Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 11606-PA

STAFF APPRAISAL REPORT

PARAGUAY Public Disclosure Authorized

NATURAL RESOURCES MANAGEMENTPROJECT

JANUARY 31, 1994 Public Disclosure Authorized

Country Department IV Agriculture and Rural Poverty Division Public Disclosure Authorized Latin America and the Caribbean Regional Office

This documenthas a restricteddistribution and may be usedby recipientsonly in the performanceof their official duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. CURRENCY UNIT

Guarani (G.)

EXCHANGE RATE (as of January 21, 1994)

US$I = G. 1,850 G. I = US$0.0005

FISCAL YEAR

January 1 to December 31

WEIGHTS AND MEASURES

The metric system has been used throughout the report.

ABBREVIATIONS AND ACRONYMS

A list of abbreviations and acronyms used in the report is shown in Annex 13. FOROFFICLIL USE ONLY PARAGUAY

STAFF APPRAISAL REPORT

NATURAL RESOURCES MANAGEMENT PROJECT

Table of Contents

LOAN AND PROJECT SUMMARY ...... i

I. AGRICULTURAL SECTOR BACKGROUND ...... 1

Agriculture in the Economy ...... 1 Major Public Institutions in the Sector ...... 2 Natural Resource Use in Agriculture ...... 3 Previous Bank Lending ...... 4 Lessons from Previous Projects in Paraguay ...... 5 Lessons from General Bank Experience ...... 5 Bank Lending Strategy for the Sector ...... 8 Rationale for Bank Involvement ...... 8

II. THE PROJECT ...... 9

A. Origin and Concept ...... 9 B. Objectives ...... 10 C. Project Description ...... 11 Introduction ...... 11 Project Components ...... 12 Agricultural Development Component ...... 13 Indigenous Communities Component ...... 17 Infrastructural Development Component ...... 18 Institutional Development Component ...... 19 Pilot Agricultural Credit Component ...... 20 D. Costs and Financing ...... 22 Project Costs ...... 22 Financing ...... 22 Procurement ...... 22 Disbursements and the Special Account ...... 25

This report is based on the findingsof a Bankmission which visited Paraguayin June 1992, comprisingMessrs. Steven Oliver (Task Manager), JohnMcKenna, Philip Hazelton, Alain Tobelem, and Robert Kirmse, of the Bank, and Ms. Isabel Valencia,Consultant. The peer reviewerfor the projectis Mr. AndresAbramovich. Mr. Victor Valle assisted in the preparation of this report. The DepartmentDirector and Operations Division Chief are Messrs. Ping-Cheung Loh and MarkWilson, respectively.

This document has a restricteddistribution and may be used by recipients only in theperformance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization. Page

E. Organization and Implementation ...... 26 Project Management ...... 26 Monitoring, Supervision and Evaluation ...... 27 Accounts, Audit and Reporting ...... 28

F. Benefits and Risks ...... 28 Benefits ...... 29 Risks and Uncertainty ...... 29 Environmental Impact ...... 30

ITI. SUMMARY OF AGREEMENTS. AND RECOMMENDATION ...... 31

Recommendation ...... 34

ANNEXES:

1. The Project Area: Location and Main Characteristics .35 2. Forest Conservation and Agro-Forestry .39 3. Pilot Agricultural Credit Component .49 4. Institutional Capacity Analysis and Development .61 5. Infrastructural Development: Rural Roads .69 6. The Natural Resources Conservation Fund (FOCORN) .77 7. Project Costs and Financing ...... 81 8. Disbursement Schedule and Estimated Annual Payments .89 9. Schedule of Monitorable Actions .91 10. Supervision Plan .93 11. Documents in the Project File .95 12. Environmental Assessment: Summary .97 13. Abbreviations and Acronyms .105

MAPS: IBRD Nos. 24200, 24201 and 24303 PARAGUAY

STAFF APPRAISAL REPORT

NATURAL RESOURCES MANAGEMENT PROJECT

LOAN AND PROJECT SUMMARY

Borrower: The Republic of Paraguay

Executing Agencies: The Ministry of Agriculture and Livestock The Ministry of Public Works and Communications The Paraguayan Institute for Indigenous People The Smaliholder Credit Agency The Ministry of Education The Ministry of Health and Welfare

Loan Amount: US$50.0 million equivalent

Terms: Repayable in twenty years, including five years of grace, with amortization on an annuity basis, at the Bank's standard variable interest rate.

Project Objectives: The objectives of the project would be: (a) to establish the institutional framework necessary to deal with the major agricultural and natural resource problems of the project area; (b) to generate information through research and implement an area-wide system of natural resource protection; (c) to assist small farmers in the establishment of sustainable, diversified agricultural production systems and conservation measures; and (d) to encourage the direct participation of the local population in project implementation.

Project Description: The components of the project would be: (a) agricultural development, which would include research, technical assistance to producers and their organizations, and support for protected areas; (b) support for indigenous communities, which would include land acquisition and regularization of titles, and the provision of technical assistance in agriculture, health and education; (c) infrastructural development, which would improve and maintain part of the existing feeder road network; (d) institutional development, including technical assistance and training support for existing and newly- created institutions; and (e) pilot agricultural credit, for on-farm investment by small farmers to support production and resource conservation initiatives.

Project Benefits: The main project benefit would be the establishment of the institutional framework capable of addressing the long-term problems of agriculture and natural resource use in the project area. The - 1i -

project would introduce a coherent strategy of watershed management. It would introduce technology, technical assistance and research output to small farmers in selected catchment areas to enable sustainable, diversified agricultural production to be achieved in harmony with natural resource management. Designated protected areas would be expanded and support provided for their maintenance. Remaining indigenous people would be supported, and enabled to maintain their traditional way of life on increased land areas and on protected forest areas. The provision of agricultural credit to small farmers would be improved.

Poverty Reduction: The project is classified as a Program of Targeted Intervention with respect to Poverty Reduction. Environmental degradation in Paraguay has worsened the level of exposure of the rural poor to the risks of further impoverishment. Inadequate natural resource management practices, particularly those resulting in severe soil degradation, have tended to reduce farm income and increase its variability. Under the project, the growth prospects of smallholders and indigenous communities would be improved. Technical and financial support for the adoption of environmentally sound production technologies, rehabilitation and modernization of basic rural infrastructure, and improved access to formal sources of credit would enhance productivity and create an economically viable alternative to the existing pattern of natural resource mining.

Project Risks: Institutional weakness is a risk faced by all projects in Paraguay. The project's institutional structure has been carefully designed, and demands considerable adjustment to established patterns of behavior in multiple institutions. The institutional structure would include a program of institutional development, and monitorable indicators would allow progress to be followed closely during supervision and mid-term review. The extensive and careless use of natural resources in agriculture has been the basis for development to date. The project aims to provide the basis to slow down and ultimately to reverse this depredatory approach to natural resource use. This will depend on a consistent message from the government and the provision of a framework of incentives and penalties. Short-term political expediency may run counter to the requirements of the necessary long-term strategic approach. The Agricultural Sector Review in progress will provide detailed recommendations and will form the basis for the necessary dialogue between the Bank and the Government. Under a Japanese PHRD grant, executed by the Bank, a natural resource inventory is being compiled; the finalized product will be an agro-ecological zoning document and an accompanying body of legal and policy instruments. This would be the subject of review, on its completion, by the Bank and the Government, and agreement would be reached on the appropriate mechanisms and timetable for their implementation. - iii -

Estimated Costs:

Local Forei'n Total ------US$ million ------

Agricultural Development 31.0 11.8 42.8 Indigenous Communities 2.8 0.4 3.2 Infrastructural Development 6.4 6.5 12.9 Institutional Development 3.9 0.6 4.5 Pilot Agricultural Credit 4.8 3.8 8.6

Total Baseline Costs 48.9 23.1 72.0

Contingencies: Physical 1.1 1.2 2.3 Price 3.4 1.4 4.8

Total Project Costs 53.4 25.7 79.1

Financing Plan:

IBRD 29.0 21.0 50.0 Government 20.8 1.2 22.0 Producers 3.6 3.5 7.1

Total 53.4 25.7 79.1

Estimated IBRD Disbursements:

IBRD FY 1995 1996 1997 1998 1999 2000 2001 2002 ------uS$ million ------

Annual 2.3 1.5 7.5 8.0 10.0 10.0 10.0 0.7 Cumulative 2.3 3.8 11.3 19.3 29.3 39.3 49.3 50.0

Economic Rate of Return: Not applicable

MMps: IBRD Nos. 24200, 24201 and 24303 I Z I PARAGUAY

STAFF APPRAISAL REPORT

NATURAL RESOURCES MANAGEMENT PROJECT

I. AGRICULTURAL SECTOR BACKGROUND

Agriculture in the Economy

1.1 The agricultural sector has played a key role in the impressive economic performance achieved by Paraguay since 1970, and its resource base will allow it to continue as a major source of export-driven growth. The sector, broadly defined to include crops, livestock and forestry, generates 30% of GDP, employs 40% of the work force, and provides 90% of registered merchandise exports. Agricultural products are also important raw materials for industry, and agro-industry contributes about 50% of total industrial value- added.

1.2 Paraguay is divided into two major regions, in terms of its natural resources. The Western Region (the Regi6n Occidental or Chaco), with 60% of the country's total area of 40 million ha, contains only 2% of the population and is limited, for reasons of soil quality, topography and climate, almost in its entirety to extensive cattle production. The Eastern Region (the Regi6n Oriental), by contrast, has a large proportion of land suitable for crop production, and has three main sub-regions. The Center-South, with 5 million ha, is the area of oldest agricultural development; its high population, sub-economic small holdings (minifundia) and low yields make it an area of population emigration. The East, with 5.8 million ha (including the proposed project area of Alto Parana and the north of Itapuia), contains the best soils and has the highest agricultural potential of Paraguay. The natural forest cover is being removed at an increasing rate by colonization and agricultural development. The North, with 5 million ha and traditionally an area of livestock and forestry, is an area of recent colonization, with soils of inferior quality to those of the East, although with good agricultural potential under systems of careful management.

1.3 The development models emphasizing industrialization and urban growth which characterized many Latin American countries after the Second World War were not adopted in Paraguay, which has the region's lowest level of urbanization. Almost 60% of the population of 4.4 million lives in the rural areas. Instead of a tendency towards rural- urban migration, with the resultant increase in the number of marginalized poor experienced by so many countries, Paraguay has achieved a deconcentration of its population through settlement of previously-undeveloped parts of the country.

1.4 Paraguay's economic performance during the past two decades was one of strong growth (1970-1981), followed by periods of stagnation (1982-1986) and slow recovery (1987-1992). Between 1970-1981, GDP grew at an annual rate of 8.1% in real terms, equal to 4.7% per capita; the main driving forces were a major and sustained increase in agricultural production and exports and the construction of joint-venture hydro-electric projects with neighboring countries at Itaipuiand Yacyreta on the Parana river. A combination of external and domestic factors caused the recession. Reduced capital flows - 2 - associated with the completion of the ItaipiI project coincided with falling world prices for key agricultural commodities and adverse weather conditions (floods in 1982-1983 and drought in 1985-1986). The resultant pressures on the balance of payments, the level of economic activity, employment and tax revenues were met with a hesitant and inadequate policy response. The multiple exchange rate policy, in particular, which started in the early 1980s, introduced severe distortions that were compounded by large fiscal deficits and excessive monetary expansion. Since the change in government in early 1989, important progress has been made in the removal of macroeconomic distortions.

1.5 The agricultural sector's performance since 1970 closely followed that of the economy as a whole. Its annual growth rate between 1970-1981 was 6%, followed by virtual stagnation between 1981-1986, renewed growth, of over 8% per year, between 1986- 1990, followed by further stagnation in 1991-1992. Absolute declines in sectoral GDP occurred in 1983 (-2.4%), in 1986 (-6.1%) and again in 1992 as a result of poor weather conditions. Renewed growth in the late 1980s occurred in spite of the poor macroeconomic environment, which indicates that unregistered trade made simple the evasion of multiple exchange rates and registered export prices (aforos); sectoral GDP grew by 5.2% between 1988-1989, but registered exports of primary commodities increased by more than 80% over the same period, once the discriminatory measures had been removed. The system of multiple exchange rates and arbitrarily-determined aforos presented the sector, and particularly that part oriented towards exports, with an uncertain environment in which to plan both production and investment. Major sectoral dislocations were avoided because of the existence of irregular trade channels, which were more readily exploited for unprocessed commodities (e.g., live cattle, soybeans and timber) than for processed goods (e.g., ginned cotton), thereby introducing specific allocative distortions into the agricultural sector.

Major Public Institutions in the Sector

1.6 The institutional structure of the agricultural sector has undergone a number of shifts since the change in government in early 1989. The rigid and centralized decision- making approach has been modified, although a new equilibrium has not yet been reached. The Ministry of Agriculture and Livestock (Ministerio de Agricultura v Ganaderia - MAG), which has overall responsibility for the definition of strategy and policy in the sector, is being reorganized and restructured; its new and much-debated Carta Organica was signed into law at the end of 1992. The Rural Welfare Institute (Instituto de Bienestar Rural - IBR), which is responsible for the colonization of new areas and settlement of small farmers, is also in the process of being restructured; whilst it has achieved much of its mandate, and was largely responsible for the opening-up of new areas and consequent increases in production and exports particularly of cotton, it is widely recognized as having been inefficient and corrupt, problems that its present management is working hard to correct. In order to overcome problems of implementation in rural and regional development projects, the National Office of Project Coordination and Administration (Oficina Nacional de Administraci6n v Coordinaci6n de Provectos - ONCAP) was established in 1983 on an inter- ministerial basis; with recent organizational changes, it has come fully under the control of MAG as the National Directorate for Project Coordination and Administration (Direcci6n Nacional de Coordinaci6n y Administraci6n de ProvecEos- DINCAP). Agricultural credit has been provided (in part from Bank and Inter-American Development Bank resources) via the Livestock Fund (Fondo Ganadero - FG) at the Central Bank (Banco Central del Paraguay - 3 -

- BCP), the National Development Bank (Banco Nacional de Fomento - BNF) and the Smallholder Credit Agency (Credito Agricola de Habilitaci6n -CAH), as well as via rediscounts made available by the BCP through private sector agro-industrial and marketing channels.

Natural ResourceUse in Agriculture

1.7 The different stages of Paraguay's agricultural development have all been extractive and/or exploitive of natural resources. With land as an abundant factor, the natural renewal of fertility and the low level of intensity of land use allowed this to operate as a sustainable form of production for a long period. Beginning in the early 1970s, however, the agricultural sector and the economy as a whole underwent important structural changes. The Government's major road-building programs quickly put huge, and hitherto undeveloped, areas within economic access, and large tracts of state land (tierras fiscales) were distributed to both large and small farmers. Large-scale internal migration of peasants occurred, coupled with the arrival of significant numbers of farmers from neighboring countries, mainly Brazil. Only in the past 30 years has a truly national agrarian economy been created, and the different phases of evolution of the agricultural sector have left their mark on the structures of land-holding and production. Indigenous hunter/gatherers, extensive cattle ranchers, and minifundio/microfundio subsistence farmers are all present, in addition to numerous forms of production based on small-, medium- and large-scale commercial farms.

1.8 As recently as the early 1950s, the agricultural sector was slow growing, based on the extraction of forest resources, extensive cattle raising and crop production, and mainly oriented to domestic consumption with few export products. By the 1980s, the agricultural sector had become one of the most dynamic sectors of the economy, driven by export demand and based on the growth of production via an extension of the cultivated area. This major sectoral growth resulted from the strategy adopted in the early 1960s to promote agricultural and agro-industrial exports. Public sector expenditure in infrastructure (mainly roads) and land settlement was combined with private sector investment encouraged by the stable economic and political environment. Between 1960-1970, an estimated 400,000 people moved to the new lands of the east and north-east. The early emphasis on settling peasants was partly replaced by the introduction of larger-scale operations, with significant capital resources and a modern, higher technology approach to agriculture. The Eastern Region received a major inflow of settlers from Brazil, where the agricultural frontiers of Parana and Mato Grosso do Sul were rapidly being reached. As a result, colonization by Paraguayans and Brazilians has rapidly transformed an area of natural forest into one of major agricultural growth in a period of twenty years. The biggest changes have been experienced in the Departments of Alto Parand and Itapua.

1.9 This social and economic development strategy has increased the absolute and relative importance of the agricultural sector, but this has not had a balanced impact on the rural population. In particular, deforestation has pushed the remaining indigenous communities into ever-smaller areas, for the most part inadequate to support their traditional way of life. The acceleration of agricultural growth at the expense of the natural forest has meant that the frontier of agricultural production based on the extension of the cultivated area will soon be reached. In general terms, forest clearing has been indiscriminate, with little - 4 - regard paid to slopes, soil types, land use category or natural water courses. The driving forces have been the land distribution policies themselves, cheap credit, absence of taxation, and the lack of enforcement of land-use restrictions embedded in the forestry law and in frontier controls (e.g., on logwood exports). The rate of deforestation and incorporation of land into productive use has, in fact, accelerated in the aftermath of the change in government in 1989, as large land-owners have sought to avoid illegal occupation by the land-less and/or expropriation by the State for settlement purposes. In addition, there is a potentially serious problem of increasing degradation and erosion of soils in the areas already taken into production; there is, in general, a wholly inadequate application of existing knowledge and technology in the area of soil management. Much of the feeder road network itself contributes to erosion, as a result of poor alignment and construction which do not follow the conservation requirements dictated largely by the topography.

1.10 After more than two decades of dynamic agricultural growth, Paraguay is rapidly approaching a crucial juncture in the development of its rural areas; the strategy to be adopted must go beyond the confines of purely agricultural development, and must emphasize increases in output and productivity in tandem with a heightened concern with the environment and the preservation of natural resources. The development potential of the agricultural sector (in terms of under-utilized resources, available technology and markets) is more than sufficient to allow it to continue to play an important role in economic growth and development. However, the "easy" phase of Paraguay's agricultural development is coming to an end. A structural change is required from the present policy of continuous expansion of the agricultural frontier to a strategy of intensification of resource use through sustainable agricultural practices. Given the importance of the small farmer and the pioneering nature of much of the agricultural development achieved to date, a change in priorities in public sector expenditure, both capital and recurrent, will be required if rational and sustainable growth is to be achieved in future.

1.11 The challenge now facing the government is that of orchestrating the change from horizontal development (i.e., expansion of the productive area) to the vertical development of agriculture by adopting measures to improve productivity: the strategy adopted must take account of the major population growth being experienced. The key issues in the agricultural sector are: (a) the use and protection of natural resources in sustainable agricultural production systems; (b) the skewed distribution of land, and the land tenure system; (c) the weakness and fragmentation of sector institutions; (d) the lack of agricultural strategy and policy, and of information for their formulation; (e) the low level of taxation of agriculture and the lack of efficient tax instruments; and (f) the growing pressure on indigenous communities in the competition for natural resources.

Previous Bank Lending

1.12 Since 1975, the Bank has undertaken seven operations in the agricultural sector; the two most recent were the Eje Norte Rural Development Project (Loan 2141-PA, which closed at the end of 1991) and the Caazapa Area Development Project (Loan 2087- PA, the Closing Date of which was extended to December 1993 in order to assist with recovery from severe flooding). Although an agricultural development project for the Departments of Alto Parana and Itapua was prepared (with Bank and FAO/CP assistance) in the mid-1980s, it was not appraised by the Bank because of its major disagreements with the Government'smacroeconomic policies, mainly the multipleexchange rate policy then in force. Followingthe re-openingof the dialoguebetween the Governmentof Paraguay (GOP) and the Bank, in March 1992 the Board approveda loan to support the Land Use RationalizationProject, designedto improvethe Government'sland informationbase via the creation of a new rural cadastre and GeographicInformation System. The most recent Country Economic Memorandum(Report No. 9147-PA)was issued in Grey Cover on October 15, 1991.

Lessons from Previous Projects in Paraguay

1.13 Four main lessons have been learned from the Bank's involvementin the agricultural sector in Paraguay. Institutionalweakness has been a recurrent theme. The MAG is currently being reorganizedand restructured, and the former ONCAP now comes clearly under the control of MAG as DINCAP (para. 1.6). There have been serious problems of inter-ministerialcoordination in the past in integrated rural and area development projects, which ONCAP was only partially successfulin resolving. Research and extension have been weak, particularly where the public sector and small farmers are concerned. There has been a marked reluctanceon the part of the Governmentto be innovative,and both research and extensionhave been consistentlyunder-funded. What has been achieved has mostly been done by the private sector, includingcooperatives, which has mainly worked with imported, adapted technology. The organizationof farmers has been poorly developed, mainly because of the previous government'slack of support for groupings of small farmers. As a result, many of the services typicallyprovided by such groupings (e.g., input supply, savings mobilization,product processing and marketing)are only now becoming developedin the areas dominatedby small farmers. Little attentionhas been paid in the past to conservationof natural resources. This is a consequenceof the strategy of area expansion that has underlain agricultural development,but it is also the result of the weaknesses described above in research and extension,which have failed to appreciatethe long-term consequencesof inappropriatefarming methodsand technology.

Lessonsfrom General Bank Experience

1.14 The Bank's concern over the environmentalimplications of developmenthas increasedsteadily for more than two decades. An OperationsEvaluation Study by the Bank entitled "RenewableResource Managementin Agriculture"(December 1989) examined experiencewith 335 completedprojects from the period 1965-1986to identify lessons for future policy and project initiatives. The report concludedthat, in general, the Bank's economic and sector work (ESW) did not provide the strategic frameworkfor definingthe main resource managementissues in any given country and, therefore, could not define the options for dealing with them. The report argued that the Bank should take a leading role in clarifying issues, options and strategiesthat would ultimatelylead to fundamentalchanges in the way renewable resources are used.

1.15 The country case studies included in the report showed a wide divergence in the nature and extent of resource managementissues which affect economicdevelopment. The report emphasizedthat, until the late 1960s, issues of sustainabilityand equity were not raised in the discussionof the use of natural resources, the impressionbeing that many, if not most, countries had large, under-exploitedresources, the rapid exploitationof which was necessary in order to accelerate economic development. Paraguay would certainly have fallen into this category. Commenting on the impact of ESW, the report defined four basic weaknesses:

(a) the policy recommendations that were made were unrealistic in practice;

(b) there was no comprehensive overview of developments in any given country which had an impact on the use of renewable resources;

(c) the Bank, therefore, by design or by default, appeared to be largely unaware of the major changes affecting resource management within that country; and

(d) little had been done to assess how the actors, and the institutions governing their interactions, had created the policies, bureaucracies and decisions that had undermined sustainable development.

1.16 Twelve individual country studies were included in the report's analysis, and above all serve to demonstrate the diverse nature of issues of natural resource management in different countries. Excessive faith has frequently been placed in technical solutions, with insufficient attention paid to the political realities which underlie policy formulation and implementation where the opening-up of new land is concerned. Project experience has also illustrated the importance of sectoral inter-relationships in resource management. In a number of countries, the Bank has had little success in persuading government to accept the priorities and policies identified or to implement the programs and projects necessary to address the issues. The weakness of institutions and the inadequacy of the resource inventories and data bases used for planning have been a frequent shortcoming, and are areas in which the Bank has taken initiatives through projects. In only one case, Malaysia, was resource management felt to have been sophisticated, aided by a sound technical civil service, good resource information and effective implementing agencies. The pattern of development was considered sustainable, but forest policy was felt to have erred, possibly on the side of conservation, and other issues quickly swarmed up to fill the void (e.g., the trade- off between equity and efficiency, large versus small size in agricultural operations, public sector versus private enterprise).

1.17 The conclusion was that ESW had not provided either governments or the Bank with a strategic, inter-sectoral framework for policy and action. As a result, project lending had done little to promote sustainable development or the equitable distribution of benefits. Since environmental issues vary widely between countries, a standardized approach to analyzing issues would be inappropriate. The relevance of ESW should be increased for countries where resource degradation is of critical importance. This should include, inter alia, discussions of policy options and institutional constraints, and the strengthening of the information base in order to improve policy for natural resource management.

1.18 A number of useful lessons can be learned from the Bank's experience in financing projects under the Integrated Development Program for North-West Brazil (Polonoroeste). In the construction of a major system of trunk and feeder roads, the government's strategy was to constrain the development of the fragile areas and those occupied by indigenous people and to promote non-exploitive and sustainable systems of -7- agricultural production and forest use in the appropriate areas. The program was perceived as having only a marginal impact on reversing the destructive pattern of land occupation and use which began in the 1970s. Mid-term review showed clearly that key planning parameters could quickly become invalid, mainly outside the control of the implementing agencies. The environment provided by policies, regulations and investment programs actually encouraged the depletion of the natural resource base and engendered a major contrast between the economic costs of the non-sustainable use of resources and the high financial gains to the private beneficiaries of the policies.

1. 19 The main lessons learned from the program were:

(a) public sector investments in frontier-area development should be based on a sound knowledge of the sustainable development potential of the area. Agro- ecological zoning to guide public investments should be an essential condition for future projects in such areas, and the policy and regulation framework should be made fully consistent with the technical aspects of zoning. [In the proposed project, although the Alto Paran-Itapiia area is no longer a frontier between unexploited forest and cultivation, the need for knowledge of the sustainable development potential is crucial to the halting and eventual reversal of degradation.];

(b) the scope and context of project interventions should be sufficient, in number and importance, to achieve the objectives of the project;

(c) centralized decision-making (in this case, at the federal level) is detrimental to the efficient implementation of project initiatives. Decentralization, including control over budgetary resources, is essential, and an enhanced role for NGOs in implementation improves accountability to the ultimate beneficiaries;

(d) where development depends upon long-term financing, careful analysis should be made of the availability of credit and the suitability of its terms. Where credit is not available, and where the failure of the development strategy might result in resource degradation, the Bank should make special provisions for credit in the project or not support the project at all;

(e) innovative projects need a system of monitoring and evaluation capable of generating early warnings about problems of impact and implementation, and the project design itself should be flexible enough to allow for the introduction of timely corrective measures;

(f) a longer start-up period and less-optimistic assumptions concerning the rate of farm development should be used for projects in relatively unknown or difficult environments; and

(g) the physical demarcation of conservation units (e.g., forest reserves) or land allocations to indigenous people is a necessary but not sufficient condition for their protection. Strong disincentives and enforcement capacity are also required to ensure the integrity of such protected areas. 1.20 In the design of the proposed project, therefore, close attention was paid to the specific lessons learned from projects in Paraguay and to the more general lessons from wider Bank lending. With respect to natural resources management and environmental issues, the proposed project is the direct result of the dialogue between the Bank and the Government. It emphasizes the need for a radically-altered strategy, aimed at the development of sustainable agriculture, and represents an essential step in putting the strategy into action.

Bank Lending Strategy for the Sector

1.21 The Bank's country assistance objectives and strategy have been defined through intensive mission contacts since the change of government in early 1989. Bank strategy is to support Paraguay's shift from an extensive model of agricultural expansion to growth through intensification, with emphasis being placed on sustainable agriculture within a framework of natural resource management and environmental protection. The Government is beset by short- and medium-term problems in the rural areas concerning the increasingly vocal and frequently militant landless peasants. Whilst the resolution of these problems is important, the Bank's key role is to assist the Government to plan strategically for the long term and to assist in the implementation of key projects to achieve the objectives of the strategy. The Bank should, therefore, support those initiatives which: (a) improve the Government's knowledge base and policy-making capacity; (b) promote the rational management of natural resources; (c) improve the institutional capacity of the sector; and (d) improve the productivity and well-being of smallholders.

Rationale for Bank Involvement

1.22 The agricultural sector of Paraguay faces a number of serious issues in its future development. These issues cannot be resolved in a single project. The present approach to natural resource use and agricultural development strategy must both undergo a major transformation. The Bank's role is to assist the Government in the definition of the issues and in the mobilization of the resources needed to deal with them. The transition from an extensive agriculture, careless in its use of natural resources, to more intensive and sustainable agriculture in a framework of appropriate natural resource management will require: (a) an improved knowledge of land ownership, its capability and actual use; (b) an enhanced role for the Government in the provision of basic services which will itself require major institutional change; and (c) the preparation and introduction of the necessary framework of incentives and restrictions concerning land use. The Bank, through its existing activities and the proposed project, is closely involved with the Government in the process of acquiring the basic knowledge necessary to satisfy these requirements.

1.23 The policy framework to which farmers have responded in the "extensive" phase of Paraguay's agricultural development has begun to change and must change further. There is little, if any, state-owned land remaining for distribution and land clearing is no longer driven by subsidized credit. The Bank, through the Land Use Rationalization Project and the implementation of Japanese PHRD grants, is playing a key role in the definition of natural resource management issues and the available means to resolve them. The multi- purpose cadastre will provide the Government with the necessary technical basis to tax agriculture; in a planned future operation, the cadastre data base would be employed to - 9 - improve the system of land titling, which is essential for the realization of long-term on-farm investment. The work being carried out under the first PHRD grant, executed by the Bank, will provide detailed technical information on natural resources and on the policy and legal framework controlling and influencing their use. The basic recommendations will be implemented by the proposed project at the level of catchment area and individual farm planning, in order to demonstrate their value on a pilot basis. The application of the agreed recommendations at the level of the whole Eastern Region would be pursued under the Natural Resources Management II Project, the preparation of which is to begin shortly under a third Japanese PHRD Grant.

1.24 The proposed project would address many issues which are generic to agriculture in the whole of the Eastern Region, and their successful resolution in the project area would allow the replication of the project in other areas. Bank involvement in the conception and preparation of this project has already been a catalyst in the definition of a new approach to the use of natural resources in Paraguay. Though still at a very early stage, this approach is the only realistic hope of sustaining the growth of output in the long term and of mitigating the effects of the migration of landless and impoverished people into the urban sector.

II. THE PROJECT

A. ORIGIN AND CONCEPT

2.1 The initial project identification mission took place in November 1989, following discussions with the Government in which it emphasized to the Bank the importance of agriculture and agro-industry to the achievement of its long-term economic development goals. The project concept was centered on the regional agricultural development of the Departments of Alto Parana and the north of Itapuia. With Bank involvement, a project had earlier been prepared for this area but had not been processed because of disagreement between the Government and the Bank concerning the major macroeconomic policy distortions then in effect (para. 1.12). On re-examining the project in late-1989, it became apparent that agricultural activity in the 1980s in the project area had developed in such a way that the emphasis must now be placed on promoting rational and sustainable land use and agricultural systems in the framework of natural resource management. It also became clear that major changes are required in the country's overall agricultural development strategy, and that the Bank's support should be designed to assist in its definition and implementation. A key requirement for this is the provision of land information, and "national level" components were proposed including a new rural cadastre and a Geographic Information System.

2.2 At the GOP's request, technical assistance was provided by the Bank in late 1990 for the preparation of these national level components, which were separated in early 1991 to form the Land Use Rationalization Project. A loan to support this project (Loan 3445-PA) was approved by the Bank's Board in March, 1992, and signed in April, 1992. - 10 -

2.3 A lack of definition concerning institutional roles and responsibilities in Paraguay, in particular the creation and ultimate demise of the National Rural Development Coordination Council (CONCODER), delayed the start of project preparation. Preparation missions commenced in early 1990, including joint missions between the Bank and the FAO/CP, which provided support to the Technical Department (GT) of MAG and to ONCAP. In mid-1991, preparation work commenced in full and the preparation report was sent to the Bank by the GOP in December, 1991.

2.4 The Eastern Region of Paraguay covers 160,000 km2 and contains 98% of the country's population. The high proportion of cultivable soils and adequate, well-distributed rainfall have been the basis of a major expansion in export-oriented crop production since the 1960s. The increase in the cultivated area at the expense of the natural forest has caused deforestation at the rate of over 100,000 ha per year for the past two decades, and this has accelerated markedly since 1989; soil degradation and erosion are increasingly serious problems. Nowhere is this problem clearer than in the project area of Alto Parana and Itapua. Clearly, this process is incompatible with the long-term sustainable development of agriculture and a new approach to the sector is urgently needed. This approach requires a major investment in the technical and institutional capacity to monitor and control land exploitation, combined with an increase in services aimed at intensifying production and conserving soils on land that has already been brought into production.

2.5 The proposed project has modest objectives compared to the problems which face the area. It is not designed to halt deforestation. It should be recognized that there is little dialogue between the GOP and the medium- and large-scale farmers in the project area who are responsible for most of the environmental damage. The project would provide the ground-work for the implementation of incentives and controls concerning land use, but the lack of suitable long-term credit would be a significant impediment to changing farming and land-use practices.

B. OBJECTIVES

2.6 The objectives of the project would be: (a) to establish the institutional framework necessary to deal with the major agricultural and natural resource problems of the project area; (b) to generate information through research and implement an area-wide system of natural resource protection; (c) assist small farmers in the establishment of sustainable, diversified agricultural production systems and conservation measures; and (d) to encourage the direct participation of the local population in project implementation. The project would increase the productivity and incomes of small farmers, to enable them to accumulate capital and put the development process on a self-sustaining basis. It would seek to alter the attitudes of the rural community toward natural resource management and to develop a consensus on its importance and value. The project would seek the participation of the population in the project through the stimulation of cooperatives, local government and other institutions.

2.7 The project would promote: (a) agricultural production systems to increase output and income via improved productivity; (b) the management of natural resources via appropriate land use planning; and (c) an increase in value-added, through processing and improved marketing. The project would represent a first phase of a continuing initiative to - 11 -

alter radically the way in which natural resources are used in agriculture. As such, it would strengthen institutions, undertake pilot programs (e.g., in watershed management and small- farmer credit supply) and develop a strong information base in conjunction with the Geographic Information System and resource inventory to be implemented under the Land Use Rationalization Project (Ln. 3445-PA). This phase would allow the design and implementation of one or more project initiatives, which could overlap in time with the proposed project, which would involve the larger-scale producers that occupy a large part of the area.

C. PROJECT DESCRIPTION

Introduction

2.8 Four main lines of strategic action are proposed to achieve the project objectives, to encourage self-sustained and efficient development whilst conserving the natural resource base:

(a) a systems approach would be adopted to integrate the demands of agricultural production with the need to conserve and protect natural resources. The basic planning unit for the formulation of plans would be the rainfall catchment area (micro-cuenca);

(b) changes would be made in the way in which the public sector institutions of the agricultural sector function in the project area; this will involve decentralization, regional responsibility for natural resource management, and the creation of a Regional Project Execution Unit with spending authority;

(c) intensive training of producers and their families concerning organization, resource use, and marketing; and

(d) rehabilitation and realignment of existing roads to mitigate negative environmental impacts.

2.9 The project area occupies the Department of Alto Paranr and that part of the Department of Itapuia lying to the north of the Rio Pirap6 plus the District of Bella Vista to its south (see Map No. 24201). The area covers a significant portion of that part of the Parana watershed lying in Paraguayan territory and up-stream of the Itaipui and Yacyreta hydro-electric dams. The climate is humid sub-tropical, with well-distributed average annual rainfall of 1,700 mm and an average minimum temperature of 17°c. The natural vegetation is composed of semi-moist Atlantic forest, open grassland, low-lying (i.e., floodable) areas and scrub-land. The forest has suffered the greatest deterioration and the remaining natural forest, for the most part, can only be considered as residual. The soils of the area are mainly lateritic, with good natural fertility but fragile in their structure and susceptible to erosion. Some 70% of the soils are of Classes II and III, which allows agricultural use with few (but important) limitations; inappropriate use rapidly acidifies these soils, reduces their fertility and causes erosion, which is particularly marked on those areas of pronounced slopes and those without vegetation cover during periods of heavy rains. Agriculture is dominated by soya/wheat production on large farms and subsistence crops plus cotton as a cash-crop on - 12 - small-holdings. The area has experienced a major increase in population in recent decades; between 1972-1982, it grew by 62%, compared to 28% at the national level, and between 1982-1992 it grew by 69%, compared to 36% at the national level. The population of the project area is estimated at 500,000, of which 57% lives in rural areas.

Project Components

2.10 The project would be implemented over eight years, and would have five components as described in Table 1:

Table 1. Project Components

Responsible Component/Sub-component Institutions Objectives AgzriculturalDevelopment: Agricultural Productionand MAG Increase agriculturaloutput within sustainable, Natural ResourcesManagement diversifiedsystems.

Forestry and Environmental MAG Increase protected areas and forestry research. Conservation

Training, Social Organization MAG Developagro-industry and marketingthrough and TechnicalAssistance producers' organizations.

Natural Resources MAG Encourageconservation-oriented investment at Conservation Fund (FOCORN) the farm level. IndigenousCommunities: INDI/MECI Improvementof security and well-being. MSPBS l InfrastructuralDevelopment: MOPC Mitigatethe negative environmnentalimpact of Rural Roads existing roads. InstitutionalDevelopment: MAG Decentralizemanagement by encouraginglocal and more democraticparticipation. Pilot AgriculturalCredit: CAH Increase productionby smallest farmers using sound environmentalpractices.

2.11 The design of the project's implementation structure involves a decentralization of authority and recognizes the need to coordinate a large number of institutions. Three new units, to be created by MAG, would be responsible for project implementation. These would be:

(a) the Project Technical and Administrative Coordination Unit (Unidad de Coordinaci6n Tecnica y Administraci6n del Provecto - UCTAP) which would be responsible for overall project management and coordination; - 13 -

(b) the Rural Research and Training Center (Centro de Investigaci6n y Capacitaci6n Rural - CICAR) which would be responsible for research and for channelling extension services under the project; and

(c) the Regional Environmental Center (Centro Regional Ambiental del Este - CRAE) which would be responsible for all environmental protection activities.

AgriculturalDevelopment Component

2.12 The key characteristics of the project area which have heavily influenced the design of this component include the increasing emphasis on mono-cropping, the deterioration of natural resources as a consequence of deforestation and inappropriate agricultural practices, the rapid decline in productivity related to the deterioration of soils, and the poor coverage of agricultural support services. The component would assist in restructuring the productive process towards sustainable, conservation-oriented agriculture. The component would be based on: (a) a reorientation of the institutional apparatus concerned with promoting organization and technology; (b) a reorientation of the traditional productive focus; (c) the involvement of the population and its organizations; (d) an emphasis on sustainability and resource conservation in the development of operational plans; and (e) an emphasis on diversification. The component would directly reach about 7,900 farm families, which represent about 22% of farmers in the target group of under 200 ha, and would affect about 12% of the area covered by the project.

2.13 The component would cost US$46.4 million, including contingencies, (which represents 58.6% of total costs) of which US$32.0 million would represent investment costs including structures, purchase of vehicles and equipment, land acquisition, on-farm investments in resource protection, training and technical assistance. The component would have four sub-components.

2.14 The Agricultural Production and Natural Resources Management sub- component would achieve its objectives via three programs of action: (a) Natural Resource Zoning and Agro-ecological Extension; (b) Agricultural Research; and (c) Agro-forestry Research.

2.15 The Natural Resource Zoning and Agro-ecological Extension program would plan and implement actions designed to slow down and ultirnately to reverse the degradation of soils and other natural resources. Several activities are already in progress in pursuit of this objective. The first PHRD grant, executed by the Bank, is being used within the framework of the Land Use Rationalization Project (Ln. 3445-PA) to provide the technical basis for agro-ecological zoning and an analysis of the existing legal and policy instruments, with detailed recommendation for change, where necessary. This work is being carried out in close cooperation with the SSRNMA, which will ultimately be responsible for the operation and maintenance of the Geographic Information System, and is expected to be completed by early 1994. It was agreed at negotiations that, once the work is completed, and no later than June 30, 1994, the results would be formally reviewed jointly by the Bank and the Government. At that stage, agreement would be sought on the appropriate mechanisms and timetable for the implementation of agreed measures, which in turn would be included in an action plan to be furnished to the Bank no later than December 31, 1994 - 14 -

(para. 3.1 (a)). The technical basis for land-use zoning would be adopted in the project area in the design of catchment area plans and individual farm plans, in order to test recommendations on a pilot basis. The second PHRD grant is being employed in the preparation of a detailed watershed analysis and protection master plan for the proposed project area. A more complete application of land-use zoning applied to the whole of the Eastern Region would be supported under the proposed Natural Resources Management II Project, on which preparation will shortly begin under the third PHRD grant.

2.16 A total of 7,900 farms would be targeted under the sub-component, of which 5,700 would be assisted through agro-ecological extension and 2,200 through technical assistance in soil conservation and mechanization. Natural resource management would focus on the selection of 50 critical catchment areas (micro-cuencas) of approximately 3,000 ha each within the watersheds of the Acaray, Monday and Tembey rivers; for each of these catchment areas, the project would design detailed management plans. These would be prepared in consultation and implemented with the support of the Local Natural Resource Management Groups (Junta Vecinal para la Conservaci6n de Recursos Naturales - JVCRN).

2.17 The Agricultural Research program would address the basic weakness of research in the project area, which has failed to support agricultural production either through the generation or adaptation of technology. The program would provide specific alternatives for production which are agronomically suitable for the area, for which there is market demand, and which fit in with sustainable production systems and natural resource management. Other research priorities would include appropriate mechanized cultivation methods and innovative production technology. A total of 76 research projects is proposed, 14 of which would include the strengthening of activities already in progress, and would be divided almost equally between diversification and technological change.

2.18 The program of Agro-forestry Research would develop and test promising agro-forestry systems. Research would be conducted by a multi-disciplinary team of specialists, combining on-farm and on-station research in order to allow control while incorporating the practical lessons at the farm level. In the 50 selected catchment areas, a total of 800 ha of agro-forestry research plots would be established and monitored at five MAG centers and on farmers' land where the entire farm would be included in the agro- forestry system. The research design for each plot would accommodate: (a) inter-planting of annual and perennial plants on contour lines; (b) enrichment planting of degraded forests; (c) silvo-pastoral management; and (d) reforestation on deforested and degraded sites.

2.19 The Forestry and Environmental Conservation sub-component would achieve its objectives via three programs of action: (a) Forestry Research; (b) Environmental Control (enforcement); and (c) Support for the Protected Areas.

2.20 The Forestry Research program would ameliorate one of the most serious consequences of the rapid deforestation experienced in the project area, the extinction of commercially-valuable species. It would protect, conserve and recuperate the genetic diversity of the area, and develop activities of research, reforestation and technology generation. Genetic material would be classified, stored and multiplied via a germplasm bank, and an arboretum would be established. The long-term research into the silvicultural characteristics, growth rates and uses of native tree species would be initiated, so that - 15 -

information would be available where needed for large-scale reforestation. The project would also develop sustainable forest management systems and appropriate small-scale wood utilization technologies that would help to give value to the remnants of forests on farmers' holdings. This would include an assessment of secondary (i.e., non-wood) forest products.

2.21 The Environmental Control program would begin to implement the environmental legislation which already exists, taking steps to strengthen it and the institutions involved. Three new control posts would be established in the area, and the five existing control posts would be strengthened. A manual of regulations and procedures would be prepared, which would also serve as the basis for the issuing of Municipal By-laws concerning natural resource use. The program would also develop and implement a mass media education program.

2.22 The Protected Areas program would strengthen the institutional presence in existing forestry reserves and national parks, and would take steps to increase the overall size of the protected area. At present, there are only 31,300 ha of protected areas, of which 29,200 ha is under the control of Itaipu Binacional (the binational entity responsible for operation of the Itaipu hydro-electric project). The program would: (a) strengthen the institutional presence in the existing protected areas; (b) create a new national park in the Cordillera de San Rafael, defined as the major priority for environmental protection in the Alto Parana "eco-region"; (c) undertake the preparatory studies for the creation of new national parks in the watersheds of the Monday and Tembey rivers; and (d) develop management plans for the Kyri'y reserve and the protection area of the Nacunday river.

2.23 The boundaries of the proposed San Rafael National Park have been defined, and the park has been created by Decree. The existing ownership of the land is being defined from available cadastral data. Most of the owners of the land within the boundaries of the park do not live on their land, and it is anticipated that the number of people who could eventually be affected by the need to resettle is substantially less than 200. It would be a condition of disbursement of the program that if the Government were to undertake a resettlement action affecting the population living within the boundaries of the Park, it would present to the Bank a resettlement plan, including a compensation plan, satisfactory to the Bank (para. 3.3 (a)). In addition, it was agreed that the Government would carry out such a resettlement plan in accordance with its terms. The draft Terms of Reference for the preparatory studies for new national parks (para. 3.1 (c)), and the draft management plans for the Kyri'y reserve and the Nacunday protection area (para. 3.1 (d)) were agreed at negotiations.

2.24 Training, Social Organizationand TechnicalAssistance. The Training and Social Organization programs would support the development of organizations, particularly those of agricultural producers. Three basic forms of organization have been identified for support: (a) cooperatives, which in spite of their maturity in the project area need strengthening in terms of their structures and operations; (b) committees and pre-cooperatives promoted by public sector bodies and Non-governmental Organizations (NGOs); and (c) municipalities. The programs would develop the organizational and management capabilities of producers and would strengthen organizations in their role of catalyst of community development. A total of 19 existing and 8 new cooperatives, 27 municipalities, and 350 non- formal farmers' groups would be assisted. - 16 -

2.25 The Technical Assistance program would concentrate on three activities. In Agro-industry, it would promote an increase in activity to diversify, increase and add value to marketable output. It would provide support to cooperatives, local firms and other organizations. For Credit, it would provide support in two areas: (a) training in management for obtaining access to credit; and (b) studies designed to allow the development of cooperatives into financial entities. For Marketing, it would provide basic market research information and improve marketing capabilities. If justified, a second-tier marketing cooperative could be created. The marketing information data base would be developed and marketing activities undertaken.

2.26 The Natural ResourcesConservation Fund (FOCORN)sub-component has been designed as a pilot program to make available grant resources to producers to encourage them to undertake on-farm, and in some cases inter-farm, investments designed to correct damage caused, via erosion and soil degradation, by the indiscriminate incorporation of land into agricultural production. The FOCORN would follow a strategy involving the organization of producers in the catchment areas most at risk and the promotion of technology designed to conserve resources and sustain agricultural production. Due to the limited resources of FOCORN (US$5.0 million), on-farm investments would be selected to emphasize innovation and their demonstration effect.

2.27 The FOCORN would be managed by the UCTAP and would be applied in 50 catchment areas in the watersheds of the Monday, Tembey and Acaray rivers, representing approximately 3,000 producers on 150,000 ha. The individual catchment area would be the basic planning unit; in the project area, the catchment area is typically of 2-3,000 ha and contains an average of 60 production units.

2.28 The UCTAP will be responsible for the preparation of the development plans to be followed in the individual catchment areas, and would authorize and control the disbursement of FOCORN resources at the farm and community level. The preparation of plans may be carried out by consultants under the control of UCTAP. The provision of resources from the FOCORN would follow a three-phase process:

(a) In the first phase, the physical characteristics of the catchment area would be analyzed and a resource management plan prepared, including a statement of priorities and goals and a chronogram of activities. Technical assistance would be provided to organized groups of producers to carry out activities of common interest. Planning of the individual farn or holding would be carried out by technicians directly with the farmer, and technical assistance would be provided directly to the producer in the implementation of the farm-level plan.

(b) In the second phase, the plan would be approved by the local office of CICAR and by the Operations Committee of the UCTAP.

(c) In the third phase, financial resources would be made available up to 50% of the total investment defined under the plan. These payments would range between US$500 and US$1,100 for the small and medium-sized farmers. A small number of farmers (less than 200) with holdings of between 200-300 ha. occupying strategic locations within the catchment areas would receive up to - 17 -

US$2,500. Staged payments to farmers would be contingent upon certificates of completed work.

2.29 The financial resources of the FOCORN would also be managed by the UCTAP. The operation of the FOCORN would be governed by a set of Regulations, a draft of which was agreed during negotiations (para. 3.1 (e)). The approval of the Regulations would be a condition of disbursement of the sub-component (para. 3.3 (b)). The establishment of the FOCORN and the opening of a bank account in the BNF would also be a condition of disbursement of the sub-component (para. 3.3 (b)). Drafts of the Operating Manual of the FOCORN and of the Model Contract to be entered into with the producers were agreed during negotiations (para. 3.1 (e)). The financial resources of the FOCORN would be made available to individuals and to groups of producers.

IndigenousCommunities Component

2.30 The component would cost US$3.4 million, including contingencies (4.3% of total costs) of which US$2.4 million would represent investment costs including the acquisition of land, purchase of vehicles and equipment, and technical assistance. The component would have four sub-components. The entry into effect of the Subsidiary Grant Agreement (SGA) under which loan funds would be transferred, on a grant basis, to INDI would be a condition of effectiveness of the proposed loan (para. 3.2 (a)).

2.31 The component would provide assistance to the remaining indigenous population of the project area, a total of 1,285 families in 27 communities of the Tupi Guarani group. The profound changes wrought on the traditional way of life of the indigenous population by the rapid growth of agriculture at the expense of the natural forest have reached a critical stage. The survival of these groups over the long term depends on the implementation of an integrated program of support for health, education, land tenure and agricultural production. The component would support these groups, and would improve their security and well-being.

2.32 In the Land Security sub-component, the project would regularize land tenancy and expand the areas dedicated to indigenous people. An additional 6,515 ha would be acquired to be added to the 6,343 ha already occupied (but in need of regularization). The Paraguayan Institute for Indigenous People (Instituto Paraguayo del Indigena - INDI) with IBR would process the legal status of communities as well as the purchase of land to be financed from Government's contribution to the project. The entry into effect of the contractual arrangement between INDI and IBR would be a condition of effectiveness of the proposed loan (para. 3.2 (b)). Law 43/89 would be the principal instrument to regularize land tenure. Drafts of the required legal instruments were agreed at negotiations (para. 3.1 (f)), and a dated covenant has been included in the loan agreement for the completion of the land regularization activities. It was agreed during negotiations that if the Government were to undertake any resettlement action affecting population living within the area to be expanded for the benefit of indigenous people, it would provide the Bank, prior to taking any action, with a resettlement plan (including a compensation plan) satisfactory to the Bank and implement the plan. As a condition of disbursement, INDI would provide evidence that it had adopted an accounting system to keep project accounts and prepare SOEs (para. 3.3 (c)). - 18 -

2.33 The Agricultural Production Support sub-component would support the diversification and increase of output, in order to improve nutrition and increase incomes to reduce the dependency of indigenous people on paid work. Livestock production would be encouraged, and a pilot introduction of dairy cattle would be made into specific communities. Improved subsistence cropping of up to 3 ha per family, associated with poultry and pig keeping, would be promoted. The recuperation of degenerated natural forest would be promoted via agro-forestry technology, the establishment of associated perennial crops (such as yerba mate and citrus) and sustainable use of the forest.

2.34 The Health sub-component would seek to improve the health of indigenous people in mother-child care, prevention and control of highly-prevalent diseases, basic sanitation, health education, and the training and supervision of Health Workers. The sub- component would be implemented by the Ministry of Health and Welfare (Ministerio de Salud Publica v Bienestar Social - MSPBS) in conjunction with the UCTAP.

2.35 The Education sub-component would be implemented to consolidate the indigenous communities. Both primary education and informal (adult) education would be promoted. The program would be implemented by the Ministry of Education (Ministerio de Educaci6n y Culto - MEC) in conjunction with the UCTAP.

Infrastructural Development Component

2.36 The cost of the component would be US$15.4 million including contingencies (19.5% of total costs), of which US$15.1 million would represent investment costs, including the construction of roads and the acquisition of road maintenance equipment.

2.37 In the project area, several earlier Bank-funded development projects contained rural road construction, including Eje Este (Ln. 509 and Ln. 1674), Itapua Rural Development (Ln. 1418), and Route VI Feeder Roads (Ln. 1736). In addition, design work was done for rural roads in the area in the preparation of the Alto Parana Sur-Itapua Project (see para 1. 12), some of which have been incorporated into the National Rural Roads Program (Programa Nacional de Caminos Rurales - PNCR). The existing network of roads shows wide variation in the quality of surface and construction, and the roads have not always been well located, either in terms of their connections to the major road network or the physical terrain. The objective of the component is to realign, rebuild, improve and maintain existing roads to reduce their negative environmental effects and to follow and support agro-ecological land use zoning.

2.38 A total of 1,014 km of rural roads has been identified for reconstruction and improvement, of which 455 km will be implemented during the project. The maintenance program would be applied to roads reconstructed or improved under the project. The sub- component would be implemented by the Ministry of Public Works (Ministerio de Obras Publicas y Comunicaciones - MOPC) via its Directorate of Rural Roads (Direcci6n de Caminos Vecinales - DCV), which is responsible for the PNCR. The Rural Roads Unit (Unidad de Caminos Rurales - UCR) of the DCV would be responsible for planning, budgeting, coordinating and monitoring the work. The roads segments selected (see Annex 5, Table 3) do not duplicate any of the road improvements planned to be carried out in the Eighth Highway Project (Ln. 3685-PA). The maintenance program would be the joint - 19 -

responsibility of the DCV and the Local Roads Committees (Juntas de Viales Locales - JVLs) formed in the selected areas by the Municipalities and representatives of the community.

2.39 The engineering designs would be made in the first year of the project, undertaken by consultants selected via competitive bidding following a process of pre- qualification. Construction would be the subject of international competitive bidding (ICB) following a process of pre-qualification. A draft of the request for pre-qualification and the terms of reference for road design were agreed during negotiations (para. 3.1 (g)). A Schedule of Monitorable Actions associated with road design was also agreed at negotiations (para. 3.1 (g)). DINCAP would procure the road maintenance equipment following ICB. Road maintenance and the works of minor improvement would be undertaken by the JVLs, to which the MOPC/DCV would make available the machinery and equipment provided by the project. The DCV would define the modus operandi by which the JVLs would obtain and administer their resources.

Institutional Development Component

2.40 The cost of the component would be US$5.1 million, including contingencies (6.5% of total costs), of which US$1.3 million would be for investment including the acquisition of vehicles and equipment, training and technical assistance.

2.41 The responsibility for project management would lie with MAG, which would rely on DINCAP for overall project coordination including inter-ministerial relations, project accounting, management of the Special Account, preparation of SOEs and major procurement. UCTAP would operate at the level of the project area, and MAG would create by Decree new local regional administrative units necessary for project implementation. These would include: (a) the UCTAP; (b) the CICAR, to channel research and extension services to be delivered under the project; and (c) the CRAE, to ensure coordination of all environmental protection-related project activities. A Regional Operational Committee (COR) would be established to encourage and promote inter-institutional cooperation at the regional level.

2.42 The new units will need to coordinate a large number of institutional actors. Since institutional weakness is an acknowledged risk, a systematic institutional capacity analysis (ICA) of the intended implementing entities was carried out during project preparation and loan processing. The ICA led to the identification of institutional capacity gaps (ICGs) which have been the basis for the design of institutional development inputs. These inputs have been included either in the respective project components or in the Institutional Development Component (IDC). The institutions and their capacity gaps are described in Annex 4.

2.43 The component has been designed to provide inputs necessary to bridge the identified capacity gaps, and includes: (a) government decisions that are reflected in project conditionality; (b) specialist assistance to bridge those capacity gaps that require the introduction of "management and administrative technology" into entities where the gaps have been identified, or for newly-created entities such as UCTAP; (c) training activities to bridge identified skill gaps; and (d) financing for incremental recurrent costs, in particular - 20 - for the functioning of UCTAP. The component would also include the two special assessment studies designed to capitalize on the experience gained in the implementation of pilot activities (i.e., catchment area management plans/FOCORN, and pilot agricultural credit).

2.44 The component includes 306 man-months of specialist assistance, of which 261 man-months (208 of local consultants and 53 of international) are assigned to the different components. The remaining 45 man-months (20 local and 25 international) are assigned to the UCTAP for the strengthening of the coordination and overall management functions. Three consultants would begin the implementation of the component. An organization specialist would be hired as soon as possible for a period of 18 months. He would assist with the establishment of the inter-institutional network agreed for project implementation, assisted by: (a) a specialist in financial administration/accountant; and (b) a monitoring and evaluation specialist.

Pilot Agricultural Credit Component

2.45 Larger farmers in the project area have reasonably good access to formal sources of credit. The BNF and private banks normally require loan collateral of land or real estate secured with a mortgage. This discourages smaller loans, as the fixed cost for the borrower of providing this collateral is substantial. Illustrative farm models show that most small farmers with holdings of less than 20 ha are unlikely to qualify for loans of more than US$2,000 equivalent. It thus seems certain that farmers in this category will not gain access to BNF or private banks for their credit needs. For this reason, the project would finance a special intervention to provide credit to these farmers. Some 5,500 small farmers make up this target group, and they represent about 60% of the farmers to be directly reached by the project. At present, only the Smallholder Credit Agency (Credito Agricola de Habilitaci6n - CAH) operates successfully with farmers of this size.

2.46 A description of CAH's structure and operations is included in Annex 3. Its primary role is to provide supervised credit and technical assistance (TA) to the smallest farmers who cannot gain access to more formal sources of financing. In its early years, CAH gained a reputation for inefficiency and political patronage, but since 1989 the Government has given CAH new management and budget resources to expand its programs. To operate more efficiently, CAH is beginning to lend to cooperatives and to individuals grouped in the pre-cooperative form of an Agricultural Credit Users' Association (Asociaci6n de Usuarios de Credito Agricola - AUCA).

2.47 The component would cost US$8.8 million, including contingencies (11.1% of total project costs). Support to CAH would include US$0.6 million of investment which would finance the acquisition of equipment, training and technical assistance, and US$1.0 million of operating costs.

2.48 The project would include investments by small farmers in productive activities. The Bank would finance 70% of individual sub-projects, up to a limit of US$5.0 million, in a pilot credit program. In order to receive credit, farmers would have a farm development plan with conservation/resource management actions agreed with UCTAP and CAH. Farmers receiving credit would be expected to comply with the restrictions imposed - 21 -

by the existing and any future laws affecting land use, as well as with the stipulations of the farm development plan and the catchment area development plan. As a condition of disbursement for the credit component, CAH would provide evidence that: (a) its staff assigned to the Project had received adequate training to carry out this part of the project, including environmental assessment and that its operational procedures are appropriate to carry out this environmental requirement (para. 3.3 (d) (i)); and (b) it had adopted an accounting system adequate to keep project accounts, prepare SOEs, and control the arrears in the project sub-loan portfolio (para. 3.3 (d) (ii)). The project would also finance US$0.5 million of equipment, vehicles and TA to strengthen CAH's operational capability in the project area, to improve its central administration, and define the existing legal and operational constraints and disincentives to formal lending to small farmers. CAH would need training to adopt environmental assessment practices in its review of all farm plans it finances in the project area. Draft terms of reference for those studies and technical assistance to be completed in the first two years of the project were agreed during negotiations (para. 3.1 (h)).

2.49 Lending Terms. The MH, as the representative of the Borrower, would pass the credit funds to CAH under the terms specified in a Subsidiary Grant Agreement (SGA). The draft SGA and the matters to be included in the Credit Regulations were agreed upon during negotiations (para. 3.1 (i)). The entry into effect of the SGA would be a condition of effectiveness of the proposed loan (para. 3.2 (c)). In order to improve transparency, the funds to be provided through the SGA would be included in the Government's annual budget allocation for CAH. During negotiations it was also agreed that CAH would take all such actions as necessary to limit the position of its outstanding loans affected by arrears of more than 90 days to 10% of its total loan portfolio as of September 30 of each year (para. 3.1 (j)). The Government would take the foreign exchange risk and repay the Bank's loan. As a condition of disbursement, CAH would provide evidence that its operational procedures and the Credit Regulations had been modified to incorporate the necessary environmental safeguards and provisions into its lending practices, including the need for a farmer to provide a farm development plan consistent with these practices prior to the review of the sub-loan application (para. 3.3 (d) (iii)).

2.50 On average, CAH finances about 55% of the investments and inputs made by its farm clients in the project area. CAH financing of farm and non-farm clients would be limited to 70% of their sub-project costs. The Bank would reimburse CAH for 100% of qualifying sub-loans under the Statements of Expenditure (SOE) procedure. Sub-loans to individuals are expected to average US$1,000 each and would be limited to a maximum of US$1,700. Sub-loans to AUCAs and cooperatives would be limited to US$27,000 and US$82,000, respectively.

2.51 Lending Rates. Although CAH is legally free to set market-based lending rates, in practice it follows the guidance of the Government. The latter maintains the lending rate for official banks positive in real terms, but substantially below the rates (an average of 31% in 1992) charged by private banks, which are still subject to the high reserve requirements of the BCP. At present, CAH uses a uniform lending rate of 23%, compared to an average current commercial bank deposit rate of 21% and an inflation rate of 15% over the last 12 months (as measured by the Consumer Prices Index). An analysis of CAH's operating cost structure and its plans to expand its loan portfolio show that CAH could - 22 - probably eliminate its operating deficit if it charged lending rates similar to commercial banks. While the project should pursue this long-term objective of charging market rates, this may not be consistent with the Government's current policy of transition. During negotiations it was agreed that CAH would on-lend Bank funds under the project at interest rates which would always exceed the higher of the average commercial bank deposit rate or the previous twelve months' domestic inflation rate, as measured by the Consumer Prices Index (CPI) (para. 3.1 (k)).

D. COSTS AND FINANCING

Project Costs

2.52 The total baseline project costs have been estimated at US$72.0 million. Physical contingencies, at 3.2% of total baseline costs, and price contingencies, at 6.7% of total baseline costs, increase the total estimated project costs to US$79. 1 million, including taxes and duties which are estimated at US$4.6 million. Project costs are described in detail in Annex 7.

Financing

2.53 A Bank loan of US$50.0 million equivalent would finance 67% of total project costs, net of taxes and duties. Bank financing would cover 82% of foreign exchange expenditures and 54% of local costs. Project beneficiaries under the pilot credit component and FOCORN sub-component would finance about US$2.1 million and US$5.0 million, respectively, of on-farm investments. Table 2 shows the project financing plan by project component. Eligible expenditures for the early phases of project implementation from December 31, 1993, to the date of loan signing would be considered for retroactive financing, up to a maximum of US$1.0 million.

Table 2. Project Financing (US$ million)

Components IBRD Government Producers Total Agricultural Development 26.6 14.8 5.0 46.4 Indigenous Communities 1.2 2.2 - 3.4 Infrastructural Development 12.5 2.9 15.4 Institutional Development 3.5 1.6 - 5. 1 Pilot Credit 6.2 0.5 2.1 8.8 Total 50.0 22.0 7.1 79.1

Procurement

2.54 During negotiations agreement was reached with the Government that the procurement of goods and services financed under the project would be undertaken in accordance with Bank guidelines (para. 3.1 (1)). International Competitive Bidding (ICB) - 23 -

would be carried out using the Bank's standard bidding documents. The procurement policies and procedures of the Government were the subject of a procurement review carried out by the Bank in January, 1992. Comments on this procurement review have been communicated to the Government and would be closely monitored during project supervision. The review also found that procurement procedures are cumbersome, and recommended that procurement service support be provided to the project to reduce delays.

2.55 The review and approval of bid documents and procedures, including bid evaluations and contract award proposals, is the responsibility of the Comptroller-General (Contraloria-General de la Naci6n - CGN). Formerly a branch of the Ministry of Finance (Ministerio de Hacienda - MH), the CGN is now an independent agency that reports directly to the Senate, and the Comptroller-General has Ministerial rank. Paraguayan tendering procedures are governed by law dating from 1909. This has frequently been modified but not codified. The law as it now stands contains a number of provisions for public sector procurement which are incompatible with Bank guidelines and procedures, particularly where ICB is concerned. As agreed during negotiations, for Bank procedures to prevail, specific reference to the differences between the Bank's requirements and Paraguayan bidding procedures has been made in the Loan Agreement (para. 3.1 (1)). The signed loan agreement will require Congressional approval which, once received, gives it legal status in Paraguay and the Bank's guidelines would prevail. A legal opinion confirming this would be a condition of effectiveness of the loan (para. 3.2 (d)).

2.56 The following provisions have been included in the loan agreement to ensure full compliance with the Bank's procurement policies:

(a) foreign firms would not be obliged to enter into joint ventures with local firms for carrying out civil works, supply and erection of electro-mechanical equipment, or consulting services; (b) the application of Bank criteria of "lowest evaluated bidder" would be made for bid evaluation; (c) foreign bidders would be allowed to participate in Local Competitive Bidding (LCB) for goods and works; (d) no prior registration of bidders would be required; (e) price adjustments for equipment would be allowed not only when these changes exceed 15%; (f) the selection of consultants would be in accordance with Bank guidelines, and would not be treated in the same manner as when contracting civil works contractors; (g) a minimum of three bids would not be required; (h) bidders would not be required to legalize bid documents with consulates, except when awarded the contract; and (i) the use of local personnel would not be imposed on foreign contractors, except for unskilled labor. - 24 -

2.57 The proposed procurement arrangements are summarized in Table 3. The procurement of works includes the construction/rehabilitation of rural roads and small buildings. Feeder road construction totalling about US$13.2 million (about 17% of project cost) would be procured in lots estimated to cost US$1.0 million or more through ICB, including the prequalification of contractors. Other contracts for works, consisting mainly of small office buildings, stores, etc., estimated to cost US$1.9 million in aggregate, would be small in value; the largest contract would likely not exceed US$500,000. These works would be procured through LCB procedures acceptable to the Bank.

2.58 Goods. Road maintenance equipment and vehicles estimated to cost US$2.9 million would be procured in packages valued at not less than US$200,000 through ICB. Contracts for other equipment (e.g., office and laboratory equipment, computers, agricultural equipment) estimated to cost US$25,000 but less than US$200,000 and not exceeding US$1.0 million in aggregate would be awarded through LCB. Contracts for miscellaneous items of equipment and supplies, etc., valued at less than US$25,000 each and not exceeding US$0.4 million in aggregate would be awarded on the basis of comparison of price quotations obtained from at least three eligible suppliers. Ex-ante review of contracts for goods and works would cover 83% of Bank-financed contracts.

2.59 Services. The procurement of services would be carried out in accordance with the Bank's guidelines for the use of consultants. Training, which would cost about US$3.7 million, would include overseas scholarships as well as the provision of local short courses and seminars. Studies and research activities, which would cost about US$3.4 million, would include agricultural and forestry research and experiment programs, land surveying and land-use planning. Technical assistance, which would cost about US$5.8 million, would include the provision of extension and technical assistance to producers and the use of short- and medium-term specialists.

2.60 Grants under the FOCORN and sub-loans from CAH under the pilot credit component totalling US$10 million would be used by producers to supplement their own resources in making on-farm investments in resource conservation and productive activities. Producers would procure the necessary goods and services, including agricultural inputs, contractors' services and small-scale works, in accordance with normal commercial practices acceptable to the Bank, requiring awards to be made on the basis of the solicitation of price quotations from at least two eligible suppliers/contractors. The individual amounts would be small, limited to a maximum of US$1,700 for sub-loans and US$2,500 for grants.

2.61 All procedures, documents, pre-qualifications, bid evaluations and contract awards for ICB procurement of goods and works, and for procurement of consulting services costing US$30,000 equivalent or more, would be subject to prior review by the Bank. For consulting services of less than US$30,000 (and not exceeding US$1.0 million in aggregate) contracts would be signed based on a model contract and terms of reference previously agreed with the Bank. The audit terms of reference would ask the auditors: (a) to certify that procurement had been carried out using the bidding documents agreed with the Bank and that the procurement documents presented to the Bank for prior review were representative; and (b) to carry out a physical audit of actions taken under the project. The Bank would review LCB and local shopping procurement procedures on an ex-post basis by sampling, which would aim for a minimum coverage of 1:20. The above-mentioned review procedures - 25 -

would provide a prior review coverage of about 90% of all Bank-financedcontracts for goods, works and consultingservices.

Table 3. Summary of Proposed Procurement Arrangements (US$ million includingtaxes and duties)"'

Procurement Method Project Element ICB LCB Other NBFZ' Total

1. Works 1.1 Constructionand 1.9 (1.5) 1.9 (1.5) rehabilitationof offices and other buildings 1.2 Road rehabilitation 13.2 (10.4) 13.2 (10.4)

2. Goods 2.1 VehicLes 1.7 (1.6) 1.7 (1.6) 2.2 Road maintenance 1.2 (1.2) 1.2 (1.2) equipment 2.3 MisceLLaneousequipment 1.0 (0.9) 0.4 (0.4) 1.4 (1.3) and materials

3. Services 3.1 Training 3.7 (3.6) 3.7 (3.6) 3.2 Studies/research 3.6 (3.4) 3.6 (3.4) 3.3 Technicalassistance 5.8 (5.5) 5.8 (5.5)

4. Other expenditures 4.1 Operatingexpenditures 20.7 (11.5) 20.7 (11.5)

4.2 Land acquisition 8.8 () 8.8 ()

4.3 FOCORN grants 5.0 (5.0) 5.0 (-) 4.4 Pilot credit sub-loans 5.0 (5.0) 5.0 (5.0)

4.5 Producers 7.1 () 7.1 (-)

TOTAL 16.1 (13.2) 2.9 (1.5) 44.2 (35.3) 15.9 (-) 79.1 (50.0)

1/ Figures in parenthesesare the respectiveamounts to be financed by the Bank loan. 2/ NBF: non-Bank financed.

Disbursementsand the Special Account

2.62 Loan proceeds would be disbursed over eight years, in line with the standard disbursementprofile for Bank-supportedagricultural projects in Paraguay. The allocation of the proposed loan and the disbursementpercentages are summarizedin Table 4. A Special Account for Bank disbursementswould be establishedin the BCP with an initial deposit of US$2.25 million; this would be adequate to cover the average four-monthflow of disbursementsexpected during the project, not includingpayments to be made directly from the loan account. It is anticipatedthat large payments for the contracts awarded under ICB - 26 - would be made directly by the Bank. Bank disbursements to replenish the Special Account would be made on the basis of SOEs against contracts which would not require the Bank's prior review. All other expenditures would be fully documented. The relevant documentation in support of SOEs would be retained by UCTAP, and would be made available to the appropriate auditors and Bank review missions. The estimated schedule of Bank loan disbursements is shown in Annex 8.

Table 4. Allocation and Disbursement of the IBRD Loan

Percentage of Amount of Loan Allocated Expenditure Category (US$ million equivalent) to be Financed 1. Civil Works and Construction 11.9 79 2. Goods 4.1 95 3. Services 12.5 97 4. Other Operating Costs, personnel 11.5 55 Advancesunder: FOCORN 5.0 100 CAH Credit 5.0 100 Total 50.0

I/ Average:expenditures will be financedon a decliningbasis.

E. ORGANIZATION AND IMPLEMENTATION

Project Management

2.63 Based on past Bank experience, the project would aim at decentralizing decision-making and project administration to the regional level. Along those lines, decentralized administration, supported by the systematic participation of the beneficiaries themselves, would facilitate achievement of intended development objectives.

2.64 Project management responsibility would belong to the MAG, which, under the overall coordination of DINCAP, would rely on three new administrative and technical units - UCTAP, CICAR, and CRAE (para. 2. 11) - to implement the project at the regional level. MAG would establish these units in the project area and give them local autonomy to be more effective. DINCAP would be responsible for the overall inter-agency coordination and administration of the project. Provisions have been made under the project to support project start-up by strengthening DINCAP's implementation and monitoring capacity. During project preparation, an institutional assessment and proposed Action Plan was developed by independent consultants. As a condition of loan effectiveness, DINCAP would carry out phase one of the referred Action Plan. Continuation of the implementation of DINCAP's Action Plan would be supported by the project (para. 3.2 (e)). - 27 -

2.65 The establishment of UCTAP, CICAR and CRAE would be made through a Decree. A further Decree would describe new functions for existing administrative units of MAG involved in project implementation, including the required corresponding staff. The drafts of both Decrees were agreed at negotiations (para. 3.1 (m)). Their entry into effect would be a condition of effectiveness (para. 3.2 (f)). The appointment of qualified professional staff to head UCTAP, CICAR and CRAE, and the adoption by UCTAP of an accounting system adequate to control project costs and prepare SOEs, would be conditions of effectiveness of the proposed loan (para. 3.2 (g) and (h)).

2.66 To ensure close cooperation with other Government entities, inter-institutional agreements (convenios) would be entered into between MAG - MSPBS - INDI; MAG - MEC - INDI ; MAG - INDI; INDI - IBR; MAG - IBR; MAG - CAH; and MAG - Ministry of Industry and Commerce (MIC). Drafts of these agreements were agreed at negotiations, (para. 3.1 (n)) and their entry into effect would be a condition of effectiveness of the proposed loan (para. 3.2 (i)). Formal agreements would also be entered into between MAG and the project area Municipalities during project implementation; a draft of the model agreement was agreed at negotiations (para. 3.1 (n)). MAG has prepared a draft Management Services Agreement with UNDP for project support services, particularly to UCTAP. CICAR and CRAE in their administrative functions, including special emphasis on procurement procedures. The format and content of the Agreement was agreed at negotiations (para. 3.1 (o)), and its entry into effect would be a condition of effectiveness of the proposed loan (para. 3.2 (j)).

2.67 UCTAP would be strengthened institutionally by a Regional Operational Committee (COR) to promote inter-institutional harmony at the regional level. Relationships would be structured directly from UCTAP's area coordinators to MAG central or decentralized entities, as day-to-day operations warrant. Evidence that the COR had been duly established would be a condition of effectiveness of the proposed loan (para. 3.2 (k)). The administration and finance coordinator would ensure adequate management of accounting, budgeting, personnel and legal aspects. Other entities would provide technical support to UCTAP for special, ad hoc services.

Monitoring. Supervision and Evaluation

2.68 Chronograms of the main activities of the five components of the project were agreed upon during negotiations (para. 3.1 (p)); these form the basis for the Schedule of Monitorable Actions (Annex 9) and for the Supervision Plan (Annex 10), which includes a mid-term review.

2.69 The responsibility for project monitoring and evaluation (M&E) would be undertaken by the Planning Directorate of the MAG (Direcci6n General de Planificaci6n - DGP/MAG). The staffing and support requirements of the M&E unit was agreed upon at negotiations (para. 3.1 (q)).

2.70 Reporting requirements have been designed to assist with the submission of annual and semi-annual progress reports, the mid-term review, and the ex-post evaluation of the project. Project performance indicators and measures of project impact (Annex 9) would guide possible mid-course adjustments. In order to capitalize on the experience gained from - 28 - the implementation of the pilot activities (i.e., FOCORN, Pilot Agricultural Credit, and catchment area management plans), special assessment studies would be carried out under the overall coordination of UCTAP. TORs for the assessment studies would be agreed upon during the mid-term review.

Accounts, Audit and Reporting

2.71 DINCAP would have the overall responsibility for the coordination and administration of the project. UCTAP, CICAR and CRAE would incur both operating and investment costs with respect to their own establishment and operations. These and other entities would submit their requests for reimbursement of project expenditures to UCTAP, which would maintain separate project accounts and records for each project sub-component and prepare SOEs. Supporting documents provided by the various entities would be maintained by UCTAP and made available to visiting Bank missions and independent auditors, who on their judgement would make field visits to these entities for the purpose of the overall audit. A standard chart of accounts would be prepared for the project.

2.72 The financial administration of the FOCORN would be the responsibility of the MAG through UCTAP.

2.73 Project accounts (including the Special Account) and SOEs would be audited annually in accordance with appropriate auditing principles. The audit terms of reference were agreed upon during negotiations (para. 3.1 (r)), and it was also agreed during negotiations that the GOP would hire independent auditors acceptable to the Bank, to be financed from the proceeds of the loan (para. 3.1 (s)). The independent auditors would give an opinion on compliance with the Bank's procurement guidelines and procedures. Certified copies of these audits would be submitted to the Bank no later than six months after the end of each fiscal year.

2.74 It was agreed at negotiations that the UCTAP would present to the Bank, no later than the end of June of each year, its draft Annual Operating Plan (POA) for the following calendar year (para. 3.1 (t)). This draft would be subject to the Bank's review and approval. It was also agreed at negotiations that, at the end of each year, the UCTAP would produce a Progress Report, and in the middle of each year an Interim Progress Report, for submission to the Bank; these would be provided to the Bank no later than January 31 and July 31, respectively (para. 3.1 (u)). The Progress Reports would provide the basic information and data for supervision missions and interim reviews. It was also agreed at negotiations that annual reviews would be carried out jointly by the Bank and the Gvoernment, before November of each year, and that an interim review would be carried out in November 1997, the subject matter of which is defined in the Annexes to the Implementation Letter (para. 3.1 (v)). - 29 - F. BENEFITS AND RISKS

Benefits

2.75 The project has been designed to initiate a process of change in the use of natural resources in the project area. It is probable that deforestation will continue in areas of cultivable soils. The project is not designed directly to slow the rate of deforestation or to define limits on the eventual equilibrium level of cultivated land vs. natural forest. The project "philosophy" is that an improvement in land use will ultimately come from a combination of incentives and restrictions. The incentives must come mainly from an increase in output, productivity and net farm income, and the public sector must play a catalytic role in achieving this. As described above, in paras. 2.6 and 2.7, the project represents the first phase of a major initiative to alter radically the use of natural resources in agriculture. The restrictions would follow later from the imposition of land use and conservation criteria, based on: (a) the agro-ecological zoning exercise for the whole of the Eastern Region and associated legal and policy studies (currently in progress under the first Japanese PHRD grant and the LURP); and (b) the Watershed Protection Master Plan and associated studies (currently in progress under the second Japanese PHRD grant). This would be the subject matter of later projects, and the dialogue would begin with the review of the results of the work under the first grant, as described in para. 2.15.

2.76 The benefits of the project would result from:

(a) short-, medium- and long-term financial benefits realized from the adoption of on-farm investment plans;

(b) medium- and long-term economic benefits accruing from the maintenance of the productive resource base; and

(c) improved management of protected areas, stabilization of indigenous people, improved living conditions in the rural areas, and institutional development.

2.77 In order to examine the impact of the project proposals at the farm level and to analyze the need for both credit resources and support from the FOCORN, seven farm models were designed representing: (a) small (15 ha) and medium (35 ha) mixed crop/dairy enterprises; (b) small crop-producing holdings of 10 ha (center-north) and 15 ha (south-east); (c) medium-sized (35 ha) crop-producing farms, with and without their own agricultural machinery; and (d) medium-sized crop-producing farms (155 ha) defined as being in a transition stage towards large, commercial-scale operations. The models are described in the Technical File.

Risks and Uncertaintv

2.78 Institutionalweakness is an acknowledgedrisk of the project. The project's institutionalstructure has been carefullydesigned, but in practice will demand considerable adjustmentto establishedpatterns of behavior in multiple institutionswhere over- centralizationand control have been more important in the past than efficiencyand results. The institutionalstructure will include an active program of institutionaldevelopment, and - 30 - monitorable indicators will allow progress to be closely followed during supervision and mid- term review. The project aims to slow down and ultimately to provide the basis for the reversal of a depredatory approach to natural resource use. This will depend on a consistent message from the government and the provision of a framework of incentives and penalties. In some cases, short-term political expediency may run counter to the requirements of the necessary long-term strategic approach. The work described in para. 2.15 concerning agro-ecological zoning and accompanying legal and policy instruments would be the subject of review, on its completion, by the Bank and GOP, and agreement would be reached on the appropriate mechanisms and timetable for its implementation.

Environmental Impact

2.79 The environmental problems being encountered in the project area as the result of the rapid and uncontrolled expansion of agriculture at the expense of the natural forest cover are described above in para. 1.7 - 1. 11. The existing model of land use is not sustainable, and only by combining appropriate systems of agricultural production in harmony with the management of natural resources can an equilibrium be achieved. In broad terms, what is good for the environment is also good for a model of agricultural development which is sustainable in the long term.

2.80 The project has an Environmental Assessment category A. The terms of reference and work program for the Environmental Assessment (EA) were prepared during the pre-appraisal by Bank staff in conjunction with staff of the SSRNMA and members of the project preparation team. The EA was carried out by a team of consultants and was presented to the Bank in June, 1992. The summary of the EA, which was distributed to the Board on September 17, 1992, is presented in Annex 12. The full EA report is available in the Technical File.

2.81 The EA followed methodology and guidelines appropriate to a regional environmental assessment' which considered the project as a whole as presented in the GOP's project preparation document. The EA explicitly recognizes that the project aims at reversing the present abuse of natural resources by promoting diversified and sustainable production systems. The EA made several recommendations concerning the design of the project, which are summarized as follows:

(a) activities of research in agriculture and forestry should be combined, and agro- forestry and pasture-forestry activities should be included; this recommendation was adopted;

(b) the enforcement of environmental provisions as defined in law should be kept separate from the functions of extension and promotion; this recommendation was accepted;

1. IBRD EnvironmentalAssessment Workbook, Vol. 1, pp. 12-16. - 31 -

(c) the rural roads component originally contemplated the abandonment of some stretches of road which presented the worst erosion hazard and their replacement by new roads designed to follow the watershed. The EA team considered that such an approach would not necessarily represent an improvement, as many old roads would not in practice be abandoned and might even become worse erosion problems: the recommendation was adopted whereby each stretch of road would be re-examined and, wherever possible, renovated using erosion control and water-check measures; only where necessary would roads be abandoned, and in these cases they would be reclaimed through proper closure and, where appropriate, reforestation;

(d) the existing law provides for individual landowners to maintain at least 25% of their land in forest; this figure has been exceeded in the aggregate on a regional basis, and the EA recommended that all remaining forest in the project area should be declared Protective Forest. This recommendation was not adopted. There are no available means to enforce such a declaration, and it would penalize those landowners who are following proper practices and who have remaining forested land in the process of development; and

(e) the program for indigenous land titling should precede delimitation of any other land use in the project and should be initiated by mapping the entire indigenous population in the project area by ethnic group, including all land presently controlled or owned by indigenous people and the projected expansions. Following this, a "no-innovation" measure for the expansion areas should be solicited from the GOP, to protect indigenous people from expulsion by landowners or invasion; this recommendation was adopted.

2.82 The actions proposed under the project are intended to address directly many of the key issues facing agriculture in the area. The project area was at one time almost wholly under forest, and agricultural development has by definition been at the expense of the natural forest. This is a dynamic process, and much of the conversion of forested land to agriculture has occurred in the last few years. The improvement of roads under the project, by facilitating access, may have a marginal impact on the rate of conversion of forest land, but in all cases the forested land in question is residual; road improvements will not have the effect of providing access to hitherto inaccessible large tracts of forest. The pilot credit component may similarly have a marginal impact on residual forest on individuals' holdings, but the benefits of improved land management which would accrue from the project are considered to outweigh by a wide margin the potential impact of removal of residual forest.

HI. SUMMARYOF AGREEMENTS.AND RECOMMENDATION

3.1 The followingagreements were reached at negotiations:

(a) no later than June 30, 1994, a joint review would be carried out by the Bank and the Governmentof the technical basis for agro-ecologicalzoning and the accompanyingbody of legal and policy instruments;and agreement reached on - 32 - the appropriatemechanisms and timetablefor the implementationof agreed proposals to be included in an Action Plan to be furnished to the Bank no later than December 31, 1994 (para. 2.15);

(b) the Governmentwould provide a resettlementplan, includinga compensation plan, in the event that it were to undertake a resettlementaction affectingthe populationliving within the boundariesof the newly-definedSan Rafael National Park (para. 2.23) or the area to be expanded for the benefitof indigenouspeople (para. 2.32);

(c) the draft terms of reference for the preparatory studies for new national parks (para. 2.23);

(d) the draft managementplans for the Kyri'y reserve and the Nacunday protection area (para. 2.23);

(e) the drafts of the Regulations,the Operating Manual and the Model Contract of the FOCORN (para. 2.29);

(f) the draft legal instrumentsfor land acquisitionand regularizationof tenancy for indigenouspeople (para. 2.32);

(g) the request for pre-qualificationby consultantsand the terms of reference for road design, and a Scheduleof MonitorableActions associated with road design (para. 2.39);

(h) the Terms of Reference for studies and technical assistance to be undertaken by CAH in the first two years of the project (para. 2.48);

(i) the SGA and the CAH Credit Regulations(para. 2.49);

(j) CAH would take the actions necessary to limit the portion of its outstanding loans affectedby arrears of more than 90 days to 10% of its total loan portfolio (para. 2.49);

(k) CAH would on-lend Bank funds in the pilot credit program at rates of interest exceeding the higher of the average commercialbank deposit rate or the previous twelve months' domestic inflationrate as measured by the CPI (para. 2.51);

(1) procurement under the project would be undertaken in accordancewith the Bank's guidelinesand using the Bank's standard bidding documents(para. 2.54); and that specific reference would be made in the Loan Agreement to differencesbetween the Bank's procurement requirementsand Paraguayan procedures (para. 2.55);

(m) the Decrees (i) establishingUCTAP, CICAR and CRAE; and (ii) describing new functionsfor MAG administrativeunits (para. 2.65); - 33 -

(n) the agreements (convenios) between MAG and MOPC, MSPBS, MEC, INDI, IBR, CAH and MIC; and the model agreement between MAG and the project area Municipalities (para. 2.66);

(o) the draft Management Services Agreement with UNDP (para. 2.66);

(p) the chronograms of the main activities of the five proposed project components (para. 2.68);

(q) the staffing and support requirements of the monitoring and evaluation (M&E) unit to be established in the DGP/MAG (para. 2.69);

(r) the audit terms of reference (para. 2.73);

(s) the GOP would hire independent auditors acceptable to the Bank (para. 2.73);

(t) the UCTAP would present its draft Annual Operating Plan to the Bank (para. 2.74);

(u) the UCTAP would produce Annual and Interim Progress Reports to be submitted to the Bank no later than January 31 and July 31 of each year (para. 2.74); and

(v) the timing and scope of the annual reviews and the mid-term review.

3.2 The following would be conditions of effectiveness of the proposed loan:

(a) the entry into effect of the SGA governing the transfer of loan proceeds to INDI (para. 2.30);

(b) the entry into effect of the contractual arrangement between INDI and IBR (para. 2.32);

(c) the entry into effect of the SGA governing the transfer of funds from MH to CAH (para. 2.49);

(d) the legal opinion confirming the primacy of the signed loan agreement, approved by Congress, over other legal dispositions concerning public sector procurement (para. 2.55);

(e) evidence that phase one of DINCAP's Action Plan had been carried out (para. 2.64);

(f) the entry into effect of the Decrees: (i) establishing UCTAP, CICAR and CRAE (para. 2.65); and (ii) describing new functions for existing MAG administrative units, including required corresponding staff (para. 2.65); - 34 -

(g) the appointment of qualified professional staff to head UCTAP, CICAR and CRAE (para. 2.65);

(h) the adoption by the UCTAP of an adequate accounting system (para. 2.65);

(i) the entry into effect of the convenios to be signed between MAG and the project executing and cooperating agencies (para. 2.66);

(j) the entry into effect of the Management Services Agreement with the UNDP (para. 2.66); and

(k) evidence of the establishment of the Regional Operations Committee (COR) (para. 2.67).

3.3 The following would be conditions of disbursement;

(a) of the protected areas program of the forestry and environmental conservation sub-component, that the Government would provide to the Bank a resettlement plan, including a compensation plan, if it were to undertake a resettlement action affecting the population living within the boundaries of the San Rafael National Park (para. 2.23);

(b) of the FOCORN sub-component, that the fund and its account in the BNF had been established, and that the FOCORN Operating Regulations had been approved (para. 2.29);

(c) of the indigenous communities component, that INDI had adopted an appropriate accounting system to keep project accounts and prepare SOEs (para. 2.32); and

(d) of the pilot agricultural credit component: (i) that CAH had provided evidence of the training of staff with respect to environmental review of sub-loan applications (para. 2.48 (a)); (ii) that CAH had developed and implemented an accounting system to keep project accounts, prepare SOEs and control arrears in its project sub-loan portfolio (para. 2.48 (b)); and (iii) that the modification to the Credit Regulations and operational procedures incorporating the necessary environmental safeguards and provisions, satisfactory to the Bank, had entered into effect (para. 2.49).

Recommendation

3.4 Subject to the above conditions and assurances, the proposed project would be suitable for a Bank loan of US$50.0 million equivalent, repayable in twenty years, including five years of grace, with amortization on an annuity basis, at the Bank's standard variable interest rate.

January 31, 1994 - 35 - Annex 1

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

The Project Area: Location and Main Characteristics

1. The project area covers the Department of Alto Parana and that part of the Department of Itapuia lying north of the rio Pirap6, in Paraguay's Eastern Region. The project area covers some 2.0 million ha, about 5% of the total area of the country. The climate is humid sub-tropical and the project area has the highest rainfall in Paraguay, with an annual average of between 1,600 - 1,800 mm; the rainfall is reasonably well distributed throughout the year, with a drier period between June - September. Calculations of potential evapo-transpiration and analyses of the water-retention capacity of the soils of the area indicate that on average there is no soil moisture deficit in any month of the year in the project area.

2. The project area falls almost entirely within the watershed of the Parana river, into which drain 49 of its total of 50 river systems. The natural vegetation of the area comprises semi-moist Atlantic forest, open grassland (savannah), low-lying (i.e., floodable) areas, and scrub land.

3. Based on reconnaissance-level soil surveys and the USDA methodology-based classification of soils according to their appropriate use, a high proportion of the area is suitable for crop production. Soils in Classes I - IV are considered cultivable and capable of sustainable agriculture with ecologically-adapted crops. Soils of Classes V - VII are considered suitable for pasture, forestry and perennial crops or for certain specialized crops (e.g., rice). The distribution of land according to capacity of use in the project area is as follows:

Class Area (ha) % of total

II 1,243,280 62.2 III 205,460 10.3 IV 51,700 2.6 V 476,900 23.8 VI 12,380 0.6 VII 10,280 0.5 - 36 - Annex 1

4. The interpretation of satellite imagery acquired for project preparation and other estimates provide the following data on actual land use:

Area (ha)

Annual Crops: Soybeans!' 618,000 Cotton 101,000 Maize 208,000 Cassava 42,000 Others 28,000 Sub-Total 997,000 Perennial Crops: Tung 13,000 Yerba Mate 6,000 Citrus 4,000 Pastures 180,000 Sub-total 203,000 Natural forest 500,000 Natural grassland 150,000 Other use (urban, roads) 150,000

TOTAL 2,000,000

I/ Winter crops (wheat, barley, and others) are generally cultivatedin a rotation with soybeans.

5. The major part of the annual crops and some perennial crops are on Class II soils, distributed throughout the project area. The cropping pattern is dominated by soybeans on medium- and large-scale mechanized farms. The Class II soils derived from basalt rock, which occupy the center and east of the area in a band of 50 - 80 km in width parallel to the Parana river, are those preferred for soybean, maize, wheat and cassava production, whilst those derived from sandstone are preferred for cotton, maize and cultivated pastures.

6. The remaining natural forest is distributed in relatively small parcels throughout the project area. The only remaining large contiguous areas are in the Cordillera de San Rafael and in the north-east of the project area covering the catchment areas immediately adjoining the lake formed by the Itaipui dam. This latter area is mainly on Class II soil, which puts it at risk of indiscriminate incorporation into agricultural use. - 37 - Annex1

7. Potential Use. The Class II and III soils of the area are consideredthe best soils in Paraguay for their chemical and physicalcharacteristics. Their structure allows rapid absorption of rainfall, and this characteristicplus the high initial fertility after forest clearance have allowedthe rapid expansionof mechanizedagriculture. The basalt-derived Class II and III soils should be used in annual cropping with conservationpractices. Long- term pastures on these soils are not recommendedbecause of the risk of degradationvia invasionof broad-leavedweeds resulting from soil compaction. The Class III and IV soils should be dedicated to perennial crops and to reforestationwith native and exotic species. The sandstone-derivedClass II and III soils are more appropriatefor small farmer exploitationin both annual and perennial crops, and those of Class III and IV are the most appropriate for planted pastures. The Class V soils, occupyingone-quarter of the total area, are appropriate for cultivatedpasture and, where the clay sub-soil permits, for rice. - 38 - - 39 - Annex 2

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Forest Conservation and Agro-Forestry

Introduction

1. Forests and Deforestation. The natural forests of the project area are classified as "Sub-tropical Humid Forests" and form the western-most part of the Atlantic Forest biome, extending from southern Brazil to north-eastern Argentina. This ecosystem combines many tropical and temperate plants and animals, and is the most biologically diverse ecosystem in Paraguay. The forest is dominated by tall ( > 30 m) broad-leaved species, the more prominent of which include cedro (Cedrela sp.), guatambu (Balfourodendron riedelianum), incienso (Myrocarpus frondosus), kurupay (Piptadenia sp), petereby (Cordia trichotoma), and ybyraro (Pterogyne nitens). In Brazil, this forest type now covers less than 1% of its original range, and some observers (e.g., Fonseca, 1985) believe that this is the most endangered ecosystem in South America.

2. While relatively more of the Atlantic forest type can be found in Eastern Paraguay than in its neighboring countries, rapid colonization and agricultural development over the last twenty years have also depleted much of its range. In the project area itself, there were an estimated 1.3m ha of forest remaining in 1975, but by 1990 this had been reduced to about 150,000 ha. Since 1990, the already rapid rate of deforestation has accelerated. The law describes forested land as "underutilized" and therefore subject to expropriation for settlement purposes. Large landowners, who own most of the remaining forest land in the Eastern Region, have deforested their land in order to avoid the increased threat of invasion by landless people and/or expropriation which followed the end of the de facto government.

3. Although most of the deforestation in Eastern Paraguay is the result of mechanized land clearing on large private landholdings, there has also been substantial forest clearing by peasant colonists. Generally, forest clearing has been indiscriminate, with little regard to slope, soil type, land use category or natural water courses. This has resulted in serious on- farm soil erosion (especially sheet, gully and stream bank types) and soil degradation, and related declines in crop yields. Under the current farming practices in which all woody vegetation is cleared, farmers have also begun to experience wind damage to their crops and houses, shortages of fuelwood (the primary domestic energy source on small farms), and the loss of minor forest products which are important for the mixed farming system of the small farmer. Off-farm environmental impacts are also increasing. Sedimentation of streams is now considered a major and immediate threat to the region's hydro-electric projects, in particular to Itaipu. The cleared areas must be stabilized and protected, and rational judgments reached concerning the appropriate equilibrium between agriculture and preservation of natural forest. In this respect, time is of the essence. - 40 - Annex 2

4. Protected Areas. There has been little attempt by the government to protect forest areas in the Eastern Region, where less than 0.5% of the land area is classified as being either national park or forest reserve. Moreover, because there is no park legislation, all parks are instituted by decree and exist in name only. In the project area, only 2,150 ha have been declared protected forests (Yacuy, Nacunday, and Kyri'y). Typical of most protected areas of Paraguay, these are "paper reserves" because the land is not state owned and the Constitution guarantees the right to private property. As a result, there has been no attempt by the government to manage these reserves. Because all of the remaining (and rapidly disappearing) forest land in the project area is privately owned, one important strategy will be to encourage private landowners to protect forest areas on their land. In view of the lack of a legal precedent for government regulation of private lands, and in the interests of ensuring good watershed and biodiversity protection, there is also need to bring under government control and management a substantially large section of the remaining forests in the Cordillera de San Rafael.

5. Timber Exploitation and Reforestation. The forestry sector has traditionally made an important contribution to the economy. In 1990, some 250,000 m3 of roundwood were processed. Although the export of unprocessed logs is prohibited by law, it is estimated that a further 600,000 m3 of logs are smuggled over the "frontera seca" with Brazil each year. Because of the lack of inventory data on forest areas, the effective life of the forestry industry can be only roughly estimated. Nevertheless, it is generally agreed that most of the remaining accessible forest areas have already been logged over. The conversion of the forest to agricultural use, however, has created a current over-supply of logs in the project area.

6. Two important factors militate against sustainable forest management by private landowners. First, the forests of Eastern Paraguay are situated on the best agricultural soils of the country and there continues to be an economic incentive for landowners to convert forest land to agricultural use after logging. Second, there is little perceived economic return to forest management because of the low value of standing timber, which is the result of the current over-supply of logs. As an indication of the low value given to forest cover, forest land currently sells for about half the price of cleared land.

7. Reforestation efforts have suffered from the excess supply of logs resulting from forest clearings. Private landowners have not seen any market signals that would suggest that timber plantations would be profitable. Furthermore, a previous Government program to encourage private plantation establishment through fiscal incentives failed because of problems in its implementation and corruption. Meanwhile, the recently-introduced changes in the country's tax code include provisions for fiscal incentives for reforestation. The private sector, however, does not feel that this will be sufficient to attract interest. On the other hand, once timber supplies from the natural forests run out, which is estimated to happen in about 10-15 years, private sector interest in tree planting should improve.

8. Forest Policy and Legislation. The main legal basis for forest exploitation and management in Paraguay is Forest Law 422 (C6digo Forestal) of 1973 and two supplemental decrees (Decreto 11,681/1975 and Decreto 18,831/1986). While this legislation theoretically provides an enlightened framework for good management and conservation, it is not - 41 - Annex 2 enforced. There are legal provisions for designating areas to be preserved, for requiring land owners to maintain 25% of their land in natural forest, and for prohibiting the clearing of natural vegetation from slopes greater than 15% or along waterways. However, since most of the remaining forest land in Paraguay is privately owned, the Forest Law is in direct conflict with the land-owner's constitutional rights, which provides for owner discretion on land use. In addition, the Forestry Service does not have the resources or the necessary guidelines to enforce the law. There is no current legal framework for national park establishment or for wildlife protection. This is a stated government priority, however, and draft legislation has been presented to Congress for approval. In brief, there is no clear policy on the development of the forestry sector.

9. In 1990, the German Government, through GTZ, offered to fund and lead the implementation, with FAO, of a Tropical Forestry Action Plan (TFAP) exercise in Paraguay. GTZ has since offered to implement the review, then called the "Plan Acci6n Nacional" (PAN), independently of FAO. The Sub-Secretariat of Natural Resources and the Environment (SSRNMA) will be responsible for implementation and, with GTZ technical assistance and funding, will establish a planning office for the two-year activity. GTZ has insisted that NGOs should have an active role in the process and that the final product would be a viable sector strategy, including agriculture and livestock, as well as forestry.

10. Institutional Framework. In 1989, the Government made an important expression of concern over environmental problems, such as deforestation, by establishing the SSRNMA in the MAG. The SSRNMA has a broad range of environmental responsibilities, including the protection of forests, wildlife, and national parks. The three directorates of the SSRNMA - the National Forest Service, the Directorate of National Parks and Wildlife, and the Directorate of the Environment - are to varying degrees understaffed, undertrained, and inadequately funded. A six-fold increase in the Secretariat's budget in 1991, however, was an encouraging sign that priority is now being directed towards natural resources.

11. Nevertheless, little priority has been given to on-the-ground presence and there is essentially no extension capacity within SSRNMA. In the project area, there are two district offices. In Alta Parana, the staff comprises one Ing. Forestal, five technical foresters, and three administrative staff. In the Itapua district office, the staff comprises one Ing. Forestal, five technical level foresters and one administrative officer. The efficient functioning of this already weak field capacity is further compromised by highly centralized decision-making procedures. The MAG's extension service, SEAG, has some 45 extension agents in the project area. Future agro-forestry extension activities should build upon that capacity.

12. Training and Research. In the project area, there are two Forest Technical Schools, each providing a 2-year technical training certificate. The Centro Forestal de Alto Parana (CFAP), which has in the past received Bank assistance, trains about 10-12 students each year. The Centro de Desarrollo Forestal (CEDEFO) in Itapua, which receives Japanese assistance and focuses more on timber technology, trains about 15 technicians each year.

13. A forestry engineering degree program was recently begun at the newly-founded (1990) Forestry College at the National University of Asunci6n (UNA). Its output is about - 42 - Annex 2

5-10 graduates each year. With only 8 professors, some part-time, there is little research capacity, and current activities are limited to a small enrichment planting trial.

14. Little research has been done on native tree species or on native forests. At CFAP, which has 168 ha of land, some species selection and production trials of exotic and, to a lesser extent, indigenous species have been initiated. At CEDEFO, which has about 400 ha of land, there are also some silvicultural trials of various species of exotic pine and eucalyptus. Except for the ad hoc work done by Peace Corps volunteers, no agro-*forestry research has been conducted.

15. International Assistance. There have been a number of projects in the past and several continue in the areas of forestry conservation, social forestry and natural resource management, supported by international, bilateral and non-governmental organizations, from which lessons have been drawn in project design. The main donors include GTZ (Germany), JICA (Japan), IDB, U.S. Peace Corps, Itaipu Binacional, and the Swiss Government. GTZ and the Peace Corps have been the most active in generating and testing agro-forestry technologies. The most successful agro-forestry program, which has provided useful data for project design, is that of the Centro de Promoci6n Campesina de la Cordillera (CPCC) located near Caacupe. So far, about 600 member farmers have integrated agro-forestry and forest management systems into their mixed farming systems, with promising results.

16. JICA has recently shifted its project emphasis from reforestation to forest management and enrichment planting, mainly for environmental reasons. Under their original reforestation program, native forests were being cleared to plant monoculture tree plantations of pine and eucalyptus, which in most cases is environmentally undesirable.

17. ItaipiI Binacional is currently planning its second ten-year watershed management and environmental program for the area of influence of the Itaipui Dam. It will spend 2.5% of its budget (i.e., about US$5 million per year) on environmental activities, which will include forestry and other natural resource management activities. With some ten years of work on native trees species and other biological studies in reserve areas, Itaip6 Binacional's experiences will be useful in the early implementation of the proposed project.

18. The Swiss aid agency is negotiating a five-year, US$2 million project to support the renovation of Puerto Bertoni (which is in the project area) into a Centro Nacional de Manejo de Recursos Naturales. The center would focus on research on sustainable agriculture development, and would include a higher level professional training program in natural resources.

19. Local NGOs. Environmental NGOs are relatively new in Paraguay: about ten have been formed over the last five years. The largest and best organized is the Fundaci6n Moises Bertoni (FMB), established in 1988 with assistance from The Nature Conservancy of the US. Its mission is to protect biological diversity through strengthening the Directorate of National Parks, promoting private protected areas, and promoting environmental education. Through its involvement with the protection of the Mbaracayu National Park, FMB has begun to develop experience with buffer-zone management. The foundation has also begun to develop incentives and methods for implementing forest reserves on private lands. -43- Annex 2

Project Description

20. Origin and Concept. One of the original ideas for a forestry component involved reforestation and forest management. Upon closer analysis of the problem, however, this concept proved inappropriate. Under the current policy and pricing environment, there is little incentive for landowners to participate. On the contrary, large landowners, who own most of the remaining forest land, are driven to deforest their land by the threat of invasion and expropriation. Clearly, proposals for large-scale reforestation activities would need to be preceded by a thorough analysis of the policy and legal issues that constrain the proper development of the forestry sector.

21. A number of project activities could help to lay the technical foundation for a future national forestry development project. The rationale is that, while there is little current incentive for (or interest in) reforestation, rapid deforestation will, within the next 5-10 years: (a) transform Paraguay from a wood exporter to a wood importer; and (b) have eliminated much of the seed source of the valuable native timber species of the country. A second phase of the proposed project could include a large-scale reforestation component, taking into account the probable future scarcity and higher prices of timber which would provide the incentive necessary to attract private investment to reforestation.

22. The need versus the practicality of setting up forest reserves in the few remaining forested areas is a complicated issue. Because all the remaining forested land in the project area is privately owned, one strategy would be to encourage private landowners to protect areas of forest on their own land. It may be unrealistic to believe that large areas of public lands, even if the country could afford to buy them, could be effectively protected from encroachment. On the other hand, there is no legal precedent for government-imposed management of forest reserves on private land, and experience in other areas of Latin America (e.g., Costa Rica) indicates that the surest way to guarantee the protection of natural areas is for the government to have full control over the land by owning it. In Paraguay, a mixture of these two concepts will probably be required. The participation of the Bank will be a key factor in helping the Government to redirect policy and legislation so that, rather than being encouraged to clear forest land, landowners willing to place their land under reserves would be provided with official protection from invasion and expropriation. At the same time, mechanisms could be structured to purchase land for national parks.

23. The immediate needs to stabilize farming and land-use practices will be addressed in the project by a strengthened extension program. Agro-forestry systems could play an important complementary role to ensure land-use systems compatible with farm sustainability needs as well as off-farm environmental stability needs. However, due to the novelty of agro-forestry systems in Paraguay, such an approach will require substantial research and training efforts. To avoid past mistakes of improper land use and wasteful forest destruction, improved environmental controls (fiscalizaci6n) will also be required as a necessary complement to an overall effort to improve natural resource management. Because environmental issues are not well understood by the population at large, there will also be a need for a more general program of environmental education. By improving environmental awareness, this activity would set the stage for the field implementation of the entire project. - 44 - Annex 2

24. Objectives and General Description. The overall objective of the forestry and agro- forestry activities of the proposed project is to protect natural vegetation and to improve the use of natural resources, compatible with agricultural development and environmental stability. The forestry activities would be closely integrated with the agricultural activities of the project and, hence, would be included under the same sub-components. The main forestry activities would include: Agro-ecological Extension and Training; Agro-ecological Research; Forestry Research and Germplasm Conservation; Protected Area Management; and Environmental Control.

25. Agro-ecoloaical Extension and Training would aim to ensure environrnentally- appropriate land use through careful farm- and community-level land capability planning. Technical assistance would be provided to assist some 7900 farm families to draw up land- use plans, and to monitor and control the implementation of the plans in accordance with existing and proposed legislation. The soil maps, land-use map, forest cover map and watershed protection master plan being prepared under the two Japanese PHRD grants will provide the baseline information needed to implement this activity.

26. Agro-forestry extension, as well as agricultural extension, would be an important activity of the land-use plans. Because this is a new land-use concept for Paraguay, emphasis would initially be given to the development and testing of workable models, the training of extension officers and the transfer of the new technology to farmers. Project research and extension staff would review suitable agro-forestry models. These would include successful models used in other parts of Paraguay and promising models used in neighboring countries. Examples would include windbreak planting, enrichment planting of degraded forest areas, establishment of erosion control hedges (trees and/or grasses) on cropland, conservation planting of trees along critical watershed areas, planting of live fencing, planting of fodder banks with leguminous tree species, bee-keeping with timber and citrus species, and planting of medicinal plants and yerba mate under the forest canopy. Depending on the level of adaptation required for the project area, some of the systems may be readily promoted based on experience while others will need further development and testing.

27. Extension would be carried out cooperatively by the existing, but strengthened, MAG extension service (SEAG) and by local NGOs and community groups. Training in agro- forestry methodologies would be needed for the extension agents and others responsible for promoting these systems of land use with farmers. As a first step, professional staff would be trained as trainers via a series of workshops, short courses (abroad and in-country) and MSc level training. These professional trainers would then be responsible for organizing a series of agro-forestry training sessions for two extension specialists in each of the 50 selected catchment areas (micro-cuencas). Specialists in agro-forestry systems would carry out the training sessions of the extension specialists and fine tune the training program. The training of the extension specialists would be conducted at existing research and training centers in the project area. Once trained, the agro-forestry trainers would put on periodic training courses for the extension agents in their respective catchment areas. During each year of the project, each of 150 extension agents would receive 10 days of training. This training would take place at the MAG agricultural and agro-forestry research centers in the project area. -45- Annex2

28. A media campaign would be employedto increase environmentalawareness of the importanceof forests and of natural resource management. This would provide a means to inform farmers of the opportunitiesoffered by the project and of improved land-use policies and legislation. Such a campaign would help to change the current laissezfaire attitude towards the destructionof forest resourcesto a more conservation-mindedattitude. Periodic ecologicalconservation messages would be prepared for broadcast over local radio and televisionstations and for publicationin local newspapers. Film strips on conservationtopics would be prepared for presentationat schools and other institutions throughoutthe project area.

29. Afro-Ecological Research would involve the developmentand testing of promising agro-forestrysystems. Research would be coordinatedby the MAG agricultural and agro- forestry research stations, and conductedon the MAG research stations in the project area, at the forestry centers (e.g., CRAE) and on-farm. Research would be conducted by a multi- disciplinaryteam of specialists. This approach of combiningon-farm and on-station research with a multi-disciplinaryresearch team is designedto take advantage of the controls possible on a research station while incorporatingthe practical lessons that can be learned at the farm level. The on-farm approach would help the researchers to understandbetter the holistic functioningand needs of the mixed farming systemsof the area, so that differencesin cultural identities may be included in research designs. By focusing on on-farm research, the work of technologytransfer would be facilitated becausethe researchers would be able to take on an extensionrole. On-farm research would also help to reduce project costs as the farmer could assume most of the maintenanceactivities.

30. In the 50 selected catchmentareas of the project area, a total of 800 ha of agro- forestry research plots would be establishedand monitored. For budgetary purposes, this would involve 5 plots (10 ha each) on each of the five MAG centers and 75 plots (10 ha each) on farmers' land. In practice, this could involve a larger number of farmers and smaller plot sizes. However, the entire farm would be included in the agro-forestry system because all production and consumptionfunctions of the farms are consideredto be integral parts of the system. Dependingon the site and vegetationconditions of the land made available for research, the research design for each plot would accommodateone or all of the followingtreatments: (a) interplantingof annual and perennial plants on contour lines; (b) enrichment planting of degraded forests; (c) silvo-pastoralmanagement; and (d) reforestation on deforested and degraded sites.

31. The project would provide for seven incrementalresearch staff (agro-forestry, forest management,soil conservation,and watershed managementspecialists) and their support and mobility, two research assistants, and a computer specialist and computer. Equipment and supplies, as well as subsidies for farmers willing to implementresearch on their fields, would be provided for establishingand maintainingthe research plots.

32. SilvicultureResearch and GermplasmConservation would begin long-term research into the silviculturalcharacteristics, growth rates and uses of native tree species, so that informationwould be availablewhen needed for large-scalereforestation. As a necessary complement, seed orchards, covering 10 ha and includingpopulations of about 50 native species, would be establishedthroughout the project area. This would help to ensure a future - 46 - Annex 2 source of seed for these valuable timber species, many of which are threatened by deforestation. Also with an aim to conserve germplasm for future generations, seed of superior specimens of native species would be collected and placed into cold storage. For educational purposes, a 5 ha arboretum would be established in the project area.

33. The activity would also seek to develop sustainable forest management systems and appropriate small-scale wood utilization technologies to give value to the remnants of forests on farmers' holdings. The aim would be to provide sufficient economic incentives so that farmers would maintain these forest areas as useful complements to their mixed farming systems.

34. Protected Areas Establishment and Management would focus on the establishment of a national park covering 78,000 ha in the Cordillera de San Rafael where some of the largest contiguous blocks of natural forests remaining in the project area are to be found. Protection of this forest area is important for watershed management of the greater catchment area, as well as for biodiversity conservation; however, the most important reason for its preservation is that its soils and slopes are wholly unsuitable for long-termnagricultural production and there are no rational arguments for allowing its deforestation. A cadastral and physical survey of the area is in progress to initiate the process of park establishment. As a consequence of that preparation work, in May 1992 the government officially proclaimed the area a national park (Decree No. 13,680).

35. Based on the recommendations of a proposed socio-economic study of the San Rafael National Park, and with assistance from a conservation specialist, an Integrated Conservation Development Program (ICDP) would be designed which would link the conservation of biological diversity in the protected area with local social and economic development. Although the ICDP approach is innovative and experimental, lessons from other projects suggest that the project must address the following factors: (a) a supportive policies, legislation and institutional framework; (b) clear and explicit linkages between the conservation objectives and the development component; (c) effective local participation for all aspects of project design, implementation and evaluation; (d) consistency between the scope, scale, and time horizon for the project and local site conditions; (e) a strengthened park protection function in coordination with other project components; and (f) strong local management is essential.

36. The project would provide for park infrastructure (tourist center, park office, staff housing, guardposts), incremental staff, including a park administrator, park rangers, and park technical assistants, and vehicles, equipment and supplies. Demarcation of park boundaries - which would involve cutting a line of 3 m wide and placing permanent markers each 0.5 km - would be required, and it has been estimated that the perimeter of the park is about 450 km. A specialist in park management would be provided for a period of three months to help design the ICDP. Research funding would not be included, as it is assumed that the staff would mobilize grant funding for this activity and that the tourist center could be used to accommodate the periodic needs of researchers.

37. The project preparation team has initiated the establishment of a foundation of concerned landowners and farmers in the area of influence of the protected area. The - 47 - Annex 2

Fundaci6n Cordillera de San Rafael would design and conduct studies, disseminate information and implement participatory activities aimed at developing a conservation consciousness among the people living in and near the park. The project would support the activities of the foundation by itself being an active member and by providing financial support. This would consist of office equipment, a vehicle, and training in park protection.

38. Besides the proposed San Rafael National Park, five other smaller reserves would be brought under protection and management. Three of these - Bosque Protegido Yacuy (1,000 ha), Bosque Protegido Nacunday (1,000 ha) and Bosque del Kyri'y (2000 ha) - have already been declared protected areas '. However, these reserves have not been demarcated or placed under effective protection. Another two areas - Saltos del Monday and Saltos del Tembey - have been identified as important for protection under the project. Both of these include waterfalls, the former being the largest (60 m high) waterfall of the country. Each of these areas is threatened by invasion by small farmers, deforestation and illegal hunting. Accordingly, the project would undertake studies and then design and implement management plans aimed at the protection of these areas. Working with local environmental NGOs, the project would develop incentives and other mechanisms for ensuring the protection of these areas under the existing (private) land ownership and, where necessary, seek funding for the purchase of critical areas where private reserve management is not possible. For the establishment and management of these areas, the project would provide for incremental professional staff (one park ranger and two park assistants per area) and their mobility, equipment and supplies, the construction of ranger houses, demarcation of boundaries, and 3 man-months of technical assistance (park management specialist).

39. Environmental Control would consolidate responsibilities at a regional level, under a unified MAG authority. Currently, the Forestry Service has the only environmental control facilities in the project area, and these consist of four control posts (puestos de control) at which only timber traffic is controlled through a systems of Guias de Traslado. No one is responsible for regulatory controls of the other natural resources of the area, namely soil, water, and wildlife. Existing and incremental staff would be given in-service training to improve their capacity to prepare and implement environmental norms, consistent with the law. The training program would include environmental control (fiscalizaci6n) subjects covering technical, legal, social and economic aspects. The social training would be designed to help the control agents to work with the local authorities in implementing regulatory controls, for which the municipalities are also responsible. An environmental control manual would also be prepared for use by the control staff as well as for the local government agencies.

40. Forestry control posts would also be constructed at key locations throughout the project area. The project would provide for incremental staff needed to control the project area. This would include a chief control officer (Ing. Forestal K05), two university level environmental specialists (Ing. Forestal K04), 17 control officers (Tecnico Forestal, I02), and 17 technicians (1106). The project would also provide two 4-wheel drive vehicles and 27 motorcycles, their fuel and maintenance, and radios.

1. Decree numbers 30,954/73; 30,953/73; and 30,956/73, respectively. - 48 - Annex 2

41. Organization and Implementation. The MAG would have overall responsibility for the project, and project responsibilities would be decentralized. Field implementation would be coordinated by a unified management unit based at the two centers (CICAR and CRAE) being organized in the project area. The CICAR center would be responsible for agro- forestry research and extension, and would depend administratively on the Subsecretariat of Agriculture. The CRAE center would be responsible for the implementation of the more purely agro-forestry research, the protected area management, and the environmiental control functions, and would depend administratively on the SSRNMA.

42. Research activities would be located on-farm as well as on-station in order to integrate the researcher with the farmer. To ensure good integration between the agro-forestry research activities and the national park protection activities, research sites would be located in areas near the park boundaries. There would be close collaboration among all project staff (researchers, extension agents and park guards) to ensure efficient technology transfer and natural resource conservation. Local NGOs, farmers' associations and community groups would play an important role in the extension and conservation activities of the project.

43. The main benefits of the forestry and agro-forestry activities of the project would be the training of a core staff for conservation and agro-forestry extension, the conservation of biodiversity, the protection of wildlife, the reduction of wasteful deforestation, and the protection of the environment. The protection of biodiversity, associated with the establishment of conservation areas, would help ensure future genetic resources for agricultural, forestry, medical, industrial and domestic uses. Because much of the proposed protected area is on steep terrain, these reserves would protect watersheds and reduce erosion by moderating water flows.

44. The results of doing nothing (i.e., the "without project" situation) also need to be examined. In some cases, deforestation and excessive erosion can result in irreversible soil degradation, while in others, hundreds of years may be required for a system to recover unless active and very expensive rehabilitation measures are applied. Furthermore, the preservation of some ecosystems and wildlife habitats, which is in the best interest of society as a whole, may not be readily evaluated on the basis of economics alone. This is also true for activities aimed at the global concern of climatic stability. Because forests are believed to be an important carbon dioxide sink, their existence may help control the level of this important greenhouse gas in the atmosphere. -49- Annex3

PARAGUAY

NATURALRESOURCES MANAGEMENT PROJECT

Pilot Agricultural Credit Component

Introduction

1. Larger farmers and businessesin the project area have reasonablygood access to formal sources of credit. At present, the National DevelopmentBank (BancoNacional de Fomento - BNF) has five branches, a private developmentbank (BUSAIF)has two branches, and five commercialbanks have at least one branch each in the smaller towns in the area. All major commercialbanks are represented in Ciudad del Este, but they service primarily urban clients.

2. The BNF and private banks normally require loan collateral of land or real estate secured with a mortgage. This discouragessmaller loans as the fixed cost for the borrower of providing this collateral is substantial;a recent estimate put it at about 15% of the value of a US$3,000 loan. Illustrativefarm models show that most small farmers with holdings of less than 20 ha are unlikely to qualify for loans of more than US$2,000equivalent. It thus seems certain that farmers in this category will not gain access to BNF or private banks for their credit needs.

3. For this reason, the project would financea special interventionto provide credit to these farmers. Some 5,500 small farmers make up this target group, and they represent about 60 % of the farmers to be directly reached by the project. At present, only the SmallholderCredit Agency (Credito Agricola de Habilitaci6n- CAH) operates successfully with this group.

4. A descriptionof CAH's structure and operations is included in Annex 3, Appendix 1. Its primary role is to provide supervisedcredit and technical assistance (TA) to the smallest farmers who cannot gain access to more formal sources of financing. In its early years, CAH gained a reputationfor inefficiencyand political patronage, but since 1989 the Governmenthas given CAH new managementand budget resources to expand its programs. To operate more efficiently,CAH is beginningto lend to cooperativesor individualsgrouped in the pre-cooperativeform of an AgriculturalCredit Users' Association(Asociaci6n de Usuarios de Credito Agricola - AUCA). Its average loan size to a cooperativewas US$41,000 in 1991, and US$600 to the average farmer client.

5. At the end of 1991, CAH's loan portfolio totalled only US$12.0 million, but this is a six-fold increase in real terms over 1989. Partly because of its small size and high fixed costs, its total cost of operations (includingprovisions) as a proportion of its loan portfolio was 28% in 1991. This ratio is expected to improve, with its portfolio projected to grow faster than its operating costs. At present, CAH's lending interest rate of 23% does not cover its operating costs, and it receives annual support from the Government'sbudget. In - 50 - Annex 3

1991, the proportion of its loan portfolio affected by arrears was 9% and its provision for bad debts was 3 %. Both of these ratios are considered acceptable for this type of operation in the LAC Region.

Description of the Component

6. The project would include US$7.1 million of investments and inputs by small farmers, producers of handicrafts and small agro-industry. The Bank would finance 70% (US$5.0 million) of this amount. In order to receive credit, farmers would have a farm development plan with conservation/resource management actions agreed with UCTAP and CAH. CAH would ensure that its staff assigned to the Project had received training and that its operational procedures are sufficient to carry out this environmental requirement. CAH would also develop the accounting system to keep project accounts, prepare SOEs, and control the arrears in the project loan portfolio.

7. The project would also finance US$0.5 million of equipment, vehicles and TA to strengthen CAH's operational capability in the project area and to improve its central administration. CAH would need training to adopt environmental assessment practices in its review of all farm plans it finances in the project area. Terms of reference for those studies and TA to be completed in the first two years of the project would be approved by the Bank.

8. Lending Terms. The Borrower would pass the funds for this component to CAH under the terms specified in a Subsidiary Grant Agreement (SGA). The SGA and the Credit Regulations would both be acceptable to the Bank. CAH would on-lend Bank funds under the project at interest rates which would always exceed the higher of the average commercial bank deposit rate or the previous twelve months' domestic inflation rate, as measured by the CPI. In order to improve fiscal transparency, CAH would pay the Government a floating interest rate equal to its final rate to clients minus a spread of 10%. The adequacy of the spread would be reviewed regularly by the Bank and the Borrower. The Government would take the foreign exchange risk, and CAH would repay loan principal net of an agreed maximum annual arrears. This arrangement would give CAH an incentive to keep its arrears to a level lower than the maximum, as it would be the beneficiary of increased cash flow.

9. On average, CAH finances about 55% of the investments and inputs made by its farm clients in the project area. CAH financing of non-farm clients would be limited to 70% of their sub-projects. The Bank would reimburse CAH for 100% of qualifying sub-loans under the Statements of Expenditure (SOE) procedure. Sub-loans to individuals would be expected to average US$1,000 each and would be limited to a maximum of US$1,700. Sub-loans to AUCAs and cooperatives would be limited to US$27,000 and US$82,000, respectively. The Bank would reimburse 100% of the costs of equipment, vehicles and technical assistance.

10. Lending Rates. Although CAH is legally free to set market-based lending rates, in practice it follows the political guidance of the Government. The latter maintains the lending rate for official banks positive in real terms, but substantially below the rates (an average of 31 % in 1992) charged by private banks, which are still subject to the high reserve requirements of the Central Bank of Paraguay (Banco Central del Paraguay - BCP). At present, CAH uses a uniform lending rate of 23%, compared to an average current - 51 - Annex 3 commercial bank deposit rate of 21% and an inflation rate of 15% (estimated, 1992), as measured by the Consumer Prices Index.

11. An analysis of CAH's operating cost structure and its plans to expand its loan portfolio show that CAH could probably eliminate its operating deficit if it charged lending rates similar to commercial banks. While the project should pursue this long-term objective of charging market rates, this may not be consistent with the Government's current policy of transition. - 52 - -53 - Annex 3 Appendix1

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Agricultural Credit Component: The Smallholder Credit Agencv (Credito Agricola de Habilitaci6n - CAH)

Legal Framework

1. CAH is an autonomous entity reporting to the Minister of Agriculture (MAG). Since it began operating in 1943, its legal framework has been modified many times although its main objective of assisting small-scale farmers with access to credit otherwise unavailable to them has not changed. The Congress is currently reviewing a proposal for changes to update CAH's operations to current economic conditions (i.e., ceilings for credit, interest rates, guarantees, authorized capital, and for public bidding). Other changes would allow it independently to raise financial resources through banking, commercial and industrial activities. Should the Congress approve the changes proposed by CAH's management, additional modifications to CAH by-laws may not be necessary to accomplish project objectives.

Organization and Management

2. The organizational structure of CAH has changed over time in a passive way rather than through active leadership to attract more clients. Its current structure relies heavily on a horizontal delegation of responsibilities (see Annex 3, Figure 1). The Management Council of CAH is appointed by the Executive Power of the GOP for a term of five years. This Council has five members and is presided over by a President who is expected to have agricultural experience and a good knowledge of agricultural credit. The other four members are the representatives of the Ministries of Agriculture and Finance, of the BCP and of the Rural Welfare Institute (Instituto de Bienestar Rural - IBR).

3. The management of day-to-day operations is delegated to two managers: (a) the Administrative and Finance Manager, who is assisted by five in-line departments; and (b) the Operations Manager, who is assisted by two in-line departments. Both managers report directly to the President of the Management Council.

4. CAH operations are conducted at its Headquarters in Asunci6n, in thirty-six field offices in the Eastern Region of the country and one field office in the Western Region (the Chaco). Fourteen of these field offices are regional management centers. Operational decisions are centralized at Headquarters, with most loan requests being sent there for approval. A better distribution of responsibilities and decision-making between Headquarters and field offices would improve efficiency and speed up credit processing. A study would be conducted under the project to seek a better balance between Headquarters and field operations, particularly in the project area. -54- Annex 3 Appendix 1

5. CAH currently has 285 employees, of whom 45% are stationed at its Headquarters. The staff in the field offices are predominantly agricultural specialists in field work. The total staff has increased by 79% since 1989, in order to accommodate its recent expansion in operations.

Lending Policies and Procedures

6. The current lending policies of CAH are stated in its by-laws (Law 551/75). These policies allow CAH to assist farmers, including those associated under AUCAs, cooperatives or any group scheme, with technical assistance and with short-, medium- and long-term credit for crop development, marketing, and the development of rural handicrafts.

7. Should proposed changes to CAH by-laws be approved, it will also be allowed: (a) to finance small-scale rural industries; (b) to set interest rates independently; and (c) to include in its loan collaterals the future production of the farm.

8. The current lending procedures of CAH are stated in its Credit Regulations as issued in April, 1992. These regulations emphasize two main objectives: (a) to increase the income levels of farmers; and (b) to upgrade farmers' capabilities to have access to formal institutional credit.

9. The main features of CAH's credit regulations are: (a) the repayment of principal and interest payments are made on an annual basis; (b) repayment terms are: one year for short- term, up to three years for medium-term, and up to seven years for long-term credit; (c) ceilings for credit and for collateral are set on the basis of multiples of the minimum wage level (these ceilings would be, as of June 1992, equivalent to about US$700 for a signature loan, US$1,700 for a loan under collateral and US$3,400 for a mortgage loan); and (d) assistance is provided for grouping farmers into AUCAs (that is, pre-cooperative schemes) until they can develop into formal cooperatives. These regulations are adequate to reach the type of farmers targeted under the project.

Accounting and Auditing Procedures

10. Accounting, and the preparation of financial statements and related reports, is centralized at CAH Headquarters. The accounting system is fully computerized, but some minor improvements have been recommended by CAH's independent auditors. Internal audit is performed by a specialized unit reporting directly to the President of the Management Council. External audit is conducted by private independent auditors. CAH's financial activities are reported regularly to the Central Bank and to the Superintendency of Banks through the normal reporting procedures of the financial system.

11. The current accounting system is adequate to manage trust funds and lines of credit. This capability was developed to carry out the management of trust funds and lines of credit made available to CAH through bilateral and multi-lateral development agencies (e.g., the IDB, the IBRD, and the governments of the USA and of Germany). - 55 - Annex 3 Appendix 1

12. The project would finance technical assistance and the acquisitionof additional office equipment: (a) to improveCAH's accountingand reporting capabilities at the level of field officesin the project area; (b) to developa chart of accountsfor the credit component; and (c) to develop the softwareto prepare Statementsof Expenditure(SOEs) and to monitor the project-related loan portfolio, particularly the ageing of arrears.

Lending Operations

13. Until 1988, the growth of CAH's operationswas very slow, mainly due to limited financial resources and lack of adequategovernment support. Starting in 1989, larger budget allocationsmade possible a six-fold increase of its loan portfolio in real terms, and the addition of field offices, vehicles and staff. It has also contributedto a larger coverage of area developed, and to a considerableincrease of credit beneficiaries(see Annex 3, Appendix 1, Table 1).

14. The bulk of CAH's lending has been short-term, mainly for productionloans for annual cash crops. During the agriculturalyear July 1990/June 1991, the average size of a loan was equivalentto about US$850. Even though the farmers have to be organizedunder some form of farmers association(e.g., AUCAs,cooperatives, or committees)to have access to credit from CAH, the loans are granted to each individualon the basis of the financing gap of each farmer.

Financial Performance

15. The nature of CAH's objectiveshas guided its financialperformance towards a non- profit oriented managementof its operations. Its performancehas never been close to a self- sustained level of operations, and its continuouslosses have been covered by Government budgetary allocations. Prior governmentpolicies of maintainingfixed and even negativereal rates of interest have also contributedto poor financialperformance. In addition, the cost of assisting low-incomefarmers with technical assistance and with small loans was too high to be covered with revenues from its very small loan portfolio. At the end of 1991, its net losses equaled 12% of its average loan portfolio. A summaryof CAH's financial performance is included in Annex 3, Appendix 1, Table 2.

16. During the past two years, CAH has shown a relatively good performance in managing its loan portfolio. The proportion of the portfolio affectedby arrears was reasonably small (6% and 9% during 1990 and 1991, respectively)considering the risks involved. It should be noted that arrears for 1992 are expectedto increase substantiallyas a result of the recent shocks to the agricultural sector, and particularly to small farmers, caused by abnormally low cotton prices and by flooding. At the end of 1991, CAH's provisionsfor uncollectibleloans equaled 34% of that portion of its total portfolio affectedby arrears. This provision would be higher if CAH had provisionedagainst loans which went into arrears in 1989-91. These latter have not been provisionedyet, because CAH still believes they can be recovered without recourse to the judicial process, as most are covered by good collateral. - 56 - Annex 3 Appendix 1

17. Despite the substantialincrease of the loan portfolio during the past three years, it is too small to generate enough revenues to cover operating costs. Operating costs in 1991 were equal to 28% of its average loan portfolio. It would take a large increase of either the size of the loan portfolio or the level of interest rates to generate enough revenue to cover both fixed costs and financialcosts. The average return on its loan portfolio at the end of 1991 was 15%. Therefore, it would require an increase of at least fifteen points on its average return to cover its operating cost. When the governmentpolicy is changed to applying market interest rates in all officiallending operations, including those of CAH, such action should have a positive impact on CAH finances. PAaGUAY

WR.R REOICGS Shknc Prtuec

ftl1bold.r Credit ncr. oraatioml Chrt

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2=4Pasell O3ES1 towcrsslal~ ~ ~ ~.. 0 1~~~~~~~It1 1 =1 1 1X1 1 CfED 3Et 3 >4 - 58 - Annex 3 Appendix 1 Table 1

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Agricultural Credit Component

CAH Operations Summary

AGRICULTURAL YEAR '

1988-89 1989-90 1990-91 1991-92 RESOURCES

Network (No.) 25 25 29 38 Staff (No.) 159 159 204 285 Cars (No.) 16 20 33 35 Motorcycles (No.) -- 7 42 49 CREDIT BENEFICIARIES

AUCAs 246 275 295 460 Committees 2 1 12 37 Cooperatives 2 1 12 16 Farmers @' 3658 4,146 8,871 15,743 LENDING

Loans Granted (No.) 3,658 4,146 8,871 15,743 Amount Lent (G.) 3' 781 1,112 8,109 18,420 Amount Lent (G.) 4/ 781 862 4,843 8,898 Amount Lent ($US) 7.5 9.1 6.4 13.3 Collection Ratio (%) 91 89 87 N/A Area Developed (Has.) 14,272 18,254 36,679 89,306

I / From July to June 2/ Membersof credit units (AUCAs, Committees,and Cooperatives) 3/ Millionsof current Guaranies 4/ Millionsof constant Guaranies(December 31, 1988) 5/ US$ millionsat exchangerates effectiveas of December31 (1988US$1 = G.1035; 1989 US$1 = G.1220; 1990 US$1 = G.1262; 1991 US$1 = G.1382) N/A Not available - 59 - Annex 3 Appendix1 Table 2 PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Credito Agricola de Habilitacion Summary of Financial Performance

(millions of Guaranies)

A S S E T S 1989 1990 1991 Cash and banks 668 6502 10603 Current assets 122 118 68 Loans due within one year 737 4407 12480 Loans due over one year 240 1801 3203 Loans in arrears 367 368 1479 Provisionsfor uncollectibteLoans -- (222) (497) Accrued interestand commission 489 688 1423 Provisions for uncollectibteinterest and comm. (468) (240) (421) Inventory 143 134 221 Deferred assets 125 132 115 Other assets 43 574 503 Fixed assets (net of depreciation) 383 583 1530 TOTAL ASSETS 2849 14845 30707

L I A B I L I T I E S Current Liabilities 264 1182 2665 Accrued interestpayable 20 11 14 Borrowingsdue within one year 33 40 34 Borrowingsdue over one year 683 2809 7140 Other LiabiLities 42 41 51 Equity 1807 10762 20803 TOTAL LIABILITIES 2849 14845 30707

I N C O M E A N D E X P E N S E Revenues from Loans 222 382 1789 Cost of borrowings 12 56 49 Gross revenues from lending operations 210 326 1740 Sale of inputs and food suppLies 286 803 1343 Cost of sale of inputs and food suppLies 218 697 1278 Gross revenues from sales 68 106 65 Other operationalrevenues 9 21 12 Gross operational revenues 287 453 1817 OperationaLexpenditures 241 493 1400 Administrativeexpenditures 260 564 1189 General expenditures 55 105 714 Total operationaLexpenditures 556 1162 3303 Net operationaL income (Loss) (269) (709) (1486) Non operationalrevenues 16 32 50 Contributions 66 76 - NET INCOME (LOSS) (187) (601) (1436)

F I N A N C I A L I N D I C A T O R S Return on gross Loan portfolio (X) 10 15 Cost of borrowings CX) 3 1 Net income tloss)/LoanportfoLio t%) (15) (12) Net income (loss)/equity tX) (6) (60) Arrears/equity CX) 6 9 Operating cost/loanportfoLio tX) 3 7 Liquidityratio (times) 29 28 Debt/equity ratio (times) 9 9 0.4 0.5 - 60 - - 61 - Annex4

PARAGUAY

NATURALRESOURCES MANAGEMENT PROJECT

Institutional Capacity Analysis and DeveloDment

Introduction

1. A systematic Institutional Capacity Analysis (ICA) of the intended implementing universe of entities was carried out during project preparation and loan processing. This ICA led to the identification of substantial, though solvable, institutional capacity gaps (ICGs) which have been the basis for the design of institutional development (ID) inputs. These have been either: (a) built into the respective project components; or (b) assembled into the institutional development component, in order to organize and strengthen overall organization and management and the implementation capacity of the coordination functions.

InstitutionalCapacity Analysis (ICA)

2. To ensure a more adequate and refined ICA of the implementing institutional universe (see Annex 4, Figure 1), project objectives were first desegregated into the tasks necessary: (a) to acquire the goods and services for which resources are being mobilized under the project; (b) to use them efficiently; and (c) to ensure sustainability of the benefits obtained through the efficient use of goods and services. Capacity gaps were assessed for each task and from each one of the major capacity element viewpoints that, out of experience in Paraguay, have been known to hamper development activities.

3. InstitutionalUniverse of the AgriculturalSector. Since the change of government in early 1989, the agricultural sector's institutional setting has undergone several changes, sometimes disruptive rather than yielding any improvement. These changes have been justified by the need to break the prevailing rigidity and centralized decision-making process. The Ministry of Agriculture and Livestock (Ministerio de Agricultura y Ganaderia - MAG) has the overall responsibility for defining and implementing the role of the state and the corresponding sectoral development policies in Paraguay. For project implementation, the National Office of Project Coordination and Administration (Oficina Nacional de Coordinaci6n y Administraci6n - ONCAP) was established in 1983 on an inter-ministerial basis to ensure coordination, and to help overcome implementation issues of rural and regional development projects. It has recently been put under the responsibility of MAG, and with the entry into effect of the new Carta Organica has become the Direcci6n Nacional de Coordinaci6n y Administraci6n (DINCAP).

4. Colonization of new areas and small farner settlement is the responsibility of the Rural Welfare Institute (Instituto de Bienestar Rural - IBR) which has been instrumental in opening new areas and developing cash crops, in particular cotton, although it has often been judged as an inefficient entity. Agriculture credit has been the responsibility of several entities not necessarily interrelated: the Livestock Fund (Fondo Ganadero - FG) of the - 62 - Annex 4

Central Bank (Banco Central del Paraguay - BCP), the National Development Bank (Banco Nacional de Fomento - BNF), and the Smallholder Credit Agency (Credito Agricola de Habilitaci6n - CAH). Agricultural research and extension have been the responsibility of two MAG Directorates. They have been rather weak, particularly in the case of small farmers who are the most in need of extension and adapted technology.

5. Environmental protection is under the Sub-secretariat of Natural Resources and the Environment (Sub-secretaria de Recursos Naturales y Medio Ambiente - SSRNMA) within the MAG. Entities for social development will also have a role in implementing key aspects of the project, including health and education. Basic health programs and the protection of local indigenous communities will be under the responsibility of the Ministry of Public Health and Social Welfare (Ministerio de Salud Publica v Bienestar Social - MSPBS). Education in general, and education for the indigenous communities in particular, are under the responsibility of the Ministry of Education (Ministerio de Educaci6n y Culto - MEC).

Institutional Universe of the Project

6. The institutions which will participate in or otherwise affect the implementation of the project are described in Annex 4, Figure 1. The institutions are not always well defined in terms of their inter-relationships and they operate with differing levels of autonomy and efficiency.

7. Rules of the Game. The project as designed implies a certain amount of decentralization. The Government insists in its important objective of letting the project area make the most important decisions in terms of overall development plan and activities. However, legislation related to any decentralization process is virtually non-existent. Key entities that are to operate locally, such as the Project Technical and Administrative Coordination Unit (Unidad de Coordinaci6n Tecnica y Administraci6n del Proyecto - UCTAP), the Research and Training Center for South-East Paraguay (Centro de Investi gaci6n Rural - CICAR), and the Regional Environmental Center (Centro Regional Ambiental del Este - CRAE), will be created by Decree. The lack of decentralization legislation or regulations will mean that progress in the development of these institutions may be slowed. The project would virtually be the first attempt to operate in a decentralized manner for which officials in the agricultural sector from both central and project area levels would have to work on the basis of participatory and consensual processes.

8. Other legislation and regulation have certain deficiencies or are unclear. This applies in particular to environmental protection-related rules of the game. The work being done under the First Japanese PHRD grant will make detailed practical recommendations for the implementation of its proposed legal and regulatory framework concerning the use and protection of natural resources.

9. Inter-institutional Relationships. The network of entities that will have a role in implementingthe project at the national and regional levels is complex. The project design includes the definitionof the network of inter-institutionalrelationships, with a clear distribution of roles and adequateand transparent systemsof accountability. - 63 - Annex 4

10. The most important capacity gaps concern how responsibilities are defined and shared between the national and regional levels. Major issues arise not only from this lack of adequate definition of how roles are distributed: in addition, flows of funds are controlled at the center. Budgetary processes are highly concentrated in the Ministry of Finance. As a result, considerable delays in acquiring goods and services included in the project, and in disbursement flows in general, would occur particularly among decentralized levels (i.e., project area entities) if they are not given the relevant levels of authority. In general, the central administration has little presence locally, and within the central administration, past experience reveals difficult relationships between MAG/MEC, MAG/MSPBS, and MAG/IBR, whose functions and responsibility are not always clearly defined.

11. Internal Organization. In MAG, functions tend to be duplicated because there is no conscious uniform processes for planning, budgeting, accounting, internal control, or personnel management. Different units within MAG may have different procurement procedures or even lack of clear norms and procedures.

12. Personnel Poliay and Reward System. The level of salaries in the public sector and compensation packages in general do not allow for retaining competent professionals. As a result, staff turn over is high and those remaining in the implementing entities lack motivation to activate their skills at the optimum level. Furthermore, as they are forced to have a second and, occasionally, even a third job in order to reach a minimum level of income, they do not have the time and sense of security which would allow them to concentrate on their tasks and ensure the required performance. Presently, most of the entities involved, MAG in particular, lack the skill mix and levels of professional expertise required. This is particularly true for planning, budgeting and for mid-level management functions. Research and extension also lack minimum competent staff, and related entities do not have the flexibility to staff themselves adequately. The solution to such issues is worsened by the lack of clearly defined civil service systems or careers in the different public sector agencies. Finally, there is no training plan offered to civil servants, no personnel evaluation mechanisms, or hope for objective promotion.

13. Skills. Partly as a consequence of the capacity gaps signalled above, most of the personnel in the involved entities lack the skill mix required for successful project implementation, at both the management and administrative levels.

The Institutional Development Component (IDC)

14. Technical assistance and training activities, in addition to the financing of equipment, vehicles and of selected recurrent costs, have been included in the components of the project to strengthen the related entities. ID inputs related to the strengthening of overall coordination and project management functions have been included in the IDC.

15. InstitutionalArrangements for Implementation. Past project experience in Paraguay has shown that the lack of institutional capacity has been a key factor in explaining shortcomings and non-satisfactory project implementation. ONCAP, which has played an important role in helping coordinate project implementation in recent years, has not been able to solve major inter-institutional relationship issues that have seriously hampered development - 64 - Annex 4 activities. Its recent transfer under the responsibility of MAG may create better conditions for success in new agricultural development activities, but does not by itself automatically ensure this result. Experience has also shown that the centralized decision-making processes that have prevailed in Paraguay are detrimental to successful production activities, in particular in the agricultural sector, and that decentralized mechanisms, involving a more systematic participation of the beneficiaries themselves, under overall coordination of MAG, are more likely to achieve intended development objectives. The proposed project design encompasses relevant lessons of experience described in the main text. These have also been reflected in the design of institutional arrangements for implementation, which are summarized as follows:

Table 1. InstitutionalResponsibilities

Component/Sub-component Institutional Responsibility (a) AgriculturalDevelopment: - AgriculturalProduction and Natural ResourcesManagement CICAR/CRAE - Forestry and EnvironmentalConservation CICAR/CRAE - Training, T.A. and Social Organization UCTAP - FOCORN UCTAP (b) IndigenousConimunities INDI/UCTAP/MEC/MSPBS (c) InfrastructureDevelopment: - Roads MOPC/UCTAP (d) InstitutionalDevelopment UCTAP (e) Filot AgriculturalCredit CAH

16. MAG's DINCAP would be responsible for the overall coordination and administration of the project. MAG will create by Decree the new local regional administrative units necessary for project implementation, which are: (a) UCTAP, for project management and coordination in the project area; (b) CICAR, to channel research and extension services to be delivered under the project; and (c) CRAE, to ensure coordination in the execution of all environmentai protection-related project activities.

17. UCTAP. Under DINCAP, this unit would be headed by a national coordinator, assisted by three executive area coordinators and strengthened at the political level by a Regional Operational Committee (COR) to promote inter-institutional harmony at the regional level. Relationships would be structured directly from UCTAP's area coordinators to MAG central or decentralized entities, as day-to-day operations warrant. Special agreements (convenios) would be entered into with entities in charge of supervising the rehabilitation of rural roads, credit, social development, indigenous communities and support to small industries. The administration and finance coordinator would ensure adequate management of accounting, budgeting, personnel and legal aspects.

18. UCTAP's overall coordinator would be further assisted by the Institutional Development Component (IDC) to review the institutional capacity of the project, update - 65 - Annex 4

information, and formulate recommendations as the institutional development process progresses with project support. The IDC would be implemented by a specialist who would also be responsible for the coordination of acquisition and efficient use of ID inputs, as well as for the sustainability of the resulting benefits. He would also be responsible for coordinating Annual Operating Plan (POA) presentations by the different implementing entities, and for consolidating it thereafter, and for the monitoring of its implementation, including the formulation of mitigating recommendations when necessary.

19. UCTAP would operate a management information system to monitor project activities and administration, initially through a system already used by DINCAP and later, as specified in a Manual, to be adjusted in order to guide the decentralization process. UCTAP would also be responsible for ensuring flows of information with the COR and to seek approval of financial programming resulting from the management of the FOCORN. Similarly, the COR will also approve consolidated POAs before they are sent to the Bank for information and comment.

20. Operational Relationships between DINCAP and UCTAP. The project regional administrative entities, UCTAP, CICAR and CRAE, would be coordinated by DINCAP within MAG. Its capital and operating expenditures would follow normal budgetary and accounting systems satisfactory to the Bank. UCTAP may enter into management agreements with UNDP/OPS or similar service provider, acceptable to the Bank. The draft of such an agreement was agreed at negotiations.

21. The Regional Operational Committee (COR). The COR will aggregate all implementing entities with a major role in project implementation, namely: MAG (including UCTAP, CICAR and CRAE); Regional Offices of the MIC; Farmers' Committees; Municipalities; and Cooperatives, and it will be coordinated by a permanent Secretary. The COR would be created at the same time as UCTAP, within the same Decree, and would also stimulate the widest possible participation of beneficiaries' organizations and of the private sector in general.

22. The COR would be used as a support mechanism to UCTAP in general, and in progressively creating the network of relationships necessary for project success and sustainability. The COR would provide a key mechanism to bridge many of the identified ICGs listed in the previous section. It would perform this role through constant information flows to and from participating entities and through regular meetings (e.g., POA and progress reports approval) and extraordinary meetings (e.g., to resolve possible conflicts) of its members.

23. Conclusion. The above institutional arrangements for implementation are satisfactory and would lead to smooth inter-institutional relationships between the national and regional levels and within the regional level itself. The corresponding mechanisms based on wide participation of national and regional entities and the private sector, primarily the project beneficiaries and their organizations, can resolve traditional inter-institutional conflicts in Paraguay, as well as the need for learning how to be accountable for efficient results when decentralization processes are carried out, and when new responsibilities are to be assumed by regional authorities and professionals. It is expected that many of the identified ICGs - 66 - Annex 4 related to governance, rules and regulations, and inter-institutional relationships would be bridged in time to ensure project success and create satisfactory conditions of sustainability. However, the scope of the overall institutional strengthening that is required, and the very process described above about these institutional arrangements for implementation, require specific institutional development inputs that have been added to what is already included in the project components. These additional inputs are described below.

Project Coordination, Management, and Institutional Development Inputs.

24. The IDC has been designed to provide inputs necessary to bridge the identified ICGs. The IDC includes: (a) government decisions that are reflected in project conditionality; (b) specialized assistance to bridge identified ICGs that require-inter alia-the introduction of "management and administrative technology"; (c) training activities to bridge specific skill gaps; and (d) financing for incremental recurrent costs, in particular for the functioning of UCTAP.

25. Many ICGs can be bridged by simple GOP decisions. In the first place, the GOP will create UCTAP by Decree, and a Manual of functions and responsibilities will be produced that sets the rules for UCTAP's functioning. This would include: responsibilities for decision-making capacity at every level; procurement responsibilities and procedures; disbursement; financial flows for counterpart funds; and budgeting systems. This Decree would include UCTAP, CICAR and CRAE. An additional Decree from MAG would describe new functions for MAG's administrative units involved in project implementation, including the required corresponding staff. The FOCORN would be ruled by Ministerial resolution.

26. Inter-institutional agreements (convenios) would be entered into between: MAG - MOPC; MAG - MSPBS; MAG - MEC; MAG - IBR; and MAG - MIC. Formal agreements would also be entered into between MAG and the project area municipalities.

27. Specialist Assistance. Overall, the project includes 573 man-months of specialist assistance, of which 361 man-months (224 of local consultants and 137 of international consultants) are assigned to the different components. The remaining 212 man-months (172 of local and 40 of international) are assigned to the UCTAP for the strengthening of the coordination and overall management functions, including support to the different implementing entities. Three key individuals would be recruited internationally as consultants. An organization specialist would be hired for a period of 18 months, who would help the Paraguayan counterpart (MAG) create the institutional development function in UCTAP. He/she would ensure that the inter-institutional network agreed for project implementation is progressively put into place and that all involved entities are aware of their responsibilities. The consultant would also ensure that the technical assistance and training inputs of the project are acquired and used efficiently towards bridging identified ICGs. In this respect, he/she would be responsible for supervising the work of all other consultants in general and those hired for central ID functions in particular. The consultant would assist in establishing the structure necessary for monitoring activities throughout the project entities, and define mechanisms for the preparation and consolidation of future POAs. - 67 - Annex 4

28. The organization specialist would be assisted by: (a) a specialist in financial administration and accounting to analyze financial flows and regulations, in order to facilitate their implementation and enforcement, to help draft the corresponding manuals to ensure harmony through dissemination in all implementing entities, and to help train local staff; and (b) a monitoring and evaluation specialist, to help define and put into place the corresponding mechanisms using the POA. In addition, local consultants would help UCTAP's management and staff to carry out special studies and support the international team in carrying out its work program. This would include:

(a) a lawyer who would: (i) review the current Constitution, legislation and body of regulations related to project implementation, in particular within a decentralization environment, and prepare new texts to be suggested to the legislature through project authorities in MAG; (ii) review legal implications of all project elements in the light of these new texts; (iii) review legal aspects at the municipal level, in particular in establishing relationships with the central authorities; (iv) help formulate and draft specific agreements (convenios) between implementing entities at all administrative levels; and (v) review the legislation related to natural resource management and propose amendments as necessary to help achieve project objectives in related components;

(b) a financial administration specialist/accountant to help the international consultant carry out the work program and, in particular, to ensure sustainability of the new procedures; and

(c) an organization specialist to help prepare specific manuals.

29. The total cost of the technical assistance sub-program is estimated at US$ 2.6 million, including US$700,000 for UCTAP and the overall organization, coordination and management functions, and the remaining US$ 1.9 million for implementing entities' strengthening.

30. Training Activities. Most of the skill gaps identified during project preparation and loan processing can be bridged through short-term training activities, and only three training activities would be long-term. The overall project includes about 150 practical, task implementation-oriented training activities for about 2,600 staff members and 14,000 farmers. This has been considered as an investment cost built into each component. Training contents encompass a wide spectrum of curricula ranging from management to basic farming skills including general administration, operational rules for implementing the project, specific procurement procedures, monitoring, planning of training activities, programming and budgeting, social relations, group dynamics, and training evaluation. The training sub-program finally includes the provision of farming skills for the introduction of more adequate farming technology and practices. These skills would be transferred both directly and through better trained extension agents. UCTAP's IDF will be responsible for directly implementing the training program related to its management functions and will support other entities to implement theirs. PARAGUAY NATURAL flESOURCES MANAGEMENT PROJECT Inter-institutional Organigram

L+l 91 1 1 L00- 1+1 L

l = l ~ iG LX 1e12Wk~

43 [< [- o -' ~~~~~~~~~~~~~~oA. -,

- ] - l. _~A c-wc <~~~~~~~~~~~~~~~~~~~~~~~~C - 69 - Annex 5

PARAGUAY

NATURALRESOURCES MANAGEMENT PROJECT

InfrastructuralDevelopment: Rural Roads

Introduction

1. The rural road network serving the project area is of variable quality. In many cases, the existing roads follow the routes of old forest-penetration tracks or the layouts of IBR settlements. Some roads have been improved by the adjacent landowners, either to support their own productive activities or as part of a process of private colonization involving the fractioning of large land-holdings. These roads have not always followed the optimum route, either from the physical aspect or from the point of view of efficiently connecting with the main roads of the national road system. This has made necessary the development of a set of feeder roads.

Sub-ComponentDesign

2. In the basic design of the road network for the project, the principal objectives were to reduce the costs to road-users and to improve accessibility, particularly in wet weatner. The sub-component would therefore: (a) reconstruct, improve and maintain the access roads to all of the colonized areas, which currently suffer from prolonged periods of lack of access; and (b) cooperate with the process of agro-ecological zoning, to allow sustainable resource use consistent with the requirements of conservation.

3. The physical road planning has concentrated on an improvement in access between areas of production and population, to improve regular access and to ensure that the peak demands (e.g., of soybean harvest) can be adequately met. The existing roads (Routes 6 and 7, and the new highway in the north of the project area from Hernandarias to Catuete) form the main collectors of the system, and the proposed new and renovated access roads will be a combination of all-weather and dry-weather roads. In the design of the network, a road inventory was carried out and an analysis made of existing and potential land use including projections of the output of main crops by District. Emphasis has been placed on maximizing the proportion of the population reached and on serving the major production centers and port terminals on the Parana river.

4. The Ministry of Public Works (Ministerio de Obras PNiblicasv Comunicaciones - MOPC) is responsible for the road system. The Rural Roads Unit (Unidad de Caminos Rurales - UCR) of the Directorate of Rural Roads (Direcci6n de Caminos Vecinales - DCV) of the MOPC classifies rural roads as either principal (feeder roads) or secondary (farm access roads). This sub-component is concerned with the improvement or new construction of feeder-roads and their subsequent maintenance. The differentiation between the use of all- weather or dry-weather surface for these roads was based on the expected traffic loadings. - 70 - Annex 5

All-weather roads will have a stabilized surface of crushed stone, whereas the dry-weather roads would be of graded and compacted earth.

5. The proposed objectives of the sub-component are defined in terms of the National Rural Roads Program: First Stage (Programa Nacional de Caminos Rurales - PNCR), which was produced by the DJV (since renamed DCV) in 1990 with technical assistance from the IDB. The technical characteristics of the design were based on the norms provided by the UCR.

Environmental Aspects

6. Environmental considerations were important in the design of the sub-component. The fundamental role played by roads in putting pressure on natural resources was explicitly recognized, particularly in the processes of timber extraction and of deforestation to incorporate land into agricultural use. The Environmental Analysis (EA) of the project, the Summary of which is presented in Annex 12, strongly recommended that a case-by-case approach should be adopted wherever it was proposed to abandon a road because of its poor alignment and replace it with a new road. The EA strongly argued that the abandonment of a road would not necessarily result in a reduction of the erosion hazard, and might conceivably exacerbate the problem. The approach of analyzing each stretch of road on its merits will be adopted in the process of final design.

7. The proposed new roads would follow the water-shed. The existing roads would be improved unless this would cause conflict with other criteria. The network design has attempted to maximize the access of producers. Movements of earth would be minimized, consistent with the need to achieve adequate superficial drainage.

The Sub-Component

8. The sub-component consists of two programs: (a) the improvement of the basic rural road network, via the renovation and up-grading of existing roads; and (b) road maintenance.

9. On the basis of a detailed road inventory, the actual need for reconstruction and improvement extends to 1,004 kms of rural roads in the project area. This has been divided into two phases; the higher priority work, extending to 445 kms, will be undertaken within the Natural Resources Management Project, and the second phase, comprising the remaining 559 kms, will be the subject of a later project.

10. The detailed design, construction and supervision of the work would be done by private sector consultants and contractors. The bidding and award of contracts would be undertaken under the supervision of the DCV/MOPC.

11. The technical norms of the UCR/MOPC have been used in the road inventory and diagnostic study; those roads with an existing access level of Category 3 will be improved, whereas those with an access level of Category 4 will be reconstructed. The difference between them is in the degree of work involved, with the exception of the all-weather roads which will receive additional work in the compaction of the surface with granular material. - 71- Annex 5

12. The maintenance program will cover the new and renovated roads. Based on the recommendations of the PNCR, the maintenance program will be undertaken by local organizations supervised by the DCV/MOPC. The DCV will make equipment available to the Local Road Committees (Juntas Viales Locales - JVL) which will be responsible for its maintenance and for all the costs of the maintenance program, including fuel, materials and labor.

Road Planning

13. Based on the detailed inventory and analysis of the existing road network, and taking into account the PNCR - First Stage, a tentative physical plan was produced, which can be summarized as follows:

Table 1. Tentative Physical Plan

Reconstruction and lmprovement:

All-weather roads, 6m-wide compacted surface 646 kms Dry-weather roads, 7m-wide earth surface 398 kms

Total 1,044 kms Maintenance:

Minor improvements and maintenance 800 kms Routine maintenance (1) 1,044 kms (2) 300 kms of roads (constructed under Loan 1418-PA) 1.344kms

Total 2,144 kms

14. The tentative physical plan was subjected to detailed scrutiny. In the preparation of the definitive plan of the road network, emphasis was placed on the important role which roads play in the evolution of natural resource use. The following were key considerations:

(a) the road network must connect the areas of population and production, and integrate then with the main (trunk) road infrastructure and the Parana river;

(b) alternative alignments to existing minor roads must be carefully considered, especially where IBR colonies are concerned in which many of the roads have significant slopes and serious technical deficiencies;

(c) the road network must support the watershed management plans, which are the basis for the achievement of sustainable agriculture and conservation of natural resources; and - 72 - Annex 5

(d) the existing roads should be used where possible; however, where this is in conflict with the preservation of natural resources, alternative road alignments must be studied, in particular to ensure wherever possible that roads follow the watershed.

15. The definitive physical plan includes the definition of priorities between the groups of roads which make up the sub-component, which implies the following immediate actions:

(a) preparation of detailed engineering designs of the roads in the priority areas in the north of the Department of Alto Parana, which will improve access to the new settlements being established by MAG in coordination with MOPC; and

(b) final designs must be undertaken, as soon as possible, in order to allow sufficient time for bidding and contract award.

The tentative physical plan was subjected to close scrutiny and testing with the demands of the natural resource management plan (based on the development of catchment areas). In particular, the alignment of roads according to watersheds was carefully studied. The resulting definitive physical plan can be summarized as follows:

Table 2: Definite Physical Plan (km.)

First Stage Second Stage Total Constrction of new roads: All-weatherroads 243 415 658 Dry-weather roads 202 144 346

Total 445 559 1,004 Maintenance: New roads 445

Total 445

The First Stage, to be carried out under the project and to be built in the first three years of the project, covers 445 km of roads divided into seven groups, as shown in Annex 5, Table 3.

16. DINCAP will be responsible for the administrative and financial arrangements for the construction and maintenance of the proposed rural roads. The UCR/DJV of MOPC will exercise a supervision function and will receive institutional strengthening. The Environmental Unit (Unidad de Medio Ambiente - UMA) of MOPC will be responsible for assisting the UCR in includingthe necessary elements in its guidelinesto ensure that the adverse impact of roads on natural resources is minimized. The terms of reference for the -73- Annex5 production of final designs and engineeringspecifications of roads will be subject to the Bank's approval.

17. The most importantbenefit of the roads sub-componentwill be the reduction in costs of transport stemmingfrom: (a) reduced wear and tear on vehicles and reduced fuel use; and (b) reduced time spent in travel and transport, associatedwith better road quality and access.

18. The guidelinesprovided by the PNCR have been closely followedin the approach to implementationof the sub-component. The implementingagency will be MOPC through the DJV. The DJV implementsthe PNCR, and as such manages funds and contracts design services (consultants)and construction. It also establishesagreements with public and private bodies at the local level for road maintenance. Other participating institutionswould be:

(a) the UCR, as technical unit of the DJV, which would be responsible for planning, budgeting,coordinating implementation,supervising and monitoring, and ex post evaluation;

(b) intermediatebodies (e.g., JVL), created by the municipalitiesand other local bodies, which would undertake maintenancewith equipment providedby MOPC and with financialresources from the local community;

(c) the Directorate of Budget (Direcci6nde Ejecuci6n y Control Presupuestario- DECP);

(d) the Transport Planning and CoordinationOffice (Oficina de Coordinaci6ny Planificaci6nIntegral del Transporte- OCPIT);

(e) ConsultingFirms, which would be responsiblefor detailed design and supervision of construction;

(f) Contractors, which would compete via ICB called by DJV; and

(g) UMA (MOPC), which would be responsiblefor environmentalassessment, and for direct and indirect cost calculation. - 74 - Annex 5 Table 3

PARAGUAY NATURAL RESOURCESMANAGEMENT PROJECT

Proposed Rural Roads: Groups A. B & C

Length (km.) Roads included All- Dry- in the Access Justificationfor Proposed Roads Weather Weather Total first stage Group LeveL "ALL-weather"status

A. Route 6 Feeder Roads Purpose: to connect major productionareas with Route 6 and the Parana river.

CAAGUY-POTY-ALTOVERA-HOE PIRAPOI - 38 38 * 7 4 Ma. AUXILIADORA-TRIUNFO23 20 - 20 * 7 4 PopuLation - Production GRAMOPAR-CUCHILLON-NAC.TEMBEY - 32 32 4 LOMA LINDA-VICTORIA - 9 9 * 7 4 NARANJITOPALANCA-RUTA 6 20 - 20 4 Population - Production DIVISORIA-PTO.7 DE AGOSTO 64 - 64 4 Production SILOS IRUNA-LOSCERDOS TAVAI 40 - 40 4 Population - Production CRUCE IRUNA-SANCARLOS-CRUCE YUKY - 23 23 4 SAN ALFREDO-IRUNA-COL.ABATYTIGUE 46 - 46 4 Production RUTA 6-NARANJAL SAN CRISTOBAL 48 - 48 * 6 4 Population - Production AURORA-FILACUE-PTO. PARANAMBU 50 - 50 4 Population - Production STA. RITA-SAN VICENTE - 11 * 6 4 STA. RITA-STA. ROSA-PTO. IRALA 56 - 56 4 Population- Production COL. COLMAN-SAN FRANCISCO - 19 19 * 5 4 CRUCE MARGARITA-DOLORES 12 - 12 * 5 4 Population - Production EST. SERV. JM-CEDRALES 25 - 25 * 5 4 Population - Production

SUB-TOTAL 381 132 513

B. Northern Part of Project Area Purpose: to provide improved access for newly-settledareas.

JUAN E. O'LEARY-SANCRISTOBAL 70 - 70 4 PopuLation - Production COL. YGUAZU-BALSA-ACARAYMI 33 - 33 * 4 4 Population - Production NOELIA-REP.YGUAZU-STA. TERESA - 27 27 4 PopuLation - Production TRONCAL 1-ITAIPU - 38 38 * 4 4 Population - Production TRONCAL 2-ITAIPU 16 - 16 4 Population - Production GRANJA DOS HNOS. GBEBAS 2,3,4,5 - 55 55 * 3 4 Population - Production NACANINA-YTAKYRY-ZANJAMOROTI 50 - 50 * 2 4 PopuLation - Production CRUCE SAN FCO.-CRUCEMBARACAYU - 14 14 * 2 4 Population - Production M. MILAGROSA-LIMOY - 18 18 * 1 4 PopuLation - Production CRUCE DULCE-STA.MARIA-AO PIRANY 55 - 55 * 1 4 Population - Production

SUB-TOTAL 224 152 376

C. Expansion of the network in the area of influenceof Ln. 1418-PA Purpose: to connect the trunk road Sta. Clara-Mayor Otano with Route 6.

S. RAFAEL-CAICISA-NUDOPELADO 53 - 53 4 Production EL ENCUENTRO-COL.YACUTINGA - 17 17 4 SAN LORENZO 14-KIMEX - 29 29 4 CAICISA-PARAJELINDO-AGROCHACO - 16 16 4

SUB-TOTAL 53 62 115

TOTAL 658 346 1004 -75 - Annex5

19. The DJV would be provided with incrementalresources to enable it to fulfill the functions assigned to it under the project. This has been included in the investmentcosts of the rural roads sub-component;3 % of the estimated capital costs have been assigned to the DJV to cover monitoring and supervisionof the proposed works.

Project Costs and Financing

20. Road constructionwould be undertakenvia contracts awarded by ICB. Maintenance will be done by local administration. The costs of studies and final engineeringdesigns have been estimated at US$1,350 per km. The certificationof works and monitoringof progress of constructionhas been included as the equivalentof 10% of capital costs.

21. Budget cost estimateshave been made in accordancewith the norms of the PNCR; the materials quantities and operationsvary according to the slope of the land and "level of access" which the road represents before work begins. The costs developedby the PNCR are as follows:

Table 4: Road ConstructionCosts

Costs - Reconstructionand Improvement(US$ per km.)

Slope Level of Access Gentle Moderate Severe (ex ante) < 3% 3-6% > 6% 4 14,246 19,891 23,645 3 13,346 18,048 21,938 2 12,466 16,705 20,232

Surface stabilization(i.e., to improve the quality from a dry-weather to all-weatherroad) has been calculated by the PNCR as US$11,475per km.

22. Based on the demands made concerning the environment, road courses would follow the watershed and both earth-movingand the need for structures would thus be minimized. The basic cost has therefore been defined as correspondingto an access level of four and a gentle slope. The cost defined in the PNCR for dry-weather roads (US$14,246per km) has been increased to US$18,000 per km to recognize the additionalcosts for environmental protection. Elevation of the standard to an all-weatherroad increases the cost to US$30,000 per km.

Road maintenanceprograms

23. The costs include: (a) the acquisitionof equipment; and (b) routine maintenance (includingoperating costs and the provisionof materials). Three "road maintenance - 76 - Annex 5 committees" (Comite VecinalPro-Camino - CVPC) would be established,based at AsentamientoSanta Maria, Granja "Dos Hermanos" and Santa Rita.

24. The unit costs defined in the PNCR to carry out the seven basic operations involved in road maintenance are considered high, given that the type of road to be constructed will specifically be designed to reduce many of the maintenance costs (which are themselves a function of erosion). The PNCR estimate of US$540 per km per year has been reduced to US$400 per km per year. -77- Annex6

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

The Natural ResourcesConservation Fund (FOCORN)

Introductin

1. The purpose of the FOCORN is to make financialresources available, on a pilot basis, to agricultural producers to undertake on-farm investmentsdesigned to correct distortions caused by the rapid process of deforestationand incorporationof land into agricultural production. Land developmentin the project area for the most part has been undertaken without taking into account the appropriateuse of land or its topographical characteristics,creating a problem of erosion and degradationof natural resources. For the long-termdevelopment of agriculture, this process must be slowed and eventuallyreversed.

2. The availabilityof funds under the FOCORN would encourage and promote the adoption of technologyand investmentsto counter the process of degradationof natural resources. The strategy would be based on the organizationof producers in those catchment areas most at risk and the promotionof technologyto conserve resources while sustaining agriculturalproduction. The investmentswould include:

(a) increasingthe degree of plant cover of the soil as a means of countering the erosive effect of rainfall;

(b) increasing the degree of absorptionof rainfall by the soil, reducing run-off and increasingsoil moisture availabilityfor crop production;

(c) controllingsurface water flows;

(d) re-orientationof cultivationmethods (e.g., minimum tillage methods) and re- equipment;

(e) the preservationand use of germ-plasmof forestry species;

(f) recuperation of fertility and appropriateuse of soils;

(g) the diversificationof production; and

(h) controllingpollution, particularly that associatedwith agricultural chemicals.

3. The FOCORN would be managed by the UCTAP and would provide financial resources for the implementationof activities described in the Sub-Componentof Agricultural Production and Natural Resources Management. It would be applied in 50 catchment areas in the watershedsof the Monday, Tembey and Acaray rivers, representing3,000 producers - 78 - Annex6 on 150,000 ha. An additional 4-5,000 producers distributedthroughout the project area would also be included in the project as recipients of technical assistance.

Operational Strategy

4. The use of the FOCORN would recognizethree different levels of technology used in agriculture:

(a) small-scalequasi-subsistence farming, using insignificantto low levels of investmentand inputs, and principallyoperated by family labor;

(b) small-scalecommercial farming, using animal traction and limited quantities of purchased inputs; and

(c) wholly-mechanized,medium- and large-scalefarming.

The catchment area would be the basic planningunit; in the project area the catchment area is typically of 2-3,000 ha and contains an average of 60 production units.

5. The UCTAP will be responsiblefor the preparationof the developmentplans to be followed in the individualcatchment areas, and will authorizeand control the disbursement of FOCORN resources at the farm and communitylevel. The preparation of plans may be carried out by consultantsunder the control of UCTAP. The provision of resources from the FOCORN would follow a three-phaseprocess:

(a) In the first phase, the physical characteristicsof the catchment area would be analyzed, the Local Natural ResourceManagement Group (Junta Vecinal para la Conservaci6nde Recursos Naturales - JVCRN) would be established, and a physical plan prepared for the catchmentarea by UCTAP or consultantsunder its control. The catchmentarea planningwill begin with a basic natural resource inventory and diagnosticstudy of existing, incipientand potential problems. The Action Plan will be presented to the group of producers in the catchment area and approvedby them. The plan would provide a statement of priorities and goals and a chronogram of activities. Technicalassistance would be provided to organizedgroups of producers to carry out activities of common interest. Planning of the individual farm or holding would be carried out by the techniciandirectly with the farmer. Technicalassistance would be provided directly to the producer in the implementationof the farm-levelplan.

(b) In the second phase, the plan would be approvedby the local officeof CICAR and then by the OperationsCommittee of the UCTAP.

(c) In the third phase, financialresources would be made available to the JVCRN or its individualproducers, up to 50% of the total investmentdefined under the plan; disbursementswould be contingentupon certificatesof work completed, signed by CICAR or the private sector providerof technical assistance. - 79 - Annex6

Technical Assistance and Extension

6. The institutionsinvolved are CRAE, CICAR, cooperatives, consultants (as technical assistanceproviders), and municipalauthorities. UCTAP will be responsiblefor coordination and organization.

7. The operation of the FOCORN would be governedby a set of Regulations. A draft of the Operating Manual of the FOCORN, and of the model contract to be entered into by the producers and UCTAP, would be agreed with the Bank. Resourceswould be provided on a non-reimbursablebasis.

8. The financialresources of the FOCORN would be made availableto individualsand to groups of producers. At the individuallevel, resources would be used for:

(a) the rehabilitationof land; establishmentof contours, terraces, bunds, etc.; and the applicationof lime;

(b) the establishmentof permanent crops;

(c) the establishmentof temporary crops (e.g., summer and winter green manure crops); and

(d) soil analysis.

At the collectivelevel, groups which would include a minimum of five producers with a COR-approvedplan of action would receive resources for:

(a) the protection of water sources and communitywater supplies;

(b) the establishmentof toxic material disposal sites;

(c) the establishmentof water control structures; and

(d) the acquisitionof special implementsand machinery(e.g., lime distributors).

9. The Action Plan would be derived from the overall plan for the catchmentarea, and each producer must be a participant in a JVCRNin order to have access to the FOCORN. The producer would make a sworn declaration concerninghis property, assets and value of production. The resource conservationplan would define the measures to be adopted, the specificinvestments to be made and their phasing. The target farm group of the project area is shown in Annex 6, Tables 1 and 2. - 80 - Annex 6 Tables 1 & 2

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Table 1: Target Farm Group in Project Area

OWN FARMAREA NUMBER No. FARM TYPE AREA MECHANIZATION (ha.) OF l______FARM S

1 Smalt-scaLeagriculture Center-North No 10 - 15 4750

2 Small-scaleagricutture/dairy Center-South No 10 - 15 250

3 Smalt-scaleagriculture South-East No 10 - 15 500

4 Medium-scaLeagriculture/dairy Yes 30 - 50 200

5 Medium-scaleagriculture No 30 - 50 1700

6 Medium-scaleagriculture Yes 30 - 50 300

7 Transition Yes 200 - 300 200

Table 2: FOCORN - Incorporation of Farms by Type

FARM TYPE YEAR OF IMPLEMENTATION l ______1__1 2 3 4 5

1. Small-scaleagriculture ANNUAL 950 950 950 950 950 Center-North TOTAL 950 1,900 2,850 3,800 4,750

2. Small-scaleagriculture/dairy ANNUAL 50 50 50 50 50 Center-South TOTAL 50 100 150 200 250

3. Smalt-scaleagriculture ANNUAL 100 100 100 100 100 South-East TOTAL 100 200 300 400 500 4. Mediuzn-scateagriculture/dairy ANNUAL V40 40 40 40 40 TOTAL 40 80 120 160 200

5. Medium-scaleagriculture ANNUAL 50 50 100 100 0 (withoutmechanization) TOTAL 50 100 200 300 300

6. Medium-scaleagriculture ANNUAL 200 250 350 400 500 (with own mechanization) TOTAL 200 450 800 1,200 1,700

7. Transition ANNUAL 50 50 50 50 0 TOTAL 50 100 200 200 200

TOTAL 1,440 2,930 4,570 6,260 7,900 - 81 - Annex 7

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Project Costs and Financing PARAGWAY NATURALRESOURCES MANAGEMENT PROJECT Project Cost Summary

USS USS X Total ------X Foreign Base Local Foreign Total Local Foreign Total Exchange Costs

A . AgriculturalDevelopment 1. NaturalResource Dev & Pr 10249.4 3389.1 13638.5 10249.4 3389.1 13638.5 24.8 18.9 2. Forestry & Envirornment 11490.6 1107.6 12598.2 11490.6 1107.6 12598.2 8.8 17.5 3. TrainIng, Social Org & TA 4288.8 2276.2 6565.0 4288.8 2276.2 6565.0 34.7 9.1 Sub-Total 26028.8 6772.9 32801.7 26028.8 67m7.9 32801.7 20.6 45.6 B . Social Development 1. IndigenousComnunities 2845.4 356.2 3201.6 2845.4 356.2 3201.6 11.1 4.4 C . Infrastructure 1. RuralRoads 6391.7 6472.2 12863.9 6391.7 6472.2 12863.9 50.3 17.9 00 D . InstitutionalDevelopment 1. UCTAP 3386.6 562.8 3949.4 3386.6 562.8 3949.4 14.3 5.5 2. CRAE/CICAR 510.3 99.1 609.4 510.3 99.1 609.4 16.3 0.8 3. CAM 1175.1 270.9 1446.0 1175.1 270.9 1446.0 18.7 2.0 Sub-Total 5071.9 932.9 6004.8 5071.9 932.9 6004.8 15.5 8.3 E . On-FarmInvestment 8570.0 8570.0 17140.0 8570.0 8570.0 17140.0 50.0 23.8 TotalBASELINE COSTS 48907.8 23104.2 72012.0 48907.8 23104.2 72012.0 32.1 100.0 PhysicalContingencies 1099.4 1182.5 2281.9 1099.4 1182.5 2281.9 51.8 3.2 Price ContingencIes 3418.6 1387.8 4806.5 3418.6 1387.8 4806.5 28.9 6.7

Total PROJECTSCOSTS 53425.8 25674.6 79100.4 53425.8 25674.6 79100.4 32.5 109.8 ===------======-^= ==z===s=Zws=s= n==ns = ==

ValuesScaled by 1000.0- 12/3/199310:28 PARAGUAY NATURALRESCURCES NAMAGENENT PROJECT Summry Account by Project Coponent USS

Natural Forestry Training Indigeno Physicat Price Resource & sociatl us On-Farm Contingencies Contingencies Dev & Environm org & Commuit Rural CRAE/CIC Ivestm ------Pr ent TA ies Roads UCTAP AR CAH nt Total X Amount X Amnount 1. INVESTMENTCOSTS

A. Infrastructure 335.5 820.0 280.0 118.5 10926.0 70.0 9.0 0.0 0.0 12559.0 10.0 1255.9 10.0 1259.2 S. Land Acquisition 0.0 7200.0 0.0 1643.0 0.0 0.0 0.0 0.0 0.0 8843.0 0.0 0.0 0.0 0.0 C. EquIpment 1030.6 456.1 448.0 234.6 1009.2 220.0 71.6 191.7 0.0 3661.8 10.0 366.2 7.7 283.0 D. Training 999.5 246.0 1431.0 16.5 0.0 342.4 114.8 152.8 0.0 3303.0 4.6 152.8 7.9 260.1 E. Studies/Research 2232.5 315.9 35.0 0.0 600.7 0.0 0.0 0.0 0.0 3184.1 5.0 159.2 8.0 253.5 F. Technical Assistance 2884.3 109.5 1179.3 260.0 0.0 316.0 0.0 170.0 0.0 4919.1 5.0 246.0 12.3 606.1 G. On-Farm Investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 17140.0 17140.0 0.0 0.0 0.0 0.0

Total INVESTMENTCOSTS 7482.4 9147.5 3373.3 2272.6 12535.9 948.4 195.4 514.5 17140.0 53610.0 4.1 2180.1 5.0 2661.9 It. RECURRENTCOSTS

A. Personnet 5363.0 2991.4 2823.6 682.5 328.0 2781.0 396.0 877.5 0.0 16243.0 0.0 0.0 11.6 1886.4 B. Materials/Supplies 400.0 119.8 117.5 95.6 0.0 0.0 0.0 18.0 0.0 750.9 5.0 37.5 11.3 84.8 C. Maintenance 1. Vehicles 243.0 309.0 78.5 107.9 0.0 130.0 18.0 36.0 0.0 922.4 5.0 46.1 12.4 114.4 2. Heavy Equipment 116.1 0.0 66.0 18.5 0.0 0.0 0.0 0.0 0.0 200.6 2.1 4.2 11.9 23.8 3. Equipment 6.5 8.0 106.1 24.5 0.0 0.0 0.0 0.0 0.0 145.1 4.8 6.9 12.6 18.3 4. Buitdings 27.5 22.5 0.0 0.0 0.0 90.0 0.0 0.0 0.0 140.0 5.0 7.0 12.0 16.7

Sub-total 393.1 339.5 250.6 150.9 0.0 220.0 18.0 36.0 0.0 1408.1 4.6 64.3 12.3 173.4 D. 1Iscellaneous 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total RECURRENTCOSTS 6156.1 3450.7 3191.7 929.0 328.0 3001.0 414.0 931.5 0.0 18402.0 0.6 101.8 11.7 2144.6

Total BASELINECOSTS 13638.5 12598.2 6565.0 3201.6 12863.9 3949.4 609.4 1446.0 17140.0 72012.0 3.2 2281.9 6.7 4806.5 Physical Contingencies 475.9 171.8 223.5 61.5 1223.6 72.9 14.7 38.0 0.0 2281.9 Price Contingencies 1504.4 529.2 645.8 159.6 1342.5 422.6 59.6 142.8 0.0 4806.5 4.2 203.9

Total PROJECTCOSTS 15618.9 13299.2 7434.3 3422.6 15429.9 4444.9 683.7 1626.8 17140.0 79100.4 3.1 2485.9 6.1 4806.5

Taxes 746.5 398.8 347.9 112.5 2766.6 130.2 21.2 38.0 0.0 4561.8 7.9 360.8 Foreign Exchange 3922.6 1278.0 2591.0 419.7 7822.7 646.1 113.2 311.4 8570.0 25674.6 5.0 1285.4

Values SCaledby 1000.0 12/3/1993 10:29 PARA.MY NATURALRtESOUCES MANAGEENT PROJECT Suumry AccountsCost Su _ ry

US$ USS X Totat ------X Foreign Base Locat Foreign Total Local Foreign Total Exchange Costs 1. INVESTMENTCOSTS

A. Infrastructure 6558.7 6000.3 12559.0 6558.7 6000.3 12559.0 47.8 17.4 B. Land Acquisition 843.0 0.0 8843.0 8843.0 0.0 8843.0 0.0 12.3 C. Equipent 296.3 3365.5 3661.8 296.3 3365.5 3661.8 91.9 5.1 D. Training 1231.4 2071.6 3303.0 1231.4 2071.6 3303.0 62.7 4.6 E. Studies/Research 2540.0 644.1 3184.1 2540.0 644.1 3184.1 20.2 4.4 F. Technical Assistance 3459.2 1459.9 4919.1 3459.2 1459.9 4919.1 29.7 6.8 00 G. On-FarmInresteent 8570.0 8570.0 17140.0 8570.0 8570.0 17140.0 50.0 23.8 TotalINVESTMENT COSTS 31498.6 22111.4 53610.0 31498.6 22111.4 53610.0 41.2 74.4 tl RECURRENTCOSTS

A. Persomel 16243.0 0.0 16243.0 16243.0 0.0 16243.0 0.0 22.6 B. Naterials/Supplies 373.5 377.4 750.9 373.5 377.4 750.9 50.3 1.0 C. Maintenance 1. Vehicles 465.1 457.3 922.4 465.1 457.3 922.4 49.6 1.3 2. HeavyEquipment 106.1 94.5 200.6 106.1 94.5 200.6 47.1 0.3 3. Equip.ent 96.2 48.9 145.1 96.2 48.9 145.1 33.7 0.2 4. Buitdings 125.2 14.8 140.0 125.2 14.8 140.0 10.6 0.2 Sub-Totat 792.7 615.4 1408.1 792.7 615.4 1408.1 43.7 2.0 0. MisceLlaneous 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Totat RECURRENTCOSTS 17409.2 992.8 18402.0 17409.2 992.8 18402.0 5.4 25.6 TotaL BASELINECOSTS 48907.8 23104.2 72012.0 48907.8 23104.2 72012.0 0.0 100.0 Physicat Contingencies 1099.4 1182.5 2281.9 1099.4 1182.5 2281.9 51.8 3.2 Price Contingencies 3418.6 1387.8 4806.5 3418.6 1387.8 4806.5 28.9 6.7 TotaL PROJECTSCOSTS 53425.8 25674.6 79100.4 53425.8 25674.6 79100.4 32.5 109.8 ______..... mas...... wza...... ______...... ____.______=...... _._=._ZX ...... _ VaLues Scaled by 1000.0 - 12/3/1993 10:29 PARAGUAY NATURALRESOURCES MANAGEMENT PROJECT Projects Components by Year

Totals Including Contingencies Totals Including Contingencies USS USS

01 02 03 04 05 TotaL 01 02 03 04 05 Total ===2 ======x======5======-- Agricultural Develop ent A. 15618.9 1. Natural Resource Dev & Pr 4305.6 2687.0 2689.5 2961.7 2975.1 15618.9 4305.6 2687.0 2689.5 2961.7 2975.1 & Envirorment 2046.6 3196.1 2795.3 2689.0 2572.1 13299.2 2046.6 3196.1 2795.3 2689.0 2572.1 13299.2 2. Forestry 7434.3 3. Training,Social Org & TA 2826.7 1212.1 1207.3 1187.4 1000.8 7434.3 2826.7 1212.1 1207.3 1187.4 1000.8

9178.9 7095.3 6692.1 6838.0 6548.0 36352.4 9178.9 7095.3 6692.1 6838.0 6548.0 36352.4 Sub-Total 00 cn B. Social Development 239.0 3422.6 1. IndigenousComJunities 1076.8 1499.5 324.8 282.5 239.0 3422.6 1076.8 1499.5 324.8 282.5

C. Infrastructure 15429.9 1. RuraL Roads 746.2 6575.2 8014.5 94.1 0.0 15429.9 746.2 6575.2 8014.5 94.1 0.0

InstitutionalDevelopment D. 4444.9 1. UCTAP 1251.5 810.7 768.2 797.7 816.7 4444.9 1251.5 810.7 768.2 797.7 816.7 683.7 2. CRAE/CICAR 266.3 103.2 106.4 109.7 98.2 683.7 266.3 103.2 106.4 109.7 98.2 258.3 1626.8 3. CAH 639.3 235.7 243.0 250.5 258.3 1626.8 639.3 235.7 243.0 250.5 6755.4 Sub-Total 2157.1 1149.6 1117.6 1157.9 1173.2 6755.4 2157.1 1149.6 1117.6 1157.9 1173.2 17140.0 E. On-Farm Investment 3428.0 3428.0 3428.0 3428.0 3428.0 17140.0 3428.0 3428.0 3428.0 3428.0 3428.0 79100.4 Total PROJECTSCOSTS 16587.0 19747.6 19576.9 11800.6 11388.2 79100.4 16587.0 19747.6 19576.9 11800.6 11388.2 ------==- ======:==u ===gs======……==

Values Scaled by 1000.0 12/3/1993 10:29 - 86 - Annex 7

PARAGUAY NATURAL RESOURCESMANAGEMENT PROJECT uss

Project Components by Year

Base Costs Total

01 02 03 04 05 US# USS =ZxUgUZ3ZUZsZ3u33Z=XZ3ZUUSU3U33S33aznu3u3z3-s uKZsWuz3zuzz3xz3u A. Agricultural Development 1. Natural Resource Dev & Pr 3897.8 2416.0 2358.1 2514.8 2451.8 13638.5 13638.5 2. Forestry & Environment 1856.8 3045.6 2680.8 2568.3 2446.7 12598.2 12598.2 3. Training, SociaL Org & TA 2551.5 1099.5 1063.5 1015.6 834.9 6565.0 6565.0

Sub-total 8306.1 6561.1 6102.4 6098.7 5733.4 32801.7 32801.7 B. Social Development 1. Indigenous Comunmities 1026.3 1455.1 282.6 238.9 198.7 3201.6 3201.6 C. Infrastructure 1. Rural Roads 682.7 5545.0 6554.2 82.0 0.0 12863.9 12863.9 D. Institutional Development 1. UCTAP 1150.6 741.6 683.8 689.0 684.4 3949.4 3949.4 2. CRAE/CICAR 242.2 94.8 94.8 94.8 82.8 609.4 609.4 3. CAN 580.8 216.3 216.3 216.3 216.3 1446.0 1446.0

Sub-total 1973.6 1052.7 994.9 1000.1 983.5 6004.8 6004.8 E. On-Farm Investment 3428.0 3428.0 3428.0 3428.0 3428.0 17140.0 17140.0

Total BASELINE COSTS 15416.7 18041.9 17362.1 10847.7 10343.6 72012.0 72012.0 PhysicalContingencies 604.2 718.2 759.2 108.5 91.8 2281.9 2281.9 Price Contingencies 566.1 987.6 1455.6 844.3 952.8 4806.5 4806.5 ------.---.------.. ------.- -..-..-.----. ---- . TotaL PROJECT COSTS 16587.0 19747.6 19576.9 11800.6 11388.2 79100.4 79100.4 ==ZU=MsaX 3=UsZE ZSZZ ss=-- ===s -- SSZx====z======z= Taxes 807.0 1677.8 1636.7 230.5 209.7 4561.8 4561.8 Foreign Exchange 6678.1 6496.1 7340.0 2687.2 2473.1 25674.6 25674.6

Vatues Scaled by 1000.0 12/3/1993 10:29 PARAGLUAY NATURALRESOURCES MANAGEMENT PROJECT Financing Plan by Disbursement Category US$

IBRD GOVT Producers Government Total Local ------For. (Exc. Duties Amount X Amount X Amount X Amount X Amount X Exch. Taxes) & Tax.

A. Land Acquisition 0.0 0.0 8843.0 100.0 0.0 0.0 0.0 0.0 8843.0 11.2 0.0 8843.0 0.0 B. Infrastructure 11908.5 79.0 0.0 0.0 0.0 0.0 3165.6 21.0 15074.1 19.1 7213.6 4694.9 3165.6 C. Production Investment 4998.0 70.0 0.0 0.0 2142.0 30.0 0.0 0.0 7140.0 9.0 3570.0 3570.0 0.0 -a D. Conservation Investment 5000.0 50.0 0.0 0.0 5000.0 50.0 0.0 0.0 10000.0 12.6 5000.0 5000.0 0.0 E. Equipment 4111.1 95.4 0.0 0.0 0.0 0.0 199.9 4.6 4311.0 5.5 3966.1 145.0 199.9 F. Training 3536.6 95.2 0.0 0.0 0.0 0.0 179.3 4.8 3715.9 4.7 2326.9 1209.7 179.3 G. Studies/research 3418.6 95.0 0.0 0.0 0.0 0.0 178.2 5.0 3596.8 4.5 732.2 2686.4 178.2 H. Technical Assistance 5497.3 95.3 0.0 0.0 0.0 0.0 273.8 4.7 5771.1 7.3 1709.3 3788.0 273.8 I. Personnel 11512.2 63.5 6617.2 36.5 0.0 0.0 0.0 0.0 18129.4 22.9 0.0 18129.4 0.0 J. Materials/supplies 0.0 0.0 685.2 78.5 0.0 0.0 188.1 21.5 873.3 1.1 438.9 246.3 188.1 K. Maintenance 0.0 0.0 1268.8 77.1 0.0 0.0 376.9 22.9 1645.7 2.1 717.7 551.2 376.9 Total Disbursement 49982.3 63.2 17414.3 22.0 7142.0 9.0 4561.8 5.8 79100.4 100.0 25674.6 48864.0 4561.8 …======s===.======.======…=_==-======ValuesScaled by 1000.0 12/3/199310:29

-4 PARAGUAY NATURALRESOURCES MANAGEMENT PROJECT Financing Plan by Project Components uSS

IBRD GOVT Producers Goverrment ------Total Local For. (Excl. Duties Amount X Amount X Amount X Amount X Amount X Exch. Taxes) & Tax.

A. Natural Resource Dev * 11966.1 76.6 2906.3 18.6 0.0 0.0 746.5 4.8 15618.9 19.7 3922.6 10949.7 746.5 B. Forestry & Environuent 4071.2 30.6 8829.2 66.4 0.0 0.0 398.8 3.0 13299.2 16.8 1278.0 11622.5 398.8 C. Training, Social Org * 5596.7 75.3 1489.7 20.0 0.0 0.0 347.9 4.7 7434.3 9.4 2591.0 U495.4 347.9 x D. Indigenous Comsunities 1165.5 34.1 2144.6 62.7 0.0 0.0 112.5 3.3 3422.6 4.3 419.7 2890.4 112.5 E. Ruwal Roads 12532.0 00 81.2 131.3 0.9 0.0 0.0 2766.6 17.9 15429.9 19.5 7822.7 4840.7 2766.6 F. UCTAP 2984.3 67.1 1330.4 29.9 0.0 0.0 130.2 2.9 444.9 5.6 646.1 3668.6 G. CRAE/CICAR 485.2 71.0 130.2 177.2 25.9 0.0 0.0 21.2 3.1 683.7 0.9 113.2 549.2 21.2 H. CAN 1183.2 72.7 405.6 24.9 0.0 0.0 38.0 2.3 1626.8 2.1 311.4 1277.5 38.0 1. On-Farm Investment 9998.0 58.3 0.0 0.0 7142.0 41.7 0.0 0.0 17140.0 21.7 8570.0 8570.0 0.0 Total Disbursement 49982.3 63.2 17414.3 22.0 7142.0 9.0 4561.8 5.8 79100.4 100.0 25674.6 48864.0 4561.8 Values Sca=edby1…= =S=S31=91==S==x=S=S==s=S====s====SS Sun -=-2 Values Scaled by 1000.0 1213/1993 10:29

>< - 89 - Annex 8

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Disbursement Schedule 1'

Disbursement Cumulative FY (US$ million) (US$ million)

1995 2.3 1' 2.3

1996 1.5 3.8

1997 7.5 11.3

1998 8.0 19.3

1999 10.0 29.3

2000 10.0 39.3

2001 10.0 49.3

2002 0.7 50.0

Notes 1/ following the standard disbursement profile for agricultural projects in Paraguay. 2/ deposit in the Special Account. -90- Annex 8

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Estimated Annual Contractual and Other Payments (US$ million equivalent)

Project Years Total Project Element 1 2 3 4 5 6 Payments Works Roads & Construction 1.3 7.0 6.8 15.1 Goods Equipment 2.5 0.5 1.3 4.3 Services Training 2.1 0.6 0.5 0.3 0.2 3.7 Studies & Research 2.3 0.3 0.4 0.4 0.2 3.6 Technical Assistance 1.1 1.0 1.1 1.3 1.3 5.8 Other Land Acquisition 0.5 2.9 1.8 1.8 1.8 8.8 FOCORN I' 2.0 2.0 2.0 2.0 2.0 10.0 Pilot Credit 1.4 1.4 1.4 1.4 1.5 7.1 Personnel 2.8 3.7 3.8 3.9 3.8 18.0 Operating Costs 0.5 0.5 0.5 0.6 0.6 2.7

Total 16.5 19.9 19.6 11.7 11.4 79.1 Bank-financed 12.5 12.0 12.9 6.5 6.1 50.0

I/ includingproducers' contributions - 91- Annex 9

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Schedule of Monitorable Actions

Target date for PhysicaL Targets (end year) I l1 ll Co onent initiation colion 1 12 1 3 j 4 _ 5

1. AgriculturalDevelopment 1.1 Joint Bank/Governmentreview of March June the agro-ecologicalzoning 1994 1994 analysis and legal/policy instruments 1.2 Selection of criticalcatchment 50 areas

1.2.1 Design of detailed management 25 25 pLans 1.3 Agriculturalresearch - 16 30 30 implementationof programs

1.4 Agro-forestryresearch - 100 200 300 200 establishmentof research plots, ha. 1.5 Forestry research 1.5.1 Establishmentof germpLasmbank June December 1995 1997 1.5.2 Establishmentof arboretuin June December 1995 1998

1.6 Environmentalcontrol 1.6.1 EstabLishmentof new control 3 posts 1.6.2 Strengtheningof existing 5 control posts 1.6.3 Production of regulationsand December procedures manual 1995 1.7 Protectedareas 1.7.1 Complete acquisitionof Land _ 25% 25% 25% 25% for the San Rafael nationaL park. 1.7.2 Complete studies for new December national parks 1995 1.7.3 ImpLementationof management December plan for Kirily reserve and 1996 Yacuy and Nacunday protection areas I I I

1/ Based on the pLanned date of Loan Effectivenessof August, 1994, Project Year 1 would coincide with calendaryear 1995. - 92 - Annex 9

Target date for Physica[ Targets (end year) Coopornent initiationT coJpLetion 1 T 2 3 4 5

1.8 Natural ResourcesConservation Fund 1.8.1 Number of producersassisted 500 1,000 1,500 2,000 3,000 (cumutative) l

2. IndigenousCommunities 2.1.1 Acquisitionof (and Dec. 1998 2.1.2 ReguLarizationof titles Dec. 1998

2.1.3 Number of families reached (a) with agricutturalsupport 250 500 750 1,000 1,285 (cumulative) (b) with health & educationsupport 250 500 750 1,000 1,285 (cumulative)

3. RuraL Roads 3.1 Design 3.1.1 Selectionof consultants Sept. 1994 Dec. 1994 3.1.2 Award of contract Jan. 1995 3.1.3 CompLetionof design June 1995 3.2 Road building 3.2.1 Selectionof contractor (s) Jan. 1995 Mar. 1995 3.2.2 Award of contract (s) June 1995 3.2.3 Commencementof work Sept. 1995 3.2.4 Completionof work Dec. 1997 3.3 Acquisitionof machinery for Dec. 1997 road maintenance

4. InstitutionaLDevelopmient 4.1 EstabLishmentof Aug. 1994 UCTAP/CICAR/CRAE 4.2 Entry into effect of convenios Aug. 1994

5. Pilot AgriculturalCredit 5.1 Number of producersassisted 500 1,000 2,000 3,500 5,500 (cumutative) - 93 - Annex 10

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Supervision Plan

1. The proposed project would require the close cooperation of a large number of entities, including several new bodies to be created to achieve a decentralization of project implementation. Bank supervision will be based upon close and continuous communication with the UCTAP. In each of the first and second years of the project, four supervision missions would be made. It is expected that once the project is fully functioning, two supervision missions per year would be required. There would be two mid-term reviews. Supervision will require considerable technical input. Close cooperation would be maintained with the project implementation liaison staff of the Bank's resident facilitating office in Asunci6n.

2. The principal staff involved with supervision would be:

(a) Task Manager (b) Institutional Development Specialist (c) Agricultural and Forestry Research Specialist (d) Natural Resources Conservation/Land Use Specialist (e) Indigenous Peoples Specialist (f) Road Engineer (g) Credit Specialist

3. The staffing of the supervision missions in the first two years of the project's implementation is expected to be the following:

FY95 1. a, b, g 2. a,e 3. a,b,c,d 4. a,e,f

FY96 1. a, b, g 2. a,e,f 3. a,b,c,d 4. a,e,f - 94 - -95 - Annex 11

PARAGUAY

NATURAL RESOURCES MANAGEMENT PROJECT

Documents in the Project File

Proyecto de Desarrollo Agropecuario y de Conservaci6n de los Recursos Naturales de la Regi6n de Alto Parand - Itapua Norte

Ministerio de Agricultura y Ganaderia, Asunci6n, Diciembre 1991.

Main Report, and supporting annexes, including:

(a) Estudios de los Recursos Naturales en la Regi6n (b) Area Productiva (c) Sistemas de Producci6n y Desarrollo Productivo (d) Demografia y Salud (e) Diagn6stico de Sistema de Capacitaci6n y Desarrollo de Tecnologia Agropecuaria (f) Caminos Rurales (g) Componente Indigena (h) Componente de Desarrollo para la Mujer Rural (i) Programa de Cooperaci6n Tecnica para el Credito y Comercializaci6n (j) Estimaci6n de la Demanda de Credito y una Propuesta Operativa para la Region (k) Programa de Fomento para el Desarrollo de la Pequenia y Mediana Industria

2. Environmental Assessment: Terms of Reference

3. Environmental Assessment: Full Report

4. COSTAB: Detailed project cost tables.

5. Institutional Development Analysis. - 96 - - 97 - Annex 12

PARAGUAY

NATURALRESOURCES MANAGEMENT PROJECT

EnvironmentalAssessment: Summary

Introduction

1. The Environmental Assessment (EA) was carried out between April-June, 1992, by a team of four local consultants including a parks specialist, a forester, an agronomist and an indigenous peoples specialist. The methodology presented in the Terms of Reference (TOR) followed the guidelines of a regional environmental assessment ', which considered the project as a whole as presented in the preparation documents, with its four sub-projects, four programs and nine sub-programs. The methodology was unusual in that the EA was used to verify the project document regarding its environmental and sustainable development aspects, and to analyze to what extent the project already included these concerns.

2. The draft EA was made available to the project preparation team, relevant Government institutions, non-government organizations (NGOs) and other people knowledgeable of the project area, and comments were provided to the local team.

Policy. Legal and AdministrativeFramework

3. Since 1989, Paraguay has undergone enormous changes in the political, social and economic arena. The new democratic government must face the difficult present situation and respond to the demands of the population for better and more equitable living conditions. A new Constitution was approved in June 1992, which includes mandatory payment prior to land expropriation. In addition, the forest law, which in the past regulated almost all aspects regarding natural resources, is under revision, and a series of draft laws for the protection of natural resources are at different stages of review by the legislative bodies. The new Constitution recognizes community property, participation, education and assistance as being rights of indigenous peoples. In addition, a new law has been approved which changes the former dependent legal status of women; this will improve their role in the socio-economic process.

4. The whole legal framework for natural resource management (NRM) is extremely fluid at present, and regulations and enforcement have been traditionally weak. Improvements are expected to be slow, given the young institutions which are in charge of NRM. The Government of Paraguay (GOP) has adopted a policy of decentralization, which implies operational and some budgetary independence for the regional divisions of central government institutions. However, their presence in the interior of the country is limited, at best, and plagued by the remnant of historical problems. Within that framework, the EA

1. IBRD EnvironmentalAssessment Sourcebook, Vol 1, pp. 12-16. - 98 - Annex 12 was adjusted to set realistic goals and to consider the project itself as part of a process of awareness building, both for the project target groups and for the government institutions involved.

5. Institutional arrangements for the EA work included the contracting of local consultants to prepare the document, in lieu of its preparation directly by the Sub-secretariat of Natural Resources and the Environment (SSRNMA) of the Ministry of Agriculture (MAG), which reviewed the draft and approved the final version.

Project Backgroundand Description

6. The project is situated between 240 and 270 latitude south and between 540 30" and 550 20" longitude west. The project area covers 20,000 km2, or 5% of the total land area of Paraguay. It includes the Departments of ItapCia(norte) and Alto Parana, and has borders in the east with Brazil and Argentina and in the west and north with the Departments of Caaguazu, Caazapa and Canindeyui.

7. Forests, savannahs, lowlands and brush are the main natural vegetation of the area. Of these, the forests have suffered the greatest damage and only disjointed remnants of the original forests survive in a mainly degraded state. Deforestation rates are estimated to be of the order of 12.5% annually. Surface waters are significantly contaminated by human wastes and agricultural chemicals. Fauna is scarce outside the few remaining natural reserve areas.

8. Since 1970, the expansion of the agricultural frontier and the construction of the Itaipu hydro-electric dam have caused large-scale migration into the region. The population of the project area is estimated at 500,000, with 75% in the Department of Alto Parana; approximately 43 % of the population is considered as being urbanized. The accelerated population growth is one of the major problems facing the region. In addition to internal migration, and some new and established European colonies, there are large numbers of Brazilian settlers.

9. The main source of income in the region is agriculture, including forest exploitation and animal production. Monocultures, mainly of soybeans, cotton and wheat, comprise the bulk of the agricultural production.

10. The state institutions have been largely unable to support the needs of the agricultural sector in terms of extension, research, credit, and training. Services cover at most 15% of the potential target groups. Other social services, such as education, health, sanitation and potable water, are similarly weak.

11. The project preparation documents present two main objectives:

(a) to reverse the present abuse of natural resources in the area and to achieve development of the agricultural sector in a way that is economically viable and environmentally sustainable. The aim is to diversify production and to integrate productive and marketing processes to favor the generation of aggregate value and greater retention of the revenues; and -99- Annex 12

(b) to create mechanisms for participation of the population in the project implementation process. Without this participation, the process will be unable to achieve economic growth or social equity. The participation of cooperatives, municipalities and other private sector institutions will be encouraged, in order to generate a process of participative development management.

12. The project has four lines of strategic action:

(a) the integration of natural resources and productive factors into systems which allow protection of natural resources while achieving economic production levels. The rainfall catchment area (micro-cuenca) is the basic planning unit;

(b) institutional strengthening of the agricultural public sector, through operational decentralization and increased efficiency of the different services, greater participation of the private sector, and the creation of a regional system for protection of natural resources;

(c) modification of the attitudes and skills of the population through training in community organization, technical aspects of production, and marketing. A women's program has been included, to increase their participation in the socio-economic development process; and

(d) strengthening of the basic infrastructure, roads, potable water and other systems having an impact on the quality of life of the population.

13. The project includes four main components: (a) agricultural development, which would promote: (i) sustainable, diversified production systems and integrated natural resource management; (ii) conservation of natural resources; (iii) technical cooperation; and (iv) increasing the role of rural women; (b) social development, which includes: (i) support to indigenous communities and (ii) basic sanitation; (c) infrastructure, which comprises rural road improvement; and (d) pilot agricultural credit, designed to support investment activities by small farmers and to develop new credit delivery techniques.

14. Although not a stated objective, the aim of the project is to promote more sustainable and environmentally-benign agricultural methods for the region, and to strengthen the human and physical infrastructure needed to achieve this goal.

15. The only component found to have specific risks of negative environmental effects was the infrastructure sub-component for rural road improvement. The project documents originally proposed abandoning some of the existing roads in favor of the construction of new roads aligned to follow the watershed. The EA team considered that this would not necessarily represent an improvement; in practice, the old roads would probably not be abandoned by traffic or would increasingly deteriorate without maintenance, becoming even greater sources of erosion problems. A case-by-case approach was recommended which would examine all existing roads before deciding on new construction. - 100 - Annex 12

Base-line Data

16. In general, the deficiencies of the base-line data for the project area reflect those existing at the national level, and the best effort was made to compile what was available. The new IBRD-financed Land Use Rationalization Project (Ln. 3445-PA) will be extremely helpful in providing much-needed data, which is expected to feed directly into this project.

17. Present information on the remaining forest cover is not sufficiently detailed for work at the level of the micro-cuenca. The soil resource evaluation used in project preparation was based on general reconnaissance-level studies made in 1965 and 1973, which allow only a very general characterization of the project area, particularly on the areas estimated for soil classes II and III. The demographic data, based on the 1982 census, are only sufficient for a very approximate characterization. The base-line data on agricultural aspects are the most correct and up-to-date. Data on credit are very limited, and the existing guidelines for credit use are not designed for conservation of natural resources.

18. The lack of coordination, both intra- and inter-institutional, is a more serious deterrent to the efficiency of public institutions than their centralization. The lack of a regional environmental policy document to guide the activities in the project area is considered a serious deficiency.

19. The data base for the women's program was taken from national-level data, which is incomplete at best and has little gender segregation. Through more interaction with some women's groups in the project area, more data could be assembled by the project.

20. The indigenous program has an adequate data base but it needs to be improved by the addition of a map showing population distribution by ethnic group which will facilitate the resolution of the whole land tenure and reserve issue. There are several NGOs which have more precise data. Also, data on the status of negotiations by the different ethnic groups regarding their claims to land were not available, and were provided by the EA team.

Analysis of Environmental Impact

21. The conservation practices proposed in the natural resource management sub-program were analyzed according to their environmental impact for the different types of farm included in the project. All practices were found to have beneficial effects, as compared to the present practices. The largest positive effect were for medium and large farms.

22. The estimated 7,900 farms to be included in the project represent 21% of the farms but only about 12% of the land in the project area; therefore about 88% of the land falls outside the area of action of this sub-program.

23. The agricultural research sub-program, as a separate program from forestry research, would be less effective than if their activities were combined. For example, research in agro-forestry and silvo-pastoral systems, which would be very relevant to project objectives, was not originally included in the activities. - 101 - Annex 12

24. The sub-program of environmental supervision appears to be in charge of extension, promotion, supervision, and also of enforcement of environmental provisions. In addition to the risk of conflict with national institutions already in charge of enforcement, the effectiveness of the sub-program might suffer if it had to conduct supervisory and enforcement functions simultaneously.

25. The objectives established for the units of operation and support to the project (CRAE, CICARSE and UCTAP) are correct, but it is very important to avoid the creation of conflicts between those units and the national institutions. Conflicts such as those originated by the absence of a sole authority in the area of enforcement, and duplication of functions between national institutions and those of the project, may result in the detriment of the environmental benefits of the rest of the project activities.

26. An excellent feature of the indigenous communities sub-program is that it proposes delimitation of the indigenous lands prior to allocation for any other uses. However, all of the lands considered for increases of reserve areas or for relocation are presently under private ownership, and the new Constitution mandates compensatory payments to be deposited prior to expropriation of lands. Although the fiscal land value may be nominal, this still represents a new cost that the project may not be able to absorb.

27. The indigenous agricultural production support sub-program appears to require further detail in assessment of the differences between ethnic groups and of what these represent in terms of project activities. The proposed activities may suit some of the ethnic groups and not others, as in the case of dairy production.

28. The rural roads improvement component originally contemplated abandoning some of the existing roads in favor of new construction following the watershed. The EA team found that this would not necessarily represent an improvement; the old roads would not necessarily be abandoned by traffic, or would increasingly deteriorate without maintenance, becoming even greater erosion sources.

Mitigation Plan

29. The project has been in part designed to mitigate the environmental impacts of the present production models, which are causing irreversible damage to the natural resource base. Therefore only adjustments to the proposed activities, aimed at increasing their positive environmental impacts, are recommended. Because of the relatively small coverage of the project, any actions contemplated to increase its impact in the future should be considered.

30. Within the sub-program of natural resource management, some activities of comprehensive impact are recommended, such as the declaration of all forest in the project area as Protective Forests. This status is contemplated under present legislation, and does not preclude the use of trees for different purposes, only the removal of the forest. The inclusion of the costs of conservation practices proposed by the project into the credit program and the Natural Resource Conservation Fund (FOCORN) is also recommended. - 102- Annex 12

31. In the sub-program of production research, several activities which emphasize diversification and agro-forestry alternatives are recommended for inclusion. Forestry research should emphasize wind-breaks, energy wood-lots, and multiple-use riparian forests, and should be conducted in buffer zones and other suitable locations outside of protected areas. The sub-program of forestry research has been modified to include agronomists and professionals from other areas, and to be conducted in the research centers cooperating with the project. This should ensure a more multi-disciplinary approach needed for these types of research.

32. The environmental supervision activities should be framed in norms and procedures established by the national institutions in charge, and should include the municipal authorities as much as possible. CRAE might include a unit for environmental monitoring, and could also be in charge of promotion and extension for the project, but not of enforcement, which should be left to the national institutions already charged with that function, in accordance with existing laws and future regulations.

33. The sub-program for support to protected areas should elaborate management plans for protected areas and forests and for buffer zones included in the project. The plans should be explicit as to the participation of the indigenous communities. The Scientific Monument Moises S. Bertoni could be included in the protected area network covered by the project.

34. The sub-program for agro-industrial promotion should incorporate environmental considerations in the design of new plants and projects, as well as incorporating environmental assessment of existing industries in the project area for their improvement. Similarly, the sub-program for marketing should include the strict regulation of chemicals used and sold, and the appropriate disposal of toxic residues and containers.

35. The sub-programs for strengthening of cooperatives, municipal administrations and non-formal groups should include environmental education and sanitation among the activities promoted.

36. The rural women's support program should ensure sufficient autonomy from the rest of the project so that the committees may choose their own environmental concerns, often different from those of men. An area of particular interest should be the traditional medicine practices and the extraordinary knowledge of native herb species; this area should interact with the agricultural and agro-forestry research programs, and with the bio-diversity inventories.

37. The program for indigenous land titling should precede delimitation of any other land use in the project area. It should be initiated by mapping the entire indigenous population in the project area by ethnic group, including all land presently controlled or owned by indigenous people and the projected expansions. Following this, a "no-innovation" measure for the expansion areas should be solicited from the GOP, to protect indigenous people from expulsion by landowners or invasion. There are several requisites to be complied with by the indigenous communities to obtain titles to the land, which are listed in the EA document. The EA team recommended contracting the services of those NGOs which are knowledgeable and experienced in those issues. - 103 - Annex 12

38. In view of the article of the new Constitution which specifies prior compensation for expropriation of lands, the mechanisms and sources of funds for land acquisition must be clearly identified. Although most lands proposed for indigenous expansion are privately held, it may not be necessary to purchase all of them; negotiations for donations and other conciliatory measures should be attempted.

39. In the production support component, all actions should be planned on the basis of the traditional activities of the different ethnic groups, and following their opinion and initiative. For example, dairy production, which the project proposes as a blanket activity for all indigenous groups, may be appropriate for the Ava Guarani but the Mbya may prefer to strengthen their traditional chicken and pig production activities.

40. The rural road improvement sub-program was modified in favor of a case-by-case approach, where the conditions of each road would be evaluated and appropriate measures for improvement, or for safe closure and retracing, would be taken. If an existing road is to be abandoned in favor of construction of a new one, provisions should be made to ensure that the old road does not continue to be an erosion hazard. Following IBRD guidelines, the project must present an environmental assessment or declaration for each case. The Ministry of Public Works (MOPC) has recently adopted a set of guidelines which are in agreement with IBRD procedures. In addition, the MOPC, with the IBRD Environmental Division, is planning an EA course for road construction in the near future.

Management Responsibilities

41. The MAG will have overall responsibility for project implementation, through DINCAP. By executive decree, the Unit of Technical and Administrative Coordination of the Project (UCTAP) will be created as an executive unit, based in the project area. The UCTAP will be supported by the CRAE (Regional Environmental Center for the East) and the CICAR/SE (Rural Research and Training Center of the South East). The UCTAP will consist of a National Coordinator, four Area Supervisors and support staff.

42. The functions of the UCTAP will be: (a) to program, organize and control the technical activities of the project; (b) to coordinate other institutions of the private and public sectors concerned with implementing the project; (c) to administer expenditures of the FOCORN; (d) to coordinate technical staff through the Area Supervisors; (e) to maintain all records in line with ONCAP systems and methods; (f) to coordinate with the central authorities the implementation of project investments; (g) to apply the criteria for use of resources of the FOCORN; (h) to coordinate the preparation of the annual operating plans (POAs) and progress reports; and (i) to submit for approval the proposals of public and private sector participants.

Monitoring

43. Chronograms of the main activities of the project will be submitted for approval during appraisal. These will form the basis for the schedule of monitorable actions and the supervision plan, including the mid-term review. Project monitoring and evaluation are to be the responsibility of the Technical Department (Gabinete Tecnico - GT) of MAG. - 104 - Annex 12

44. A series of environmental parameters has been included in the TORs which are presented in the EA document. Environmental indicators based on water quality and soil fertility and stability will be helpful in determining the relative success of the project.

45. These parameters, and similar process-end parameters based on economic measures, may be useful in evaluating success or failure, but may not provide the information needed as feed-back to modify the project activities. A carefully elaborated monitoring plan is particularly needed in this project, where there is practically no historical baseline for comparison in any of the activities undertaken.

46. The EA team recommended that the MAG be assisted in the preparation of the guidelines and TORs for the monitoring plan. A suggested appropriate source for this assistance is the monitoring unit from the Ministry of Planning of the State of Parana, Brazil (IPARDES) which monitors the Parand Rural project. This unit has twelve years of accumulated experience in the same agro-ecological region, and the IBRD-financed Parana Rural project served as a model for the design of this project. - 105 - Annex 13

PARAGUAY

NATURALRESOURCES MANAGEMENT PROJECT

Abbreviationsand Acronyms

AC Association of Cooperatives (Asociaci6n de Cooperativas)

AUCA Agricultural Credit Users' Association (Asociaci6n de Usuarios de Credito Agricola)

BCP Central Bank (Banco Central del Paraguay)

BNF National Development Bank (Banco Nacional de Fomento)

CAH Smallholder Credit Agency (Credito Agricola de Habilitaci6n)

CEDEFO Forestry Development Center (Centro de Desarrollo Forestal)

CEM Country Economic Memorandum

CDR Regional Development Committee (Consejo de Desarrollo Regional)

CF Forestry Center (Centro Forestal)

CFAP Forestry Center of Alto Parand (Centro Forestal de Alto Parana)

CGN Comptroller-General (Contraloria-General de la Naci6n)

CICAR Rural Research and Training Center (Centro de Investigaci6n y Capacitaci6n Agropecuaria Regional del Sur- Este del Paraguay)

CONCODER National Rural Development Coordination Council (Consejo Nacional de Coordinaci6n para el Desarrollo Rural)

CPI Consumer Prices Index - 106- Annex 13

CRAE Regional Environmental Center (Centro Regional Ambiental del Este)

COR Regional Operational Committee (Comite Operativo Regional)

DCE Directorate of Census and Statistics (Direcci6n de Censo y Estadisticas Agropecuarias/MAG

DCV Directorate of Rural Roads (Direcci6n de Caminos Vecinales/MOPC)

DF Forestry District (Distrito Forestal)

DGP Planning Directorate (of MAG) (Direcci6n General de Planificaci6n)

DINCAP National Directorate for Project Coordination and Administration (Direcci6n Nacional de Coordinaci6n y Administraci6n de Proyectos)

DMA Directorate of the Environment (Direcci6n de Medio Ambiente/SSRNMA)

DRF Directorate of Forest Resources (Direcci6n de Recursos Forestales/SSRNMA)

EA Environmental Assessment

ESW Economic and Sector Work

ETAP Environmental Technical Assistance Project

FAO Food and Agriculture Organization

FAO/CP FAO - World Bank Cooperative Program

FG Livestock Fund (Fondo Ganadero)

FOCORN Natural Resources Conservation Fund (Fondo para la Conservacion de los Recursos Naturales)

GDP Gross Domestic Product

GIS Geographic Information System - 107 - Annex 13

GOP Government of Paraguay

GTZ Deutsche Geselilschaftfuir Technische Zussammenarbeit

IBR Rural Welfare Institute (Instituto de Bienestar Rural)

ICA Institutional Capacity Analysis

ICB International Competitive Bidding

ICG Institutional Capacity Gap

IDB Inter-American Development Bank

IDC Institutional Development Component

INDI Paraguayan Institute for Indigenous People (Instituto Paraguayo del Indigena)

JVCRN Local Natural Resources Management Group (Junta Vecinal para la Conservaci6n de Recursos Naturales)

JVL Local Roads Committee (Junta de Viales Locales)

LCB Local Competitive Bidding

LURP Land Use RationalizationProject

MAG Ministry of Agriculture and Livestock (Ministerio de Agricultura y Ganaderia)

MEC Ministry of Education (Ministerio de Educaci6n y Culto)

MH Ministry of Finance (Ministerio de Hacienda)

MOPC Ministry of Public Works (Ministerio de Obras Publicas y Comunicaciones)

MIC Ministry of Industry and Commerce (Ministerio de Industria y Comercio)

MSPBS Ministry of Health and Welfare (Ministerio de Salud Publica y Bienestar Social) - 108- Annex 13

NGO Non-Governmental Organization

OED Operations Evaluation Department

PCR Project Completion Report

PHRD Policy and IlumaniResources Development Fund

PNCR National Rural Roads Program (Programa Nacional de Caminos Rurales)

POA Annual Operating Plan (Plan de Operaci6n Anual)

PPAR Project Pertormance Audit Report

SEAG Agricultural Extension Service (Servicio de Extension Agricola Ganadera)

SGA Subsidiary Grant Agreement

SOE Statement of Expenditure

SSRNMA Sub-Secretariat of Natural Resources and the Environment (Sub-Secretaria de Estado de Resursos Naturales y Medio Ambiente/MAG)

TC Audit Board (Tribunal de Cuentas)

TOR Terms of Reference

UCR Rural Roads Unit (tJnidad de Caminos Rurales/MOPC)

UCTAP Project Technical and Administrative Coordination Unit (Unidad de Coordinacion Tecnica y Administrativa del Proyecto)

UNA National University (Universidad Nacional de Asunci6n)

UNDP United Nations Development Program

USAID UJnited States Agency for International Development

USDA United States Department of Agriculture : SO H B O L I V I A - | \. / ~~~~~~~~~~~~~~~~~~AM t R I C A

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