development, with a view especially to improving the productive (as opposed to the merely extractive) capacity of the State, to balance and complement the rapid urban development of Manaus and other major cities in Amazonas, to dampen the rural exodus and to increase the self-sufficiency in food supply of the state. In late 1979 the state requested Bank assistance. Work was focused on the preparation of a project emphasizing development of already populated areas with suitable floodlands, with the best production potential, and with good accessibility. The project was prepared between March 1980 and October 1981 by CEPA-AM in close collaboration with the interested federal agencies and the future implementing agencies (Annex 3). The state has initiated with Federal funding the training of project personnel, initial field work and land regularization and various other preliminary activities, in order to help condense the project's start-up period.

Design

4.02 The project would essentially assist the existing rural population in the riverine Amazon areas and have a two-pronged approach, one to increase food production on the floodlands and another to promote selected tree crop cultivation on the uplands. It would focus on a relatively limited area representative of the already settled parts of the state and address both technical and institutional constraints to development. The project would be the first Bank effort to broadly assist agricultural development in the State of Amazonas.

4.03 To better select target areas, the state carried out field surveys of rural communities in the project area. The surveys provided key data on such matters as existing services and infrastructure, and identification of priority needs. Equally important, given the general lack of systematic agronomic research results in the areas, it provided a very fruitful vehicle for helping identify simple production improvements and cropping innovations already undertaken by the more successful farmers and to be extended to others (para 7.01). The project would, nonetheless, still be very much a pioneering endeavor, with considerable economic and technical risks (paras 9.11-9.16). To help offset these risks, the project was designed to include substantial continued development of the data base (natural resource research, agronomic research and demonstration, flood forecasting) and annual evaluations of progress, with annual updating also of the detailed execution - 13 - plans. These evaluations and annual planning updates would be used to reconfirm and "fine-tune" the exact size and scope of the package of investments and support services (e.g., intensity of extension services, rate at which new cropping practices and patterns are introduced, extent and level of transport investments and services developed) in the some 150 rural communities already selected or in others which may be selected as the project progresses. The project would also include very substantial institution building efforts, reflected in the important training and technical assistance sub-components, the plans for reorganization of CODEAGRO, the assistance to cooperatives, the establishment of EMADE, and the training of a core staff in the State Center for Development, Research and Technology (CODEAMA) within the Secretariat of Planning (SEPLAN-AM), which would provide the state with a stronger capability to use results of studies of local resources, and to prepare and evaluate state-sponsored projects.

Application of Lessons from Other Projects

4.04 Experiences from other completed government projects or project preparation efforts in the Amazon region, as well as of the Bank-financed Alto Turi project in the Pre-Amazon area of Maranhao State, were also taken into account during project design. Although these projects were located in areas not comparable to the riverine lands of the proposed project and in several cases addressed problems of new settlements, they have indicated several topics which are relevant for the proposed project. These include: (a) the need to include measures to preserve the production capacity of cultivated areas; (b) the need to allow for sufficient flexibility to adjust project activities to the experience obtained early in the project; (c) the need to solve land tenure problems prior to the initiation of other project activities; (d) the need for strong political commitment from the State and Federal Governments; and (e) the need to involve project beneficiaries and communities actively in project definition and operation.

4.05. To help address these topics: (a) the project would promote tree crop cultivation on the uplands, and assist the state in developing policies and programs to improve and establish test plots throughout the area to moni- tor productivity issues; (b) project administration and monitoring activities would ensure timely data collection and a proper feedback of information to the local executive level and funds would be provided for annual evaluations to test and update original project assumptions; (c) ITERAM has given priority to, and established local offices in, the project area; started in 1980 its analysis of land ownership claims; developed close cooperation with the Federal (INCRA) and municipal authorities; and developed close coordination between its activities and those of EMATER-AM; (d) political commitment has been clearly demonstrated during project preparation, particularly through the active involvement of Government officials on all levels and the timely financial support for the implementation of pre-project activities; and (e) prior to or simultaneously with the expansion of public services, EMATER-AM would assist farmers and communities in organizing themselves. - 14 -

Objectives and Target Group

4.06 The proposed project objectives are to:

(a) raise the incomes and living standards of some 9,500 small farm families operating, with family labor, farms of under 100 ha;

(b) increase food production to supply the rapidly growing urban population;

(c) promote a sustainable and rational development of agricultural production on suitable land, mainly through increased productivity, gradual introduction of some new crops or varieties, and improved organization of production systems;

(d) improve production support and social infrastructure and services; and

(e) improve the Government's capacity to plan and execute similar projects in other parts of the state.

4.07 Since the peculiarities of the region with its long distances, multiform river transport and seasonal floodings require well organized procedures in order to make best use of available resources and services, the project would also focus on farmer organization in each of the 150 communi- ties in the project area. Most of the beneficiaries would be members of such communities, which comprise about half the farm population in the area. Ultimately, most of the total of about 18,000 farmers in the area would at least benefit indirectly from some project activities. It is expected that some 9,500 farmers, receiving direct assistance and mostly first time access to adequate extension, and gradually better access to working capital and/or investment credit, would be the major source of the proposed project's impact on incremental production. These farmers would operate on floodlands with long-term concessional use rights and/or uplands to be titled under the project. Sharecropping is not common in the project area. Possible seasonal peaks in labor requirements would be dealt with through the traditional mutual assistance arrangements (mutirao) between the farmers or by hiring occasional labor. About 47% would operate farms in the 0 to 20 ha size and 53% in the 20 to 100 ha size, but virtually all would have a cultivated area of less than 20 ha.

Brief Description

4.08 The project would include the following activities:

(a) studies of natural resources and agro-ecological zoning in the project area;

(b) the strengthening and expansion of land tenure regularization services, adaptive agricultural research, rural extension, improved seed supply and marketing services;

(c) the improvement of physical infrastructure, including expansion of storage facilities, the telecommunication network and transport - 15 -

facilities (improvement of feeder roads, farm tracks, floating mooring sites, and road and track maintenance capability) in the project area;

(d) the implementation of an initial five-year time-slice (1,800 ha) of a pilot oil palm cultivation program, including small-scale farmer participation;

(e) the strengthening of education, health and sanitation services and of community development activities; and

(f) the establishment of project management and coordination, including monitoring, ongoing evaluation and special studies.

Additional support activities such as credit for agricultural and coopera- tive development, the broader use of the minimum price mechanism in rural areas, as well as the incremental operating costs not financed under the project, would be provided by Government.

B. Detailed Description

Agricultural Support Services

4.09 Studies of Natural Resources. In support of the specific adaptive agricultural research work to be carried out under the project (para 4.15) and of the longer term development planning activities, this component would aim to better identify the natural resource potential of the project area. This would support efforts of flood forecasting, the preservation of the ecological equilibrium and measurement of agro-ecological changes in the area. It would achieve these objectives by the preparation and distribution of: (a) topographical maps of about 4,000 km2 (1:100,000); (b) soil and agri- cultural aptitude maps of about 4,000 km 2; (c) geomorphological maps of the total project area with 30-m contour lines (1:100,000); (d) vegetation and potential land use maps of 2,000 to 3,000 km2 (1:100,000); (e) detailed soil and contour maps of selected areas of about 400 km2 (1:25,000); and (f) hydrological maps of varzea areas of about 2,000 km2 (1:100,000). The component would also include the establishment of five hydro-climatological observation stations and the identification, for subsequent demarcation and control by ITERAM, of about 1,600 km2 of biological and 20,000 ha of forest reserves (para 4.12). CODEAMA would be the executing agency. It would contract the preparation of soil and agricultural aptitude maps to EMBRAPA; the hydrological and vegetation maps to INPE; and the topographical maps to ITERAM. The development of land use maps would be implemented by CODEAMA with the assistance of EMBRAPA, ITERAM and consultants. The operation of the observation stations would be commissioned by CODEAMA to EMATER-AM or CEPA-AM as appropriate. The component would finance: (a) the studies and surveys for map preparation and identification of biological and forest reserves; (b) establishment of five hydro-climatological stations; (c) vehicles and equipment, salaries of incremental staff and other operating costs required for the management of component activities; and (d) 30 man-months of consultant services for map preparation, selection of observation stations, and river level forecasting. - 16 -

4.10 Surveying and mapping would start at priority areas in each munici- pality, selected on the basis of population density, existing agricultural developments and accessibility. The results and experience of this first phase (covering about 600 km2) would help to identify the areas for surveying in subsequent years. Soil maps would be based on field surveys and satellite information. Geomorphological and biological maps would be executed using satellite information, combined with testing and data interpretation in the field. The detailed survey of the oil palm development area was subcontracted to EMBRAPA and would be completed before September 30, 1982 as a separate exercise (para 4.30). The observation stations would collect climatological data; information on river levels, ground water level and water quality at the station site; and rainfall data from pluviometers posted at several other selected points. The results would complement the Commission for Research of Mineral Reserves (CPRM) regional flood forecasting system (becoming operative by the end of 1982) with a local flood forecasting service.

4.11 Since all mapping activities require close integration for optimal results, CODEAMA would, after one year of experience, prepare a mapping manual, with the assistance of consultants, for future use in the project area and elsewhere in the state as an initial step toward a general agricul- tural zoning effort. Although CODEAMA would contract most of the work to specialized agencies, it would coordinate activities and provide logistical and field support and train a core staff able to expand similar activities to other areas in the state. The State Government has agreed to: employ, not later than December 31, 1982 the consultant services for the selection of observation stations; and complete, by April 1, 1984, the mapping manual of natural resources.

4.12 Land Tenure Regularization. The project would legalize the land occupation rights of project beneficiaries by providing either formal titles or rights of land use, thereby improving security of tenure and access to institutional credit. In addition, the component would help demarcate and control ecological and forest reserves identified under the studies of natural resources component. It would achieve these objectives by: (a) administrative discrimination of claims to lands throughout the six muni- cipalities involved with the project; (b) legalization of the land tenure of about 9,500 small-scale farmers, including demarcation of about 6,000 km of property boundaries; (c) the surveying of the municipality of Tefe; (d) demarcation and control, with the technical assistance of the Brazilian Institute for Forestry Development (IBDF) as required, of about 1,600 km2 of biological and 20,000 ha of forest reserves; and (e) the provision of special consultant services to assist the state in further developing land distribution policies and procedures. ITERAM would be the executing agency and the project would finance vehicles, boats and equipment, salaries of incremental staff and the costs of consulting services.

4.13 In order to ensure a consistent and coordinated land regularization action, ITERAM has entered into agreements with INCRA and the municipal prefects. ITERAM would execute all discrimination, distribution, demarcation and administrative tasks, while INCRA and the prefects would review and formally issue the official documents for those lands under federal (39%) or municipal (18%) control. Land tenure regularization would include titling of individual plots, as well as regularization and titling of community - 17 - holdings. The communal property reflects a local tradition of communal action. Schemes developed on this basis have been successfully carried out recently in selected areas in the municipality of Urucara. In general, the regularization (individual or group) would proceed in stages: (a) the issuance of the right of occupation as a preliminary phase; (b) the demarcation in the field; and (c) the formal titling or the issuance of a right of land use (Concessao de direito real do uso, CDRU). On floodlands, only CDRUs would be issued, because of the specific demarcation problems in flood plains and the Government's desire to control closely varzea use. In general, the titling policy would be closely linked to the land-use policy, and titling of community holdings on uplands would facilitate the enforcement of the legislation requiring that 50% of the holdings be kept under forest or tree crops. The issuance of CDRUs for varzeas would take place quickly after demarcation of the main landmarks along the river, and, in accordance with existing ITERAM regulations, recipients would pay an annually adjusted fee. Similarly, the full costs of demarcation and documentation of formal titles would be recovered over a 10-year period, with a two-year grace period and full monetary correction.

4.14 ITERAM, the executing agency, was established in 1979; it has set up at its central offices an effective system of recording and controlling existing titles and claims. It has a reasonably strong organization with a staff of 230 and five district offices. The administrative discrimination of public land has been completed for 20% of the project area. The State Government has agreed to employ, by December 31, 1982, consultant services needed for the land regularization activities.

4.15 Adaptive Agricultural Research. The project would support a five-year adaptive research program prepared by UEPAE-AM and EMATER-AM and including 24 specific research subjects. It would concentrate on improvement of cultivation practices for main small-scale farmer crops (cowpea, maize, rice, cassava, jute, malva, guarana) in upland and varzea areas, use of draft animals and farm management. A sample of 35 farms would be selected for farm management studies. UEPAE-AM would be the executing agency. It currently has a staff of 120, two experimental stations and is well organized. The project would finance: (a) the establishment of two applied research outposts in Manacapuru and Parintins, involving office, warehouse, staff housing, water and electricity supply, vehicles, boats, farm and office equipment; (b) salaries of 50 incremental research, field and support staff and incremental operating expenses, including publication of results; (c) the research work to be sub-contracted to other agencies; and (d) radio equipment for communications with UEPAE headquarters. The Federal Government would enable EMBRAPA to increase, by December 31, 1983, the research staff of UEPAE-AM by 12 and arrange for UEPAE-AM to publicize each year the results of research activities performed under the project.

4.16 Aside from its research role in the project, UEPAE-AM would also assist in producing basic seeds and participate in the training of EMATER-AM extensionists. Oil palm and rubber research would be executed by the CNPSD in Manaus under ongoing Bank-assisted research projects (Loans 1249-BR and 2016-BR). CNPSD is establishing in 1982 an experimental oil palm plantation expected eventually to reach 500 ha; it is being located next to - 18 - the pilot 5,000-ha oil palm plantation to be initiated under the project (para 4.28).

4.17 Rural Extension. The project would expand the extension services to the community or village level. The component would assist in farmer organization and promotion of ecologically well-suited cultivation tech- niques. It would aim to improve the quality of extension services by intens- ive training of extension staff, establishment of demonstration plots and a focus on farm management problems and farmer training. The component would provide for: (a) establishment and equipping of three new local offices and four lodging facilities for field and support staff; (b) the increase of the coordination and supervision staff by 5, the senior field staff including subject matter specialists by 27 and of the community level agricultural and social extensionist staff by 96; (c) training of extension staff and farmers; (d) establishment, mostly at the farm level, and operation, in cooperation with UEPAE-AM, of about 400 demonstration plots to disseminate adaptive research results; (e) acquisition of boats, vehicles and office equipment; and (f) 36 man-months of consultant services to assist in extension methods and farmer organization. EMATER-AM would be the executing agency, working in close cooperation with the agencies involved in land tenure, research, education, health and marketing activities. The project would finance construction, additional boats, vehicles and office equipment, salaries of incremental staff, consultant services, and other incremental operating costs. The project would complement assistance provided under the Bank financed Agricultural Extension Project (Loan 1568-BR) which is already funding items such as central administration and training facilities.

4.18 Since 1979 EMATER-AM has, in its efforts to better reach small- scale farmers, emphasized community organization and development, group extension work, and attention to community needs such as better transport and marketing facilities and better supply of improved seed (both of the latter in cooperation with CODEAGRO), as well as the introduction (in cooperation with UEPAE-AM) of low cost farm techniques such as higher planting density and better on-farm storage techniques. EMATER-AM has started to train field technicians originating from Amazonas (to help reduce the turnover of staff) and to create facilities for the field staff to work and live in the more isolated communities now targeted. The proposed project would support this development. In the initial phase, as the land regularization activities of ITERAM are executed, specially trained extension staff would concentrate on community organization, forming informal farmer groups, explaining the project concept, and better identifying community needs. Agronomic assistance would be phased in gradually through: (a) group extension; (b) orientation through demonstration plots, community nurseries and radio; and (c) farm visits to assist farmers in planning farm activities and preparing credit requests.

4.19 By the end of the project period, the project would have assisted most of about 150 communities, comprising about 50% of the rural population in the project area. Each extensionist would operate in a fixed number of communities (on the average, two) and, besides community work, directly reach about 50 beneficiaries initially, to be increased to about 100 after five years. The field extension agents would be supported by subject matter specialists stationed in the municipal centers and Manaus, and communications between these levels would also be improved under the project. Since most of the activities of the other components at the community level would depend - 19 - largely on EMATER-AM's progress in community development, EMATER-AM would regularly organize local meetings between extension agents and representa- tives of ITERAM, CODEAGRO, SEDUC and SESAU to work on interagency integra- tion. At the municipal and state level it would also work closely with representatives of the financial agencies to assure adequate credit services. The State Government has agreed to: (a) employ, by not later than December 31, 1982, consultant services for farmer organization and agricultural extension methodology; (b) increase, by December 31, 1983, the extensionist staff of EMATER-AM in the project area by 86; and (c) put in place, by not later than December 31, 1984, the remaining staff (42) to be employed under the project.

4.20 Improved Seed Supply. The proposed project would assist CODEAGRO in developing a pilot program for improved seed supply. The component would provide for: (a) training and strengthening of the technical staff assigned to the program; and (b) additional seed storage facilities with appropriate temperature and humidity control. In addition to helping assure adequate provision of several varieties of rice, corn and bean seeds already tested under project area conditions, CODEAGRO would initiate local production of high quality jute and malva seeds through subcontracting to Central Norte (Northern Central Cooperative) in Manaus and would speed up production of legume seeds. The project would finance civil works and cooling equipment for five small seed storage units in the municipalities of Manaus (two units), Barreirinha, Urucara and Manacapuru; training; and personnel costs for four additional staff, including the component supervisor.

4.21 The improved seed program would be carried out through: (a) selec- tion of cultivars and supply of basic seeds by EMBRAPA; (b) production sub- contracted to cooperative farmers assisted by EMATER-AM extensionists, after appropriate selection and registration; (c) processing, quality control and primary storage in Parintins and Manaus; and (d) transport to the five muni- cipalities concerned for secondary storage and distribution. This organiza- tion (detailed in Annex 4, Chart 2) relies heavily on the early completion of works already under construction with other financing, including a seed pro- cessing unit in Manaus (3 ton/hour), installation of additional cleaning and grading equipment in Parintins, and construction of seed storage facilities in Parintins and Careiro. Assurances were received from the State Government that, by not later than December 31, 1982, these ongoing improvements would be completed, and CODEAGRO would appoint four additional staff for component management.

4.22 Marketing Services. The project would stimulate the development of competing private channels while improving small farmers' access to official marketing systems in the project area. The project marketing component would fund: (a) the staff training and technical assistance necessary to help put into operation, over a three-year period, a COBAL system for supplying (with non-project funding) basic consumer goods to small-scale farmers through a network of 20 supply posts operated directly by COBAL or by cooperatives and private intermediaries; (b) CODEAGRO promotion and coordination work needed to develop several new options for marketing of the project area's subsistence food production, including: sales to the operator - 20 -

(INAN, the National Food and Nutrition Institute) of ongoing national nutrition programs; expanded use of the federal minimum price purchase and loan programs; and implementation, on a pilot basis, of newly simplified minimum price loan system procedures, permitting on-farm storage and standardized regional classification and grading of production; (c) the equipping, through CODEAGRO (in cooperation with UEPAE-AM and EMATER-AM), of local workshops to test and produce locally adapted tools for agriculture, and development of technical assistance capacity to advise small-scale farmers on the purchase of these tools, as well as other available inputs; (d) various efforts to improve the channels for fruit and vegetable marketing, based on a thorough study to be conducted by COBAL, including improvements in small producer fairs and possibly development of permanent retail farmers' sales areas in the Manaus food markets and improvements in the market information system; (e) a study on and improvements, coordinated by CODEAGRO, in private and public small cargo transport services (both river and on land) through such measures as improved central loading and access areas, expanded public ferry services, assurances of minimal land and river cargo services, operation of a lease/purchase system for acquisition of community cargo boats by farmer groups and improved information on services; and (f, assistance to the three project area cooperatives and to Central Norte, the central services agency for the cooperatives, through training and technical assistance, including a market research consultancy. Details on the sub-components are given in Annex 5. The project would finance: project coordination staff for CODEAGRO, costs of constructing and equipping possible producers' retail markets and of equipping the adapted technology workshops, trucks and boats for CODEAGRO and for the community boat scheme, and consultancv services.

4.23 CODEAGRO, established in 1979, has recently been reorganized to more effectively coordinate this component and continued management assistance will be needed. Assurances were received that the state would: (a) employ, not later than December 31, 1982, consultancy services on terms and conditions satisfactory to the Bank, to assist CODEAGRO in finalizing and carrying out its reorganization plans; (b) provide to the Bank satisfactory results of the feasibility studies and detailed execution proposals for improvement of any fruit and vegetable marketing facilities, such as the Manaus producers' market and other project area producer markets, prior to initiation of works on these facilities; (c) provide to the Bank, prior to initiation of the cargo boat lease/purchase scheme, a satisfactory evaluation of the economic and operational viability of the pilot scheme using existing boats, and detailed plans for the rental or purchase conditions and options to be offered which satisfactorily recover the costs; and (d) cause CODEAGRO to recover fror'iusers the full operating, maintenance and investment costs associated with proposed CODEAGRO boat services between Manaus and Careiro (except to the extent that such costs are related to CODEAGRO's other component coordination functions) and of project-supported truck transport services.

4.24 TransDort. The transport component would facilitate access by farm communities to key agricultural and social services and improve transport conditions for shipping farm produce and supplying farm inputs. It would include: (a) the construction of 24 floating, storage-in-transit platforms - 21 -

("anchorages") to facilitate freight and passenger transport along navigable waterways and improved feeder services by small boats; (b) studies and experimental clearing of about 30 km of small and obstructed creeks to enable neighboring communities to make greater use of small boats during the low water season; (c) purchase of light maintenance equipment to support largely manual maintenance of roads and minor waterways by municipalities; (d) the training of municipal works foremen in the maintenance of transport infra- structure; (e) the construction or improvement of about 400 km of farm tracks linking farm communities to existing feeder roads, river branches or produc- tion areas; (f) the rehabilitation or construction of about 100 km of feeder roads linking farm communities to existing roads or municipal centers; (g) surveys and detailed engineering necessary for the above works; and (h) consulting services to strengthen the state's capacity to plan, engineer and implement the above activities. Proposed standards and project execution and maintenance details appear in Annex 6. The component would be comple- mented by the actions proposed under the marketing component to improve river transport services through CODEAGRO and cooperatives (para 4.23). SETRAN would have a coordination/supervision team with overall responsibility for: preparation of detailed engineering; supervision of construction; equipment procurement; and the preparing and conducting of training in maintenance. It would be assisted in detailed engineering, field surveys and supervision of contracted works for road or anchorage construction by engineering staff of the state highway department (DER-AM) and consultants or specialists from other Government agencies. Force account works by DER-AM would be supervised by the SETRAN coordination team. DER-AM would annually enter into agreements with SETRAN defining its participation and the related costs of its services. The project would finance, in addition to the transport works themselves, the SETRAN coordination/supervision team (including a coordi- nator, two engineers and two assistant engineers), support vehicles and equipment (including operating costs), survey work, detailed engineering and construction supervision by DER-AM, the maintenance training program, and about 33 man-months of consultancy services, including a transport economist to assist SETRAN coordination team.

4.25 Transport improvements are expected to play a central role in helping increase the market and production options open to farmers, and the transport component will need to reflect considerable flexibility in selection and execution of works adapted to the varying local needs. Some of the proposed civil works may contain unconventional features, both as regards to design and possible alternative method of execution. The first prototypes of each new or unconventional alternative would be constructed by combined DER-AM and municipal force account. Experimental creek clearing or improvement would be carried out from years 2 to 4 (depending on satisfactory results of first-year surveys and studies) and would also test alternative techniques, using various types of equipment as well as local labor. The first-year investment program has been defined in detail and includes a sample combination of improved river and land infrastructure transport to serve communities which are isolated a good part of the year. Specifically it would include: (a) construction of 55 km of farm tracks; (b) construction of four anchorage platforms; (c) detailed engineering for the first two years road program; and (d) surveys and studies to assess the needs and define adequate work programs for the clearing of obstructed creeks. The effectiveness of these efforts, together with improvements generated by the SETRAN coordination/supervision group on the transport data base, would feed - 22 - into efforts to detail the programs of the following years in accordance with criteria given in Annex 6. Maintenance of infrastructure would become the responsibility of the municipalities, with some assistance from DER-AM, and would rely on integrating community labor in maintenance work. The project would provide a set of light equipment and tools to each participating municipality and would also provide maintenance training to permanent municipal staff. DER-AM would provide periodic assistance requiring the use of equipment and trucks. The responsibilities of the municipalities and DER-AM for execution and funding maintenance programs would be defined in agreements between the state and each municipality. Assurances were received from the State Government that it would: (a) employ not later than December 31, 1982, consultants for technical assistance; (b) present yearly to the Bank not later than June 30 an evaluation of the project transport component activities during the previous project year; and after an exchange of views on these evaluations, appropriately adjust work programs to take into account the results; (c) prior to creek clearing or improvement works, present to the Bank satisfactory maps, working plans and budget estimates; and (d) prior to initiating feeder road, community track or mooring site construction in a particular municipality, enter into agreements, satisfactory to the Bank, between SETRAN and the municipality establishing related maintenance responsibilities. A condition of disbursement for the transport component would be the appointment of the SETRAN coordination/supervision team.

4.26 Telecommunications. This component would provide telephone connec- tion to isolated or distant communities, a key element of support for the other project activities, such as extension, marketing and health services. It would provide for: (a) installation of one public pay phone in each of the 50 most populated rural communities; (b) expansion of the interurban tele- phone system from two to all five municipalities of the project area in the Medio-Amazonas; (c) installation of facsimile equipment in three municipal centers; and (d) some portable communication equipment. CEPA-AM would con- tract with TELEAMAZON (the State Telecommunications Company) for acquisition of equipment and licenses, and technical assistance to the municipal author- ities for operation and maintenance. The project would finance the needed telecommunication equipment, installation, and training for the operators in the communities.

4.27 A minimum communication service is not only prerequisite to the more efficient administration of such project components as rural extension, marketing and health services but also, given the long river transport routes, to the reduction of transport costs. The selection of communities eligible for installation of a public pay phone would depend on a satisfac- tory development of community organization (with EMATER-AM assistance), in order to ensure adequate operation and administration by the community council with the assistance of TELEAMAZON. The proposed telephone units would be the least-cost solution for the services required and would consist of a telephone connected by a microwave link to the state-owned telephone network of TELEAMAZON. An operator would be selected by each community and charges would be in accordance with the authorized national telephone charges, with a surcharge to cover extra transport costs for repair activities and higher local energy costs. The availability of energy might cause logistical problems in some communities. In some cases the project would provide for a simple 1 to 2 hp motor. The project execution agreement - 23 - between the state and TELEAMAZON (see para 6.04) would define arrangements for operation and maintenance and cost recovery. The project-financed telecommunication services would be provided only in communities of 50 families or more who were sufficiently trained and organized to operate the system.

Smallholder Oil Palm Program

4.28 Based on several studies on the adequacy of ecological conditions in Amazonia for oil palm production, the Government has begun to actively review various oil palm development options. EMBRAPA is intiating research on oil palm and quite a number of private firms have begun serious prepara- tory work on plantation development. In addition, and in parallel to this, the State Government intends to develop, as part of its effort to improve the productivity and incomes of small-scale farmers in the state, a viable oil palm scheme in a state-owned flat area located about 15 km from Tefe, in western Amazonas (Map IBRD 16250). In doing so, it also hopes to demonstrate the viability, in this region, of schemes including smallholder out-growers, so that private sector initiatives also consider this option. To ensure viability of the necessary investments in physical and social infrastructure, factory, port installation and training, about 5,000 ha would need to be planted. However, reflecting the time needed to build up the necessary implementing capacity, the planting program would be phased over nine years and would result in the settlement of 625 smallholders, each alloted 8 ha for oil palm (considered the maximum, given family labor availability) and 4 ha (of which about a quarter would be annually cultivated) for foodcrops and homestead. By the end of the investment period (year 13 when the last factory capacity would be installed), two new villages of about 300 farmers each would have been established, together with an administrative/processing center which would include a 26-ton ffb (fresh fruit bunch) per hour oil mill, and port facilities on the Solimoes river. Total investment would amount to US$35.0 million, about US$7,000 per planted hectare. The expected production would reach, at full development, about 20,000 tons of palm oil and 4,200 tons of kernel (20 tons ffb/ha). The proposed project would cover the first five-year time slice of the targeted program. This would include (a) final surveys of about 30,000 ha; (b) construction of about 20 km of access road; (c) import of high yielding hybrid seeds and the planting of the first 1,800 ha, with an appropriate internal track network; (d) settlement of the first 225 farm families in one new village; and (e) establishment of the administrative/processing center, including office, warehouse, workshop, housing for 102 permanent staff, training and milling facilities (5-ton ffb/hour first-stage capacity) and a floating dock.

4.29 EMADE, created in early 1982, would be responsible, with its own staff, for centrally managing the establishment and operation of the entire scheme through training and hiring of field labor from participant families. The five-year time slice would have investment costs of up to $13.7 million including technical assistance and operating costs/overheads, which would be capitalized during the immature period. Detailed features and costs of land development, infrastructure, processing and port facilities, institution building and technical assistance are given in Annex 7. The proposed first- phase financing plan for EMADE would include US$4.3 million (US$5.4 million including price contingencies) in equity and a long-term loan of US$9.4 million (US$11.7 million, including price contingencies) from the State Government (20 years, with a seven-year grace period, at the interest rate of - 24 -

6% p.a., with full monetary correction). The corresponding figures for the entire program would amount to US$10.0 and US$23.7 million, respectively. Since the project would finance only the first five-year time slice of the program, both the Federal and the State Governments, in addition to making available this funding to EMADE at these terms for the program, have agreed to take all the necessary steps to execute or cause to be executed the entire program of 5,000 ha.

4.30 Complementary to preliminary surveys made in 1978-80, a more detailed soil, topography and vegetation survey of about 30,000 ha pre- selected out of the total of about 270,000 ha of available state lands, has been sub-contracted to EMBRAPA. This survey would allow the final selection of at least 8,000 to 10,000 ha (5,000 to 7,000 ha for the smallholder program and 3,000 ha for the EMBRAPA/CNPSD experimental plantation, para 4.16), which would be mapped in detail (1:25,000). Due to the extreme scarcity of high yielding planting material locally produced, non-germinated hybrid seeds would be imported from different reliable sources (Malaysia, Ivory Coast) to meet the entire planting requirements of the first five years. The imported seeds would be germinated at the CNPSD in Manaus and delivered germinated to the project pre-nursery. Assurances were received from the State Government that it would: (a) complete, by not later than September 30, 1982, the final survey and detailed mapping of the area of 5,000 ha to be planted; and (b) secure hybrid seeds of a quality, origin and composition satisfactory to the Bank.

4.31 Participant farmers would be selected (according to criteria detailed in Annex 7) in groups of about 25 at a time. This would define the minimum size of an oil palm unit as 200 ha. During the first eight years, participants of a given group would draw their income from wages paid by the company and from their food crop plot. After eight years of participation, participants would be entitled to receive (in addition to the salary and quality/quantity premiums) a share (estimated at about 50%) of EMADE profits on condition that the participant would repay simultaneously to EMADE (over the next eight years), on an interest-free basis, the fully corrected cost of agricultural infrastructure (8 ha oil palm) and housing facilities provided under the project, amounting to about US$27,800. During the course of the debt repayment period, EMADE would convert the initial right of use into collective or individual land titles; the state currently expects that the collective titling would be predominant and that the farmer groups so titled would continue to contract with EMADE for technical and managerial assistance. Assurances were received from the State Government that it would enter into and maintain, through full implementation of the 5,000 ha scheme, satisfactory contractual arrangements with the beneficiaries covering land tenure and dividend policy, a satisfactory draft model of such agreement to be provided to the Bank by June 30, 1983.

4.32 EMADE's key managerial staff would comprise a project manager assisted by a field manager, an administrative/financial manager and later on a processing manager and a maintenance manager. To help EMADE staff develop the needed experience in managing an oil palm development scheme, the project would fund training in various fields as well as 60 man-months for a senior field management advisor and 24 man-months for an oil palm processing engineer. In addition, 12 man-months of consultants would be provided during - 25 -

the first two years to assist EMADE staff in designing and establishing an appropriate cost accounting system. During negotiations assurances would be sought from the state that EMADE would employ these consulting services in cost accounting not later than September 30, 1982. Conditions of disbursement for the oil palm program would be: (a) the appointment of EMADE's key managerial personnel, except for the processing and maintenance managers; and (b) the appointment of a senior field management adviser, on terms and conditions satisfactory to the Bank. It has also been agreed that installation of milling facilities would not be initiated until the state had provided to the Bank satisfactory evidence of progress in the oil palm planting activities, and a senior processing advisor had been appointed on terms and conditions acceptable to the Bank.

Social Services

4.33 Education. The proposed project would help the state improve primary education facilities and services in the project area and assist in improving non-formal and adult education. It would include: (a) the devel- opment, application and evaluation of a revised rural primary school curriculum (with consultancy assistance) and production and publishing of teacher manuals; (b) 852 training courses and seminars for teachers (610), literacy trainers (120), administrative assistants (87), and supervisory staff (35); (c) construction and provision of equipment for 150 primary schools or classrooms and related school canteens (including at the smallholder oil palm program in Tefe); (d) improvement or expansion of 50 schools or classrooms; (e) evaluation studies of the formal and non-formal programs to allow readjustments during project implementation; and (f) strengthening of the project coordination capacity within SEDUC, which would be the executing agency, and of the education administrative capacity at municipal level. The project would finance design and construction, the various expenses associated with curriculum development, teachers' guides publishing, training (including forty man-months of consultant services for curriculum development and the execution of studies), and vehicles and equipment, boats, materials, and operating costs (including salaries) for the component coordination unit and supervisory staff. The coordination unit would comprise the component coordinator assisted by an expert in formal education and later on an expert in non-formal education.

4.34 The project aims to establish an average teacher/student ratio of 30 and a student/classroom ratio of 30 (currently 27), or 60 on a two-shift schedule. Consequently, the number of rural schools in the area would be increased from 245 (with 315 classrooms) to 385 (with 465 classrooms) for an expected school age population of about 24,000 by the end of the project period. SEDUC would improve the quality of education services by continuous training of teachers and supervisors, and by curriculum reform based upon studies of local cultural patterns and experience gained under other rural development projects in Brazil. SEDUC would also intensify literacy efforts and adult education, and assist EMATER-AM in developing non-formal education and community development courses. Assurances were received from the State Government that: (a) by not later than December 31, 1982, consultants would be employed to assist in development of the new curriculum; (b) by not later than April 1, 1985, the new curriculum for primary schools would be fully operational and the school meal program effectively implemented throughout the project area; and (c) school construction would be contingent upon - 26 - conclusion between the state and the pertinent municipality of an agreement establishing the procedures and responsibilities for payment of teacher salaries, school maintenance and provision of educational material and supplies for school meals. The appointment of the component coordinating unit in SEDUC would be a condition of disbursement for the education compo- nent.

4.35 Health, Sanitation and Water Supply. The project would aim to improve the quality of primary health services through: (a) training of 60 health post attendants, 60 midwives, five supervisory health officers and five sanitation officers; (b) establishment of a continuous educational and training system for health attendants, midwives and hospital staff in health care and administration; (c) provision to health attendants and midwives of simple standardized sets of equipment and supplies; (d) improvement of the patient referral system, and establishment of a simplified supervision and logistical support system; (e) construction and equipping of primary health facilities for the smallholder oil palm program in Tefe; (f) reinforcement of the state immunization programs; (g) initiation of better sanitation services by provision of 3,200 sanitary installations and establishment of about 20 experimental small water supply and 10 purification systems and, depending on the operation of these, an additional 27 simple community water supply systems during the last two project years; and (h) strengthening the project implementation capacity of SESAU and provision of consultant services and studies of local health and sanitation conditions. The project would finance construction costs of a health post in Tefe, as well as the vehicles, boats and equipment and materials needed for the other sub-components, the salaries of supervisory staff in the field and project coordination unit in Manaus (comprising the component coordinator and a sanitary engineer), training/retraining costs, nine man-months of consultant services and the costs of preparation and distribution of field health manuals.

4.36 Given the virtual absence of effective primary health care in rural areas, the project would emphasize simple, community-based actions, without imposing excessive burden on the weak structure of SESAU and the municipal administrations. Health care would be provided by: (a) the recruitment from within the community of health attendants to provide basic health education; vaccinations (DPT, polio, measles, tetanus); prenatal and child health care; first aid geared toward the most common occurrences (e.g., cuts, bites and stings); and the reporting of basic vital and health statistics; and (b) the training of midwives, in order to improve their obstetrical capabilities. Health services would also benefit from communication and transportation improvements financed under other project components. In view of the importance of community participation, component activities would be implemented in close cooperation with EMATER-AM, which would also assist SESAU and the communities in the selection of field personnel and the execution of basic health education in the community. In practice, component activities would focus on communities of 50 families or more and follow EMATER-AM's community organization efforts. Finally, in executing the component, a systematic compilation of medical plants used in the area would be carried out in close cooperation with INPA.

4.37 Waterborn infections are one of the important causes of disease and death in the area. The project would start to bring some improvements in the control of water quality in the rural areas through an educational - 27 -

effort, the study of local conditions, the training of local sanitation officers, organization of communities to install and use latrines, and con- struction of demonstration installations for water supply and purification in selected communities. The project would also provide funds to expand devel- opment of such systems in other communities, assuming positive response and readiness to participate in construction and operation. SESAU would subcon- tract the construction of deep wells and ancillary systems to COSAMA. Assurances were obtained from the state that, prior to construction of such systems, it would conclude with the municipality and the local user association an agreement establishing the responsibilities for maintenance and the financing of operation and maintenance costs. Also, to help assure timely initiation of training and preparation of field-level health and sanitation service manuals, the state would: (a) employ consultant services, by December 31, 1982 to assist SESAU in carrying out its program; and (b) complete satisfactory field manuals as well as supervision and information guidelines no later than October 1, 1983. The appointment of the component coordinating unit in SESAU would be a condition of disbursement for the health, sanitation and water supply component.

4.38 Community Development Fund. Much of the project would depend on community organization efforts of EMATER-AM (para 4.18). To supplement these efforts, the project would finance a Community Development Loan Fund (US$1.0 million) to finance community-sponsored activities, which were not foreseen in the other components of the proposed project or which could not be financed by other existing institutions or programs. These community projects might include small infrastructure improvements and equipment or draft animals. The resources of the fund would be used according to specific criteria as detailed in Annex 8. The fund would be administered by CEPA-AM and BEA would be the financial agent. Proposals for subprojects would be submitted through EMATER-AM to the project coordination unit for review. Final approval would be given by the executive committee of the PDRI-AM, and funds would be disbursed after conclusion of a contract between BEA and the community, describing the project, its costs and disbursements and the conditions of loan repayment. The State Government has agreed that, by April 1, 1984, or if fund expenditures have reached US$250,000 equivalent, whichever comes first, CEPA-AM would evaluate, in consultation with the Bank, the impact of component actions and fund operations on community development before continuing fund disbursements.

Project Management

4.39 SEPROR would be responsible for overall project coordination. SEPROR would delegate to CEPA-AM, responsibilities for day-to-day coordination (para 6.01) and monitoring activities (para 6.06). CEPA-AM would maintain a Project Coordination Unit (PCU). The evaluation of the project would be carried out by CODEAMA, an autonomous entity attached to the Secretariat of Planning (para 6.08). The project would finance: (a) vehicles, boats and equipment for the PCU offices; (b) staff salaries and other incremental operating costs of project management and monitoring; (c) training and consultancy support; and (d) costs of project evaluation and studies carried out by CODEAMA. - 28 -

Parallel Activities

4.40 The provision of on-farm credit, including short-term, investment and marketing credit, would not be subject to project funding, but would need to be carried out in parallel to the project. Short-term and marketing credit resources would be provided through standard credit lines of the various banks operating in the project area, of which the Bank of Brazil (BB) is the principal institution. Due to limited recent availability of rural investment credit, the state is requesting a special Central Bank allocation, supplemental to the standard credit lines but on standard credit terms, to the participating banks to finance on-farm, marketing and cooperative investments. Considering the high level of subsidies incorporated in current credit terms (interest rates ranging from 12% to 35%, with inflation expected in 1982 around 85%), credit would not be suitable for Bank co-financing. The project would, however, seek to improve access to credit, principally by encouraging simplified procedures, mobile credit posts, field visits to farmer groups by bank personnel and improved bank staffing in high demand periods. Training and orientation of both project and local bank staffs would be undertaken on the problems of small-scale farmer credit services.

4.41 On-farm investment credit of the order of US$10.3 million are estimated to be needed for small-scale farmers to finance the planting of permanent crops, purchase of small livestock and on-farm improvements and equipment. Estimated requirements for seasonal credit, for the planting of annual and bi-annual crops, would reach about US$12.4 million by project year 5. Investment credit of about US$6.0 million would also be sought for cooperatives for storage, transport and marketing facilities. Marketing credit would primarily be sought through the federal minimum price systems (US$4.3 million). The Federal Government has agreed to take all necessary steps to ensure the timely availability of adequate working capital, marketing and investment credit (detailed in Annex 9, Table 2) to project beneficiaries.

4.42 In addition, various incremental operating costs for road, community track and creek maintenance and teacher and health attendant salaries, amounting to US$4.6 million, would be locally funded, in parallel to the project.

V. PROJECT COST AND FINANCING

Cost Estimates

5.01 The total project cost, exclusive of parallel activities, over the five year project implementation period (April 1982 to March 1987) is estimated at US$77.3 million, including a foreign exchange cost of US$14.2 million, or about 18%, and taxes of about US$1.6 million. Physical contingencies total 6.5% of baseline costs, and price contingencies are equivalent to 22% of baseline cost plus physical contingencies. Physical contingencies were added to baseline costs at: 12%, on average, for civil works and buildings; 10% for vehicles and equipment, materials, consultancies and studies; and 6% for training. Price contingencies were calculated in US dollar terms based on international inflation rates estimated at 8.5% for calendar 1982, 7.5% for 1983-85 and 6% from 1986 on. The project cost summary is given overleaf and the yearly phasing is detailed in Annex 9, Table 1. - 29 -

Total Project Cost Summary 1/ (US$ million)

% of % Baseline Foreign Local Foreign Total Costs Exchange

Agricultural Support Services

Studies of Natural Resources 0.9 0.3 1.2 2.0 28 Land Tenure Regularization 4.6 1.3 5.9 9.9 22 Adaptive Research 3.5 0.7 4.2 7.0 17 Rural Extension 9.0 0.5 9.5 15.9 5 Improved Seed Supply 0.2 0.0 0.2 0.4 4 Marketing and Assistance to Cooperatives 1.8 0.5 2.3 3.9 22 Transport 6.5 2.3 8.8 14.7 26 Telecommunication 0.4 0.3 0.8 1.3 41 Sub-Total 26.9 5.9 32.8 55.1 18

Smallholder Oil Palm Program

Agricultural Infrastructure 4.0 1.5 5.5 9.2 27 Industrial Infrastructure 2.4 0.8 3.2 5.3 24 General Infrastructure 1.5 0.4 1.9 3.2 23 Overheads/Administration 1.7 0.7 2.4 4.0 30 Sub-Total 9.6 3.4 13.0 21.7 26

Social Services

Education 4.8 0.3 5.1 8.5 5 Health, Sanitation and Water Supply 3.0 0.6 3.6 6.1 17 Community Development Fund 0.7 0.3 1.0 1.7 30 Sub-Total 8.5 1.2 9.7 16.3 12

Project Management

Coordination and Monitoring 3.1 0.1 3.2 5.4 4 Evaluation and Special Studies 0.8 0.1 0.9 1.5 7 Sub-Total 3.9 0.2 4.1 6.9 5

Total Project

Baseline Costs 2/ 48.9 10.7 59.6 100.0 18 Physical Contingencies 2.8 1.0 3.8 6.4 25 Price Contingencies 11.4 2.5 13.9 23.3 18

Total Expected Project Costs 63.1 14.2 77.3 3/ 129.7 18

Front-End Fee on Loan - 0.4 0.4

Total Financing Required 63.1 14.6 77.7

1/ Excluding agricultural investment and working capital credit, and road and social infrastructure maintenance costs, which would not be financed by the Bank. 2/ Based on unit costs measured in Cr$ of November 1981 converted to US$ at the rate of Cr$114.26 = US$1.0, with adjustment to mid-April 1982 prices to reflect intervening inflation. 3/ Including about US$1.55 million of local taxes. - 30 -

Financing

5.02 The proposed Bank loan of US$26.4 million to the Federative Republic of Brazil, which includes US$0.4 million for the capitalized front-end fee, would finance 35% of the project expenditures net of taxes, or about 34%, on average, of project costs including taxes, the balance being financed by the Federal Government. The loan would be for 15 years, including three years of grace. It would cover the project's foreign exchange costs of US$14.6 million, as well as US$11.8 million equivalent, or 19%, of the local costs. In addition to these project costs, the Federal Government would provide rural credit for project beneficiaries (totalling US$13.0 million in incremental working capital, including some US$0.6 million for EMADE, and US$10.3 million for on farm investments) and for cooperatives (US$6.0 million for investment credit) and marketing (US$4.3 million) and the state would make the necessary arrangements to finance incremental operating costs for road and community track maintenance and teacher and health attendant salaries, not included in project costs financed by the Bank, in order to operate and adequately utilize the investments financed under the project. Assurances were obtained from both the Federal and State Governments that: (a) adequate counterpart funding would be made available for the effective and timely execution of the project and parallel supporting activities; and (b) project facilities and services would be adequately operated and maintained. The State Government has also agreed to arrange for the timely acquisition and necessary financing of additional land or rights-of-way required for project works.

5.03 To help ensure timely and effective implementation of project activities, the state already initiated in 1981 preliminary activities, such as recruiting and training of staff, administrative land discrimination (review of claims), and agricultural land prospecting. To achieve the neces- sary continuity and complementarity of action and to maintain the momentum gained, retroactive financing of up to US$700,000 is proposed to help cover eligible expenditures made after April 1, 1982, but before loan signing.

Procurement

5.04 The palm oil mill first stage equipment and installation would be procured by international competitive bidding in accordance with Bank guide- lines; this would amount to about US$3.1 million. The equipment, boats and vehicles required over the project implementation period by the 10 agencies responsible for the different project components are locally produced and readily available. With the exception of special equipment for creek clearing, these items (amounting to about US$8.1 million) would be procured over the project execution period in various areas by different participating agencies in accordance with local procurement and bidding procedures, which are acceptable. Special creek clearing equipment (amounting to about US$200,000) would be procured by international shopping. Building construction (totaling US$9.1 million) would be grouped into packages suitable for local competitive bidding. In the case of access roads and other transport works (totaling US$10.3 million), the same procedure would be followed. Construction standards and standard bidding and contract documents for road works would be reviewed before the first round of bidding. Contracts would be awarded on the basis of competitive bidding advertised - 31 - locally and in accordance with procedures which are satisfactory. Where bidding is not possible or where bids received are not responsive, SETRAN would negotiate prices for DER-AM force account works. Brazil has a competitive local construction industry capable of carrying out the project works. Since the individual construction works are relatively small, dispersed and located in remote areas, foreign contractors are not expected to be interested, though they would not be excluded from bidding. Equipment for telecommunications (totaling about US$180,000) would be procured through negotiated contract, taking into account compatibility with existing equipment, and would be installed under force account. Demonstration units for water supply and purification (about US$70,000), the clearing of small waterways (about US$300,000) and other small construction works included in the project would be of varied design as well as scattered and could be executed under a combination of self-help, force account and local bidding. Consultancy services (totaling about US$3.0 million) would include about 350 man-months (at an average cost, without contingencies, of US$6,450/man-month, including individual fees, travel and local allowances). It is expected that a major part of consultant services could be found in Brazil, but it is likely that about 110 man-months (mainly, but not only, those for the oil palm scheme) would be provided by expatriates.

Disbursement

5.05 The proceeds of the Bank loan would be disbursed on the basis of a uniform rate of 33% for all project expenditures, except those made for consultant services under the studies of natural resource and the smallholder oil palm program, for which a rate of 100% would be applicable. Disburse- ments would be made against withdrawal applications initiated by the various implementing agencies under the project and certified by the PCU in CEPA-AM. Supporting documentation for salaries, administrative expenses and minor civil works by force account which would be disbursed against statements of expenditures, would not be submitted to the Bank, but would be retained by the PCU and made available for inspection by the Bank during the course of project supervision missions. Standard documentation covering civil works, vehicles and equipment and technical assistance would be submitted to the Bank. Disbursements are expected to occur over a period of about five years. The closing date of the loan would be December 31, 1987. The estimated disbursement schedule is given in Annex 10 and reflects the dis- bursement profile for previous agricultural projects in Brazil, adjusted slightly to take into account improvements likely to result from the estab- lishment of the Special Account (para 5.06), the relatively higher initial expenditures to start the oil palm program, and the fact that the state has already initiated personnel training and the pre-project start-up activities as from July 1981.

5.06 In order to reduce the interval during which the Government would finance the Bank's share of project cost with its own resources, a Special Account would be opened in the Central Bank with an initial deposit of up to US$2.0 million. The Government may request the Bank to make advance payments in dollars from the loan account into this Special Account. Withdrawals in cruzeiros from the Special Account would be made on the basis of the with- drawal applications forwarded to the Central Bank. Conversion from dollars into cruzeiros would be made at the exchange rate that prevailed on the date the expenditures were made. The Central Bank would send the withdrawal applications to the Bank, which would then replenish the Special Account. - 32 -

Accounts and Auditing

5.07 Each of the participating agencies, including the PCU, would maintain separate accounts of its project expenditures, which would be audited annually by the Central Secretariat of Internal Control (SECIN) of SEPLAN according to standard Government practice, which is satisfactory to the Bank. EMADE would have its accounts audited annually by an independent auditor satisfactory to the Bank. The Special Account at the Central Bank would also be audited by an independent auditor satisfactory to the Bank. Copies of the audited statements of project acounts of various participating agencies would be provided annually to the Bank within six months of the end of their fiscal years. These audit reports would convey the auditor's opinion (and comments as necessary) on the methodology employed in the compilation of the statements of expenditures, their accuracy, the relevance of supporting documents, eligibility for financing in terms of the project's legal agreements and the standard of record keeping and internal controls related to the foregoing.

VI. PROJECT IMPLEMENTATION

Organization and Management

6.01 The State of Amazonas has already created a Rural Development Program (PRORURAL) directed by an inter-agency Management Council chaired by the State Governor (para 3.01). The council delegates its general administrative functions for each project to an Executive Committee, consisting in the case of the proposed project, of the Secretaries of SEPROR, SEPLAN, SEAE and the General Coordinator of CEPA-AM. To carry out the day-to-day coordination of the activities under the proposed project, the PCU has been established within CEPA-AM. The Project Coordinator, or head of the unit, responds directly to the head of CEPA-AM. He would be assisted by five senior field coordinators in the Medio-Amazonas to ensure adequate coordination and integration of project activities at the local and community level and by the EMADE project manager in Tefe who would liaise with him in relation to integration of project activities at the local level in Tefe. The other participating agencies would each appoint a full-time component coordinator. These managers would meet periodically with the PCU staff to discuss implementation progress and make appropriate recommendations to the Executive Committee of the project. A list of executing and collaborating agencies are in Annex 3 and project organization charts are presented in Annex 4, Charts 2 and 3. A summary of training efforts to ensure timely and efficient project implementation and development continuity is given in Annex 9, Table 3.

Project Coordination Unit

6.02 The PCU would have its office at CEPA-AM headquarters in Manaus; the field offices would be located in the municipal centers of Manacapuru, Careiro, Barreirinha, Urucara and Parintins. The central office would be responsible for the administration at the state level and liaison with the federal institutions involved in the project. To carry out these tasks, the Project Coordinator would be assisted by: - 33 -

(a) a monitoring and technical assistance unit, consisting of a coordinator with one assistant and four technical officers;

(b) an administrative unit, consisting of an accountant with one assistant and a staff officer for providing accounting assistance to the executive agencies, as appropriate;

(c) adequate support staff; and

(d) consultants, particularly for project management and development of cost accounting procedures (para 4.23).

Each local office would be staffed by one local senior coordinator and an administrative assistant. Due to the great distances and limited postal services, telephone communications and facsimile equipment would be installed at these local offices. The local coordinator would be responsible for organizing local and community level coordination among participating agencies and liaison with the municipal authorities. This would include: (a) meetings of local representatives of other executing agencies and bank branch managers, and establishment when feasible of municipal consultative groups; (b) meetings with farmers or community organizations; (c) promotion of an efficient information flow among participating agencies at the local level; and (d) assistance in the operation of the hydro-climatological observation stations (para 4.10). The project consultancy and technical assistance fund- ing would in part be made available to assist municipal authorities to improve administrative procedures, including tax collection, as a complementary effort to the assistance currently provided under several existing programs of this type. The PCU field staff would assist in coordinating these other programs and in identifying possibilities for complementary assistance under the project. Assurances were received from the state that it would maintain an adequate and qualified staff in the PCU and its local offices.

6.03 In view of the specific circumstances in the Amazon region, the limited experience of state institutions in spreading their services to rural areas, the introduction of a new crop (oil palm) and the need for group or communal action to implement project activities, the timely appointment of key personnel is of vital importance. A condition of disbursement for each component (with respect to the transport, oil palm, education, and health components, see also paras 4.25, 4.32, 4.34 and 4.37) would be the appointment of the coordinators of the participating agencies. The Project Coordinator and EMADE's Project Manager in Tefe have already been appointed. Assurances were received from the state that the Bank would be consulted prior to any change in the Project Coordinator or EMADE's Project Manager in Tefe.

Operating Agreements and Procedures

6.04 Because the project requires effective inter-institutional inte- gration, the State Government, through the Executive Committee of PRORURAL, would enter into agreements (convenios) with each executing agency, outlining the agency's obligations in the project's execution, the annually phased project targets, the need for collaboration with other entities, the funding arrangements and the implementation schedules. In addition, with the - 34 - assistance of the PCU, agreements would be concluded between the executing agencies and the collaborating agencies, outlining their responsibilities in the specific area of collaboration. Where the agencies have to subcontract activities to other institutions (such as to INPE for hydrological maps or INPA for specific research programs), the respective head agency would enter into a definitive service contract according to the agreed-upon procurement guidelines. Finally, prior to construction of civil works, the executing agencies would conclude agreements with the involved municipalities and local entities to ensure their proper operation and adequate maintenance (paras 4.25, 4.34 and 4.37). Assurances were obtained from the State Government that it would: (a) enter into and maintain as long as required all such convenios and agreements; and (b) inform the Bank promptly about any substantial amendments to these agreements. The signing of satisfactory agreements between the state and executing agencies would be a condition of disbursement for the respective components.

6.05 Since the project covers a broad range of activities with innova- tive design under diverse circumstances, the timing and scope of activities (detailed in Annex 11, Charts 1 and 2) would undoubtedly require adjustments during project implementation. By the end of September, each executing agency would prepare an annual plan, detailing the activities and expected expenditures for the following fiscal year (April 1 - March 31). After review by the Executive Committee, the project's working plan and budget would be presented to the Council for Rural Development for final approval by October 31 to secure adequate funding in the State and Federal budgets. Assurances were received from the State Government that the annual project work plan and budget proposal would be made available to the Bank by November 30 each year for comments.

Monitoring and Evaluation

6.06 Monitoring. Project monitoring would be executed by the PCU through the project monitoring and technical assistance unit. The basic information for monitoring would be provided by the executing agencies, mainly through their own supervising and accounting departments. To ensure timely data collection, the PCU would work out with the executing agencies standard reporting procedures, making optimal use of available information within the agency and compatible with the existing administration systems prevailing in the institutions. The PCU would prepare quarterly monitoring reports, giving details of project implementation progress and expenses. They would point out achievements as well as shortfalls in project execution, costs relative to expectations, and comparisons of actual performance with specific target indicators (detailed in Annex 12). The monitoring reports would be distributed to the members of the Executive Committee, the executing agencies, the project component managers, and the field coordinators. Since there is relatively little experience in preparing and using monitoring reports, the project would make funds available for consultant services to assist the PCU and the executing agencies in establishing the monitoring system and manuals and in focusing on major project risks. The PCU would also work closely with other teams in the CEPA-AM, which is also responsible for other rural development projects, in standardizing the state's project monitoring procedures. This would enable the PCU to monitor the direct or indirect effects of those other programs (such as PROMAM, PROVARZEAS, PROBOR, and the CEPLAC program) on the proposed project. - 35 -

6.07 The oil palm component would be closely monitored by the EMADE administration, which would prepare monthly progress reports and balance sheets in a format acceptable to the Bank. Summary data from these reports would be included in the overall quarterly monitoring reports of the project. After three years, a special analysis would be made of the progress achieved in the establishment of oil palm plantings and training of person- nel, in order to confirm whether sufficient production would be available to warrant the construction of the first phase of the oil mill as scheduled (para 4.32) and whether changes would be warranted in scope and policies of the oil palm planting program. Overall, the PCU would work closely with the project evaluation team (para 6.08) to establish key indicators and select monitoring data, in order to ensure that the evaluation team would have adequate information to perform its task. The PCU's monitoring unit, utiliz- ing inputs from independent evaluation studies, would also be responsible for the preparation of a Project Completion Report. The quarterly monitoring reports would be made available to the Bank within two months after the end of the period under review and the Completion Report would be prepared and submitted to the Bank within six months after project completion.

6.08 Evaluation. To complement monitoring activities, which are intended mainly as a tool for day-to-day management, project evaluation would aim to provide the state with the necessary information to adjust, when appropriate, project strategy and rural development policies. Evaluation activities would attempt to assess the impact of the project on the develop- ment of the project area. The evaluation would be executed by CODEAMA. Due to the lack of experience in project evaluation in the state and the state's objective to build up such a capacity in order to follow closely the various state-sponsored development projects, the project would provide funds to train a core staff of three in CODEAMA in evaluation techniques. This staff would thereafter instruct other selected officers of CODEAMA'S existing staff (about 60) to establish an overall evaluation effort of state projects. During the training period of about one year, with assistance of consultants, various complementary field surveys would also be executed. These would not only help train the evaluation staff, but also improve the data base and establish the points of reference of the pre-project situation, to the extent possible. The evaluation team would provide the PCU with short, written comments on the quarterly monitoring reports and would prepare annual and post-project evaluation reports. Annual evaluation reports would call the attention of the Council of Rural Development to existing development trends in the project area and make appropriate recommendations, and also try to anticipate future developments and assist the state and the project management to respond adequately. The post-project evaluation would assess project impact, and it would assist the PCU in preparing its Completion Report (para 6.07). Assurances were received from the State Government that it would: (a) employ not later than December 31, 1982, the consulting services required; and (b) present to the Bank the annual evaluation reports not later than six months after the end of each fiscal year. - 36 -

VII. PRODUCTION, DEMAND MARKETING AND PRICES

Production

7.01 The thrust of the project would be to make a better and more rational use of the available resources. It would help diversify small-scale farmer activities from the traditional cultivation of subsistence crops into more commercial agriculture and also permanent crops. Key factors taken into account in the development of recommended production systems and practices were the experiences observed, by local extensionists and during the project preparation surveys, among the more progressive farmers in the area. Also taken into account was the observed labor constraint (para 8.03). The impact of the project on agricultural production in the project area is expected to derive from: (a) a moderate expansion of the area under crop cultivation (annual and perennial) and improved pasture; (b) an increase in the productivity of annual and perennial crops and livestock and a reduction in the decline in fertility in newly cultivated upland soils; and (c) a reduction in post-harvest losses. Such improvement would be achieved through, inter alia; (a) adoption of improved cultivation practices (e.g., the timing and density of planting, use of animal traction and improved tools); (b) use of improved planting material (the locally more successful varieties of various crops would be made available to larger numbers of farmers); (e) improved disease and pest control; (d) introduction of better rotation systems to partially replace the present shifting cultivation in the uplands; (e) improved post harvest handling and marketing systems; (f) gradual introduction of new crops; (g) improved animal husbandry practices (applied to the existing local dual-purpose beef/milk cattle); and (h) improved transport and communication infrastructure. The production increase (including the entire 5,000-ha oil palm program) is assumed to come mainly from some 9,200 farmers who already operate in the project area and from about 700 new farmers who would settle spontaneously in the communities of the project area. It is expected that participant farmers would only gradually adopt improved farming practices and technology, receive more intensive extension assistance and utilize improved infrastructure facilities. Average yields assumed at full development represent conservative estimates based on local observation of general production levels attainable, given constraints of soils, input supply, risks due to the specific environmental hazards in the area, the availability of support services and the typical farmer's managerial capability. The projected oil palm yields are comparable to those already attained in an oil palm operation near Belem (at the mouth of the Amazon River), where natural conditions are considered to be less favorable than those in Tefe.

7.02 At November 1981 prices, the value of incremental production at full development is expected to amount to about US$43 million (Annex 13). Of this, some 43% is due to traditional food crops, 33% to fiber and tree crops (including guarana), 16% to livestock production, and 3% to vegetables and fruits. In comparing the production activities in the "without" and "with" project situations, the main change is the increasing relative importance of tree crops for industrial processing. A small portion of the incremental tree crop production is estimated to come from rubber. Though the Government is actively promoting rubber in parts of the project area, the estimates used here have been scaled down to a very modest level, reflecting the fact that uncertainty remains as to the technical and financial viability of controlling South American Leaf Blight in this particular part of the Amazon basin. - 37 -

Demand, Marketing and Prices

7.03 The total farm produce in the project area is divided into four major groups: (a) traditional food crops; (b) vegetables and fruits; (c) crops for industrial processing; and (d) livestock products. The products would have three major destinations: on-farm household consumption; urban food markets in or near the project area; and industrial processing plants in or outside the project area. Because of the specific transport conditions and the long distance from the major Brazilian urban food markets, it is not likely that food products for direct consumption would be shipped out of the state. However, relatively strong demand exists not only in Manaus but also in the other cities and municipal centers in Amazonas. While there is little official or complete data on the demand situation for agricultural products in the project area and the state, various pieces of information and indicators enable some assessment of the demand situation.

7.04 Traditional Foodcrops. This group includes four basic food commod- ities: rice, maize, beans and cassava. The state still needs to import large amounts of each from elsewhere in Brazil. However, local production of these crops, with the exception of beans, has been growing over the last several years. As Brazil is an occasional net importer of rice and maize, depending on harvest conditions nationwide, and given growing local consump- tion, there are solid market opportunities for local production of these crops. Returns to farmers in the project area from production of basic food crops are relatively low, but sufficient to allow continued production. How- ever, they are expected to improve with the development of better marketing systems and facilities.

7.05 Vegetables and Fruits. Presently, vegetables and fruits are grown only on a small scale in the project area, consumed mainly on the farm, with very small but increasing quantities reaching the nearby urban markets, which absorb all the vegetables and fruits delivered. There are strong indications of growing demand in Manaus and the municipal centers for vegetables and fruits and the prices paid to farmers are of satisfactory level. Particular attention is given to guarana, a fruit that is sold for industrial processing and currently enjoys a particularly high return. The demand for this fruit which is used for juices and soft drink syrup is growing, and is expected to grow even more as manufacturers move to export guarana products to other countries. In general, improved marketing and the recent opening of local producers' markets have boosted local fruit and vegetable production.

7.06 Crops for Industrial Processing. This group includes the fiber crops (jute and malva), rubber and oil palm. Jute and malva produced in this region are sold to numerous large or small manufacturers who process the product in Manaus or Belem. Presently, all the area's production is absorbed by the industry, which is operating below capacity. However, farmers are tending to diminish production of fiber crops, due to the hardship of cultiv- ation and harvesting and the relatively low incomes yielded. Indeed, production of jute in the state dropped from 25,200 tons in 1977 to 16,800 tons in 1980, while malva production dropped from 19,800 tons to 11,474 during the same years. It is expected that the improved yields and efficiency introduced by the project will partially dampen the trend. As to rubber, of which Brazil is a net importer, the Government is actively encouraging expanded production. The national consumption of natural rubber has been increasing at an annual rate of 7 to 10%. Brazil's production in - 38 -

1980 reached 29,500 tons, while the total consumption was estimated at 95,000 tons. Forecasts for 1990 estimate consumption at around 200,000 tons. Producers of native rubber (seringueiros) currently sell their raw material ("bolas") to local mills which process it into dried sheets or crumb rubber before selling it to manufacturers in Sao Paulo. They enjoy support prices currently set very high to encourage new plantings of this crop which takes a relatively long time to enter into production. Rubber planted under the project would start producing only after the completion of the proposed project and would be processed locally directly to dried sheets. With respect to vegetable oils, Brazil's production is still projected to continue growing at a rate lower than that of consumption. Overall demand for fats and oils in Brazil is increasing at about 6% p.a., and demand for margarine has been growing at 10% p.a. Export quality palm oil is an ingredient in margarine for which it has technical advantages and its price is competitive compared with other oils. The projected demand for palm oil in Brazil, based on forecast margarine consumption alone, shows that even with already planned production increases, a shortfall in supply of 14,000 tons in 1985 and 22,000 in 1990 would occur.

7.07 Livestock Products. Currently, most cattle raised in the project area are local dual-purpose beef/milk cattle. The milk is either consumed fresh or further processed by traditional means into butter and cheese. Other livestock products such as eggs, poultry meat, pork and goat's milk and meat are also presently produced on a small scale. Most locally produced livestock products are consumed on-farm or in the immediate village, with only relatively small amounts marketed in nearby urban centers. In most urban markets in the project area, demand for livestock products exceeds supply, and retail prices are high. In general, the towns and cities within the project area are expected to provide a strong demand for the estimated project-generated increases in livestock production.

Marketing Channels

7.08 Marketing channels in the project area are dominated by private monopsonistic intermediaries, although the role of farmers' cooperatives, while small, is increasing. Various logistical and organizational constraints have limited the small-scale farmers' access to alternative channels. The complexity and expense of using the official minimum price system, centralized in the municipal centers, has virtually closed the system to small-scale farmer participants, although CFP, the Federal Commission for Financing Produce, has recently introduced some innovative experiments to broaden access to the system.

7.09 A number of actions considered under, or in parallel with, the project should help improve small-scale farmer access to alternative and competing market channels and thereby substantially improve and stabilize farmgate prices. These include: (a) improved roads and tracks in production - 39 - areas and river and land transport from production areas to purchasing points and markets; (b) expanded farmers' markets in key areas; (c) experiments with an expanded and simplified minimum price system; (d) improved market price information; (e) expanded and simplified credit access for the small-scale farmer, which would indirectly increase the range of marketing options; and (f) strengthened cooperatives, which would provide some marketing services.

VIII. FINANCIAL ANALYSIS

Illustrative Farm Types

8.01 The project area is suited for a wide variety of crops and trees, reflecting a variety of ecological and physical conditions. Based on a field survey conducted by CEPA-AM and additional information gathered by EMATER-AM, UEPAE-AM and other agencies, six illustrative farm models have been constructed to represent a framework of agricultural development for the project participants. The project objective, to increase farm-family income, would be achieved by gradually changing the present product mix and introducing higher value crops and trees, by more efficiently utilizing the labor resources and by actions to minimize marketing risk. The illustrative farm types and the assumed distribution of the project participants and their cropped areas for the "pre-project" and "with project" situations are presented in Annex 2, Table 1.

On-farm Operations

8.02 Based on the analysis of the six illustrative farm types, including one for small farmer participants in the oil palm program, it is estimated that the financial rates of return to the 9,500 farmer participants would range from 21% to over 50% as detailed in Annex 2, Tables 3-5. The higher returns appear in farm types which include high value crops such as vegetables and tree crops, for which the best market prospects exist. The lower returns appear in farm types depending mainly on production on the traditional staple food crops, jute and malva. Details of the agrotechnical assumptions for the farm models are provided in Annex 2, Table 2. In estimating the expected farm revenues, allowance was made for greater than usual quantities of product loss due to the specific market situation and the natural hazards (heat and periodic floods) which would continue to exist, even with project-supported marketing improvements. Prices for inputs and production were assumed to be generally at prevailing local farmgate prices, averaged over the past three years and adjusted to November 1981.

8.03 In general, while greater expansions of the cropped area could further increase the rate of return from farm operations, farmers are not likely to greatly expand cultivated areas because available family labor does not exceed an estimated 720 man-days per year, and the possibilities for hiring farm labor are limited. In an attempt to reduce variability of farmers' income and improve their capability to withstand the hazard of floods, limited livestock development is being encouraged along with crop development. At the same time, the cropped area of low value crops, espe- cially those that require high amounts of labor and cause hardship to the farm worker (e.g., jute ), is assumed to gradually decline. - 40 -

Oil Palm Cultivation Program

8.04 In addition to the analysis of financial returns to participant families in the oil palm program (which, as noted in para 8.02, would be quite attractive), financial and cash flow projections were reviewed for EMADE's entire 5,000-ha program. These projections are shown in Annex 7 in detail. The financial rate of return to the EMADE investment (including the full costs of physical infrastructure and overheads for the scheme, which would yield benefits outside those reflected in EMADE's cash flow) was estimated to be about 12%. The projected consolidated balance sheets reflected the hypothesis that EMADE would start, in year 11, a second similar 5,000-ha program through self-financing and long-term credit on conditions similar to those for the first program.

Producer Income

8.05 As a result of the project, the estimated family income from agricultural activities could increase from a weighted average of about US$1,900 equivalent (pre-project) to about US$6,100 equivalent at full development. The estimated income of most of the prospective participants is currently below the rural relative poverty level in Brazil, which is about US$330 per capita, or US$1,980 per family (assuming a family composition of 6.0 persons). The "pre-project," "without project" and "with project" (at full development) income levels are summarized below. The income estimates cover only the principal activity of the farm operation and represent typical farm models; obviously, individual producer incomes would fluctuate around the average.

% of Pre-Project Without Project With Project a/ Parti- Family Per Capita Family Per Capita Family Per capita cipants Income Income b/ Income Income Income Income US$

I. Varzeas - Annualcrops 43 1,815 302 2,040 340 5,640 940

II.Varzeas - Anrnal crops and cattle 4 5,290 882 5,850 975 11,430 1,905

III. Varzeas - Annualcrops and vegetables 4 5,150 858 5,265 877 9,645 1,608

IV. Terra Firme - Annualand perernial crops 29 1,775 296 2,170 361 5,810 %8

V. Varzeas and Terra Firme - Annualand perernial crops 18 1,145 191 1,310 220 6,090 1,015

VI. Terra Firme - Oil palm and annual crops 2 1,070 179 1,410 235 5,520 920

Weighted Average/Total 100 1,900 317 2,075 345 6,118 1,020

a/ At full development occurring between years 7 and 17. b/ Assunirg a family size of 6. - 41 -

Fiscal Impact and Cost Recovery

8.06 The costs (including contingencies) of the production support (extension, research and seed supply) components focussing directly on the 9,300 farm families that constitute the main beneficiary group in the Medio- Amazonas, would amount to about US$1,900 per family over the five years of project implementation. Investments in physical and social infrastructure, broader based non-agricultural services and project management would have a cost of US$4,600 per family if allocated only to the families directly benefiting from agricultural services. The impact of project investments would, however, not be confined to those beneficiaries mentioned, but would include a broader benefit to other inhabitants of the project area, and to nearby communities.

8.07 Substantial fiscal benefits would be obtained from the taxation of incremental project production marketed inside or outside the state. At an average rate of 16% on the adjusted value of marketed production, the market- ing tax (ICM) would produce annual revenues to the state of Amazonas amounting to US$3.8 million at full development. This compares to US$2.6 million in recurrent costs required to maintain the infrastructure and services established under the project. Incremental rural social security revenues (FUNRURAL) levied at 2.5% on the value of marketed production, would amount to some US$0.5 million per year at full development. In addition, telecommunication and water supply tariffs would recover at least the operating and maintenance costs of these services. As to the rural credit extended in parallel to but not financed by the project, the currently highly subsidized interest rate structure would result in direct recovery of only a small portion in real terms.

8.08 As to the smallholder oil palm program, the state would recover a good part of project costs (see Annex 7 for details) through: (a) EMADE repayment of the long-term loan (about 70% of total investment cost, over 20 years, with a grace period of seven years, at 6% interest p.a., with full monetary correction); (b) the building, through retained earnings, of EMADE's Reserve Development Fund for further similar development programs; (c) dividends paid to the state by EMADE; and (d) taxes. Of these charges, long-term loan repayment would amount to 57%; Reserve Development Fund, 22%; dividends, 13%; and taxes, 8%.

IX. ECONOMIC BENEFITS AND JUSTIFICATION

Economic Rate of Return

9.01 The economic rate of return for the directly productive aspects of the project (including some 85% of project costs) has been estimated at about 21% (23% for the Medio Amazonas subproject and 14% for the Oil Palm scheme in Tefe). The relatively higher returns in the Medio Amazonas reflect both the relatively lower off-farm investments per farmer and the relatively lower - 42 - costs in the production systems envisaged; the lower, but still quite acceptable, estimated return on the oil palm component reflects the higher investment and production costs and the appropriately conservative estimates of phasing and returns, to reflect the risks involved. Project activities linked only indirectly to agricultural production, such as improved health and sanitation, education and training, have an important impact on the standard of living and the productive potential of rural families in the project area, but their direct benefits are not readily quantifiable. Therefore, these activities have not been included in the cost-benefit calculation. The details of the cost and benefit streams used in the economic analysis are given in Annex 14.

9.02 It should be noted that most of the off-farm investments and serv- ices would have significant benefit over and above the incremental production of the 9,500 participants receiving direct and intensive assistance. For example, extension service activities extend beyond direct assistance in agricultural production, and assist also the family unit in its social life and improving its standard of living. Project transport facilities are expected to have a substantial beneficial Impact on all who live in the project area, increasing access to services, facilitating the outflow of production and improving the likelihood of adoption of more productive farming techniques. Investment in health and education, which are not included in the cost stream for economic analysis, are also expected to benefit not only the participants in the project's agricultural components but also other inhabitants in the project area.

9.03 The cost stream used in the economic evaluation includes: (a) all investments and incremental operating costs on farms (based on the phased aggregate of the different types of participants, comparing the "with" and "without" project situations); (b) off-farm investments and incremental oper- ating costs directly related to agriculture development during the project period; and (c) recurrent costs of services and maintenance of infrastructure after the five years of project implementation. The cost stream includes 100% of the project costs for studies, land tenure regularization, agricul- tural extension, research, marketing and cooperatives, transport facilities, seed production facilities, project coordination at the field level, and the entire 5,000 ha oil palm development scheme.

9.04 The benefit stream used in the economic rate of return analysis includes all of the incremental production (and reduced losses) above the "without project" development situation of 9,900 farmers (the 9,500 direct project beneficiaries, as well as some 400 participants in the oil palm development to be phased in after the initial five-year time slice), phased according to the incorporation of these participants into the development effort.

9.05 The prices used in the economic analysis for those goods traded on the international market are border prices adjusted to take into account transport, handling and insurance costs. Of the products produced under the project, Brazil is an occasional net importer of rice, corn and meat, and a regular net Importer of rubber and palm oil. Brazil is also a net importer of fertilizers, for which border prices, similarly adjusted, were calcu- lated. Non-traded goods such as cassava are valued at local farmgate prices. Most of these prices would be stable or would increase over the next - 43 - decade. Labor was priced at the market wage. Foreign exchange costs were adjusted upward by 20% to reflect trade-distorting tariffs, subsidies and advance import deposits.

9.06 To measure the impact of possible changes in the economic environment on the project's stream of costs and benefits, several sensitivity tests were made, with the results of the most significant as follows:

Internal Economic Rate of Return - Sensitivity Test Results

(%)

Best Estimate : 21 Benefits down by 50% 15 Costs up by 20% and benefits down by 20% 18 Benefits lag two years 18 Benefits lag three years: 17

The results indicate that the estimnated return of the project is at a satis- factory level and suggest that it is fairly insensitive to possible variations in costs and benefits. The switching value ERR of 12% would be reached if costs increased by 188%, or if benefits decreased by 65%. A test of the sensitivity of the ERR for just the oil palm component showed that an unexpected increase in costs by 20% would reduce the rate of return to 11%. However, as the main technical and organizational risks in the component (paras 9.12 and 9.16), which might affect costs or benefits, have been carefully taken into account in the "base" cost and return estimates, the likelihood of the return of this component falling below 12% is not considered to be high.

Employment

9.07 The expected impact of the project on employment relates not only to an increase of employment opportunities, but more importantly to a shift in occupation of the members of the farm families. Currently, farm activ- ities have a low labor productivity and the whole family is involved in farm work, especially during harvest periods. Consequently, the time available for education of the children is limited, and the present school curriculum (not matching the agricultural calendar) and long distances between school and home exacerbate the situation. Under the project an adjusted school curri- culum, better transport facilities, an increased number of schools, labor saving equipment and a more labor-efficient crop mix (reducing seasonal labor peaks) would make more time available, not only for production and marketing, but for the children's primary education and also for the other farm family members' adult education, agricultural courses and other community activ- ities. More details are given in Annex 1, Table 8.

9.08 The expected development of agricultural activities should generate by year 5 the equivalent of about 6,000 worker-years and by year 10 (full development) about 10,000 worker-years. Most of the increment (86%) would be provided by family labor. The number of ancillary jobs resulting from the increased agricultural production are estimated at 1,450 (about 10% for oil palm scheme). - 44 -

Environmental Impact

9.09 The project would improve the information base about natural resources and the environment in the project area and promote measures for appropriate protection of the soil, forest and fish resources. Although the project addresses mostly areas already cultivated, it would provide a base for improved land use and improved zoning (para 4.09). It would also provide better information to the extension staff to assist the farmer in selecting better farm and plot sites. In order to avoid excessive soil erosion, sandy soils on the floodlands and slopes on the uplands would be excluded from cultivation, tree hedges on the river banks would be maintained or replanted and better soil management techniques would be promoted. About one-third of the beneficiaries are located on the bordering uplands. The expected substitution by tree crops for forest or regrowth would amount to about 9,500 ha. Only a small area (about 2,500 ha) now in forest would be replaced by annual cropping.

9.10 The requirement that 50% of each holding be maintained under forest has proven difficult to enforce and, in practice, most farms contain a reduced area of primary forest. In order to better enforce this regulation, ITERAM would, in the case of communal holdings, establish agglomerated forest reserves in extension equal to the titles granted (para 4.13). In addition, the project would identify, demarcate and maintain various biological reserves, to preserve a combination of forests, marshes and lakes (180,000 ha). The project area would touch less than 1% of the river and lake network of the state, and the project's impact on the fish resources would be minimal, especially since most of the project-assisted area bordering the rivers is already occupied and used. However, the project should have an improving effect since proper border protection is envisaged, fishing rights of communities would be regularized and water quality and the use of harmful, agricultural chemicals would be monitored. Fishery resources of regional scope are already being studied by INPA and training by INPA of EMATER's extensionists will be provided under the project; also, the state is implementing a regional fisheries project with BNDE, to improve fishing techniques to reduce overfishing in the main rivers. Finally, the project would also provide funds to monitor the possible introduction by migrants of Schistosomiasis and Chagas diseases not as yet observed in the project area.

Project Risks

9.11 General. The currently low level of development of public infrastructure and services, private enterprises and of project beneficiary incomes in the project area provide an indication of the very difficult problems constraining achievement of the economic potential of the area. These problems also suggest the significant risks which the project will face, these risks having been taken into account in the estimation of project costs and benefits (paras 9.01-9.06). The following paragraphs summarize the major identified project risks and some of the measures built into the project to reduce such risks as far as possible.

9.12 Institutional. The project involves 10 state institutions and a wide range of collaborating state and federal institutions, with relatively little field experience in the project area, and limited project experience. Some require considerable strengthening to accomplish their respective functions in the project. The company responsible for oil palm development - 45 -

(EMADE) has only recently been established and the key institution respon- sible for improving part of the marketing arrangements (CODEAGRO) needs strengthening. The project includes numerous specific measures for institutional improvement, centering on training, technical assistance and the project coordination and monitoring arrangements. The state has already begun staff training courses. During implementation, key personnel would be upgraded in courses organized by the PCU. The motivation and active participation of state officials and future project personnel during project preparation are seen as positive indicators for steadily improving inter-institutional coordination.

9.13 Floods. Local farm communities have adapted their living and cultivation systems to the regularly occurring floods, which bring fertility to their lands through sedimentation, and which help control some plant diseases. The cropping on the low varzeas include only a four- to five-month cropping period outside high water months (January - July). However, work on the high varzeas could include year round crops, basically vegetables and fruit crops. The real flood risks are confined to the high floods inundating all varzeas lands, about once every 10 years on the average. The risk is not so much in the flood occurrence, but in the inability to predict floods and minimize crop losses. The Federal Government has initiated, with UNDP assistance, a regional program for flood forecasting, which would become operative by end-1982. The project would provide funds to adapt the regional information to local needs and to provide the farmers with better flood information, in order to eliminate the factor of surprise and better enable the farmers to move temporarily to alternate sites. The existing crop credit insurance system (PROAGRO) does not provide protection against flood damages. The project would include a study of the possibilities to develop adequate flood insurance for the farmers of the varzeas.

9.14 Amerindians. The project area has been long settled and does not border on any Amerindian reserves. In the Medio-Amazonas, some Amerindians have already been integrated into rural towns and villages and would be potential project beneficiaries. In the municipality of Tefe, several small groups with a long tradition of contacts and commercial exchanges with modern Brazil are found along the Solimoes river in the northern part of the municipality and outside the project area. The project will not interfere with the rights of these communities and is not expected to have any negative impact on their welfare and activities. However, in the unlikely event that an uncontacted tribe would be encountered during implementation of project activities, existing legislation and confirmed arrangements between ITERAM and the National Indian Foundation (FUNAI) would call for any project work to be stopped, until FUNAI had ruled on the case and established reserve limits for the tribe. Necessary health care measures for the Amerindians contacted in such an event would be taken as appropriate.

9.15 Production. The technical production risks relating to incomplete knowledge of the project area and of most appropriate cultivation and soil management techniques are addressed in the components for studies of natural resources, rural extension and adaptive research. In addition, the project's executing agencies would be assisted by federal research institutions already working for many years in the Amazon region, such as INPA. Technical risks are also addressed by CPATU and CNPSD of EMBRAPA. Extension staff would receive extensive pre-service training in topics specifically related to the - 46 - project area and thereafter be updated by the research staff in refresher courses. The Agricultural Research Unit in the State of Amazonas (UEPAE-AM) of EMBRAPA would be strengthened and expanded with two substations to permit quicker adaptation of EMBRAPA's research to conditions in the project area.

9.16 The successful implementation of the development of the small-scale farmer oil palm program relies heavily on timely and proper execution of the work programs, and the acceptance by local farmers of a more highly organized system of cultivation. Although there is a strong tradition of communal agricultural exploitation and the system of communal land ownership in some parts of the state, there is a risk that the level of acceptance of this crop new to the region and cultivation technique and untested dividend distribution policy would encounter problems. However, the risk would be reduced by arrangements for the participants to receive training and wages during the immature and mature period, besides the income from their foodcrop plot. They would be provided with housing facilities and their living conditions would be immediately and visibly improved. The participants would be permanently assisted by technicians who would explain the requirements of the new crop and oil palm cultivation techniques, ready them for the transfer of land ownership (whether communal or individual), and accompany them during the productive phase in understanding the methodology of dividend distribu- tion and repayment to EMADE of the on-farm investments. The project would also provide for development of a training center to train project farmers and EM1ADE staff, as well as participants in future expansions. Another risk, observed elsewhere in new oil palm cultivation frontiers, could be the inci- dence of new pests. The EMBRAPA research center, through its experimental plantation to be established next to the smallholder scheme, would carry out the necessary research and assist EMADE in its pest and disease control policy. Undoubtedly, some errors would be made and unexpected developments would occur, but the potential for creating a stable and better basis for income to an impoverished rural population and for stemming the current land degradation in this area outweighs the risks involved.

9.17 Environmental. The project is located in the Amazon Basin, which has a well known ecologically sensitive environment. The project concen- trates on the proper use of the suitable and more fertile varzeas of the Solimoes and Amazon rivers, with a view to reducing the settlement pressure on the less fertile uplands. The project development strategy (as illustrated in the farm models and the oil palm program) includes a minimum of additional forest cutting for shifting cultivation and would promote substitution of degraded vegetation by better controlled tree crop cultivation and, in general, the promotion of sustainable agricultural exploitation, with simultaneous preservation of flora and fauna, and protection against excessive erosion. The project would monitor the environmental impact under the natural resources component to reduce the risk and to enable the timely adoption of any additional protective measures. - 47 -

X. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION

10.01 During negotiations assurances were obtained from the Federal Government that it would:

(a) enable EMBRAPA/UEPAE-AM to increase by December 31, 1983 its research staff by 12 and publicize each year the results of research activities performed under the project (para 4.15);

(b) make available the funding for the entire 5,000 ha oil palm program and take all necessary steps to cause it to be executed (para 4.29);

(c) ensure the timely availability of adequate working capital, marketing and investment credit to project beneficiaries (para 4.41);

(d) provide adequate counterpart funding to assure effective and timely execution of the project and parallel supporting activities, and assure adequate operation and maintenance of project facilities and services (para 5.02); and

(e) assure proper auditing and reporting (para 5.07).

10.02 During negotiations, assurances were obtained from the State Government that it would:

(a) employ, by December 31, 1982, consultants for the selection of observation stations and complete, by April 1, 1984, the mapping manual of natural resources (para 4.11);

(b) employ, by December 31, 1982, consultants for the land regularization activities (para 4.14);

(c) employ, by.December 31, 1982, consultants for farmer organization and agricultural extension methodology; increase by December 31, 1983, the staff of EMATER-AM in the project area by 86; and put in place, by December 31, 1984, the remaining 42 staff to be employed under the component (para 4.19);

(d) complete, by December 31, 1982, the seed processing and storage facilities under construction and appropriately increase the seed supply staff of CODEAGRO (para 4.21);

(e) employ, by December 31, 1982, consultant services satisfactory to the Bank to assist CODEAGRO in its reorganization; provide to the Bank satisfactory feasibility studies and execution proposals for any marketing facilities, prior to initiating construction; provide to the Bank, prior to initiation of the cargo boat lease/ purchase scheme, a satisfactory evaluation of the pilot scheme and detailed plans for the rental or purchase options to be offered; and cause CODEAGRO to recover from users the costs associated with proposed CODEAGRO boat and truck services (para 4.23); - 48 -

(f) employ, by December 31, 1982, consultants for the transport activities; present yearly by June 30 to the Bank evaluations of the transport component activities; prior to initiating waterway clearing works, present to the Bank satisfactory working maps, working plans and budget estimates; prior to initiating feeder road, community track or mooring site construction in a particular municipality, enter into an agreement between SETRAN and the municipality establishing maintenance responsibilites (para 4.25);

(g) provide the telecommunication services in communities of 50 families or more, sufficiently trained and organized to operate the services (para 4.27);

(h) complete, by September 30, 1982, the final survey and detailed mapping of the area to be planted; make available the funding for the entire 5,000 ha oil palm program and cause it to be executed; secure hybrid seeds satisfactory to the Bank; enter into and maintain satisfactory contracted arrangements with beneficiaries covering land tenure and dividend policy, a satisfactory draft model of such agreement to be provided to the Bank by June 30, 1983; employ, by September 30, 1982, consultant services to help in designing and establishing a cost accounting system; and prior to the installation of milling facilities, provide the Bank with satisfactory evidence of progress in planting, and appoint a satisfactory senior processing advisor (paras 4.29-4.32);

(i) employ, by December 31, 1982, consultants to assist in development of the new curriculum; ensure, by not later than April 1, 1985, that the new curriculum would be operational and the school meal program implemented; and subject school construction to the conclusion between the state and the pertinent municipality of an agreement establishing responsibilities for teacher salaries, school maintenance and provision of materials and supplies (para 4.34);

(j) employ, by December 31, 1982, consultants to assist in the health component activities; complete, by October 1, 1983, satisfactory field manuals and supervision guidelines and prior to construction of water supply systems, enter into an agreement between SESAU, the municipality and the local user association, establishing maintenance responsibilities (para 4.37);

(k) evaluate, in consultation with the Bank, by April 1, 1984, or expenditures of US$250,000 equivalent, whichever comes first, the impact and operation of the community development fund before continuing its operation (para 4.38);

(1) provide adequate funding and acquire land and rights-of-way needed for timely project execution, and assure adequate operation and maintenance of project facilities and services (para 5.02);

(m) ensure maintenance of separate project accounts and arrange appropriate audits (para 5.07); - 49 -

(n) maintain an adequate and qualified staff the Project Coordination Unit (PCU) and its local offices (para 6.02); and consult with the Bank prior to any change in the Project Coordinator or the EMADE's Project Manager in Tefe (para 6.03);

(o) enter into and maintain satisfactory project execution agreements with executing agencies and between such agencies and local entities and inform the Bank about major amendments to these agreements (para 6.04);

(p) forward to the Bank for comment the annual work plan and budget proposal not later than November 30 of each year (para 6.05);

(q) provide the Bank with quarterly monitoring reports within two months after the end of the period under review and the Completion Report within six months after project completion (para 6.07); and

(r) employ, by December 31, 1982, consultant services for the training of evaluation staff and setting up of evaluation work programs; and present to the Bank the annual evaluation reports within six months of the end of each year (para 6.08).

10.03 Conditions of disbursement would be:

(a) for the transport component, that the SETRAN coordination/supervison team had been appointed (para 4.25); and the component execution agreement signed (para 6.04);

(b) for the smallholder oil palm program, that key EMADE managerial personnel, except maintenance and processing managers, and a satisfactory senior field management adviser had been appointed (para 4.32); and the component execution agreement signed (para 6.04);

(c) for the education component, that the coordinating unit in SEDUC had been appointed (para 4.34); and the component execution agreement signed (para 6.04);

(d) for the health, sanitation and water supply component, that the component coordinating unit in SESAU had been appointed (para 4.37); and the component execution agreement signed (para 6.04); and

(e) for all other components, the coordinator in the executing agency had been appointed and the component execution agreements signed (paras 6.03 and 6.04).

10.04 No disbursements could be inade against expenditures prior to the date of the Loan Agreement, except in an aggregate amount not exceeding the equivalent of US$700,000 on account of payments made for eligible expenditures before such date, but after April 1, 1982 (para 5.03).

10.05 With the above assurances and conditions, the proposed project would be suitable for a Bank loan of US$26.4 million. The term would be 15 years including a three-year grace period. - 50 - APPENDIX Page 1 of 3 APPENDIX

List of Working Papers and Key Documents in Project File

1. State Government of Amazonas (CEPA-AM)

Amazonas Integrated Rural Development Project (PDRI) - Summary - 1 Volume - October 1981 - Natural Resources Component - 2 Volumes - September 1981 - Land Tenure Regularization - 1 Volume - September 1981 - Agricultural Research - 1 Volume - October 1981 - Technical Assistance and Rural Extension - 3 Volumes - September 1981 - January 1982 - Farm Budgets - 2 Volumes - September 1981 - Seed and Planting Material production - 2 Volumes - October 1981 - Marketing Component - 1 Volume - September 1981 - River Transport Improvement - 1 Volume - September 1981 - Agro-Industrial Oil Palm Scheme in Tefe - 3 Volumes - October 1981 - Telecommunication Component - 1 Volume - September 1981 - Transport Component - 1 Volume - September 1981 - Education Component - 2 Volumes - September 1981 - Health and Sanitation Component - 2 Volumes - September 1981 - Community Fund - 1 Volume - September 1981 - Administration and Monitoring - 1 Volume - October 1981 - Evaluation - 1 Volume - October 1981

2. State Government of Amazonas (SEPROR)

- SEPROR-ITERAM - Legal Documents related to land tenure regularization in the State of Amazonas - I Volume - 1981 - SEPROR-CEPA-AM - Drafts agreements (convenios) between the state and the executing agencies of PRORURAL projects. 1 Volume - 1981 - Copies of Various Official Documents; Decree/Law for Creation of: PRORURAL (No. 5768, August 18, 1981) PDRI (No. 5769, August 18, 1981) EMADE (No. 1510, January 13, 1982) - Signed and draft Convenios and Contracts (2 Volumes - April 1982):

(a) Studies of Natural Resources: SEPROR and CODEAMA (April 22, 1982) (b) Land Tenure Regularization: SEPROR and ITERAM (August 21, 1981 - Addendum dated April 22, 1982) ITERAM and INCRA (May 6, 1981 - Draft Convenio for one year extension starting from May 5, 1982) APPENDIX - 51 - Page 2 of 3

List of Working Papers and Key Documents in Project File Con'd.

ITERAM and Municipality of Urucara (March 10, 1980) ITERAM and Municipality of Barreirinha (March 10, 1980) ITERAM and Municipality of Parintins (March 10, 1980) ITERAM and BEA (December 27, 1979) (c) Adaptive Research: SEPROR and EMBRAPA/UEPAE-AM (April 22, 1982) EMBRAPA/UEPAE-AM and INPA (draft) EMBRAPA/UEPAE-AM and EMATER (draft) EMBRAPA/UEPAE-AM and CODEAGRO (draft) EMBRAPA/UEPAE-AM and FUA (draft) (d) Rural Extension: SEPROR and EMATER-AM (August 21, 1981 - Addendum dated April 22, 1982) (e) Improved Seed Supply: SEPROR and CODEAGRO (August 21, 1981 - Addendum dated April 22, 1982) CODEAGRO and COOPJUTA (draft) (f) Marketing and Assistance to Cooperatives: SEPROR and CODEAGRO (August 21, 1981 - Addendum dated April 22, 1982) CODEAGRO and BRASCOOP (draft) CODEAGRO and COBAL (draft) CODEAGRO and COOPCAR (draft) CODEAGRO and COOPJUTA (draft) (g) Transport: SEPROR and SETRAN (April 22, 1982) SETRAN, DER-AM and the Municipalities of Careiro, Urucara and Barreirinha (drafts) (h) Telecommunication: SEPROR and TELEAMAZON (April 22, 1982) (i) Smallholder Oil Palm Program: EMADE Statute (April 1982) Appointment of the Chairman and Members of the Board (April 22, 1982) Convenios between EMADE and ITERAM, EMATER-AM, CODEAGRO, SETRAN, SESAU, SEDUC and the Municipality of Tefe (drafts) (j) Education: SEPROR and SEDUC (April 22, 1982) SEDUC and EMATER-AM (drafts) SEDUC and the Municipalities of Careiro, Urucara, Barreirinha, Parintins and Manacapuru (drafts) APPENDIX: - 52 - Page 3 of 3

List of Working Papers and Key Documents in Project File Con'd.

(k) Health, Sanitation and Water Supply: SEPROR and SESAU (April 22, 1982) SESAU and FSESP (draft) SESAU and COSA2MA (draft) SESAU, Municipality of Careiro and Communities (draft) (1) Evaluation: SEPROR and CODEAMA (April 22, 1982) CODEAMA and PIMES (draft)

- Work Plan and Budget for fiscal year 1982/83 (1 Volume - March 1982)

3. Miscellaneous

- EMBRAPA/UEPAE-AM - Agricultural Research Results - 1 Volume - October 1981 - IBRD - Working papers from preparation and appraisal mission members.

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