World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No. 2161-PAN

STAFF APPRAISAL REPORT

PANAMA Public Disclosure Authorized

TROPICAL TREE CROP DEVELOPMENTPROJECT

Public Disclosure Authorized February 28, 1979

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

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

Currency Unit = Balboa (B) US$1 = B/.1

Note: The issue of Balboas is restricted to coins. The US dollar (US$) bills and coins are legal tender in Panama.

WEIGHTS AND MEASURES

Metric System

and

1 quintal (q) = 45.4 kilograms (kg) 22.0 q = I metric ton (m ton) 1 banana box = 18.2 kg

GLOSSARY OF ABBREVIATIONS

(see next page)

GOVERNMENTOF PANAMA

FISCAL YEAR

January 1 - December 31 FOR OFFICIAL USE ONLY

PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Glossary of Abbreviations

BDA Banco de Desarrollo Agropecuario - Agricultural Development Bank

BNP Banco Nacional de Pan.ama - National Bank of Panama

CATIE Centro Agronomico Tropical de Investigacion y Educacion - Center for Research and Education on Tropical Agriculture

CBN Comision Bancaria Nacional - National Banking Commission

CFN Comision Financiera Nacional - National Finance Commission

COBANA Corporacion Bananera del Atlantico - Banana Corporation of the Atlantic

COBAPA Corporacion Bananera del Pacifico - Banana Corporation of the Pacific

COFINA Corporacion Financier.aNacional - National Financial Corporation

COMUNBANA Comercializadora Multinacional del Banano - Multinational Banana Marketing Corporation

CONABA Consejo Nacional del Banano - National Banana Council

DAD Decentralized Audit Division

EMBACHI Empresa Bananera de Chiriqui - Chiriqui Banana Enterprise

GOP Government of Panama

IDIAP Instituto de Investigaciones Agropecuarias - Agricultural Research Institute

IMA Instituto de Mercadeo Agropecuario - Agricultural Marketing Institute

IRHO Institut de Recherches, pour les Huiles et Oleagineux - Research Institute for Oils and Oil-bearing Crops

This documenthas a restricteddistribution and rnaybe usedby recipientsonly in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Glossary of Abbreviations (Continued)

MIDA Ministerio de Desarrollo Agropecuario - Ministry of Agriculture and Livestock Development

SIATSA Servicio de Investigacion Agricola Tropical S.A. - Tropical Agricultural Research Service

UB United Brands Corporation

UPEB Union de Paises Exportadores del Banano - Union of Banana Exporting Countries PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page No.

I. BACKGROUND ...... I

A. The Agricultural Sector ...... 1 B. Agricultural Sector Development Strategies and Policies ...... 3 C. The Banking System and Agricultural Credit ...... 4

II. THE SUBSECTOR AND THE PROJECT AREAS ...... 7

A. The Subsector ...... 7 B. Subsector Development, Strategies and Policies .... 9 C. The Project Areas ...... 10 D. Institutions Participating in the Project ...... 13

III. THE PROJECT ...... 17

A. Introduction ...... 17 B. Brief Description ...... 17 C. Detailed Features ...... 18 D. Project Costs ...... 21 E. Financing ...... 22 F. Procurement ...... 25 G. Disbursements ...... 25

IV. PROJECT IMPLEMENTATION ...... 27

A. Organization and Management ...... 27 B. Lending Policies and Procedures ...... 31 C. Accounts and Auditing ...... 33 D. Progress Reporting, Monitoring and Evaluation ..... 33

V. ILLUSTRATIVE INVESTMENT MODELS; SPECIFICATIONS AND ASSUMPTIONS ...... 34

A. Production Coefficients ...... 34 B. Illustrative Investment Models ...... 35

This report is based on the findings of an appraisal mission which visited Panama during February/March 1978. The mission comprised Messrs. G. Rioseco (Mission Leader), F. Portilla, J. Yaron and Ms. D. Babelon (Bank), and F. Connor, and R. Desrosier (Consultants). TABLE OF CONTENTS (Continued)

Page No.

VI. PROJECT PRODUCTION, MARKETS AND FINANCIAL ANALYSIS ..... 37

A. Production ...... 37 B. Markets, Marketing and Prices ...... 38 C. Benefits and Financial Rates of Return ...... 41 D. Financial Projections for Project Entities ...... 42

VII. ECONOMIC BENEFITS AND JUSTIFICATION ...... 44

A. Economic Benefits ...... 44 B. Economic Rate of Return ...... 45 C. Project Risks ...... 48 D. Environmental Impact ...... 48

VIII. AGREEMENTS REACHED AND RECOMMENDATION ...... 48

ANNEXES

1. Terms of Reference for the Oil Palm Feasibility Study 51

2. Progress Reporting, Monitoring and Evaluation of the Cocoa and Coffee Components ...... 56

3. Supporting Tables T. I - Agricultural Sector: Total Value of Production and GDP, 1973-77 61 T. 2 - Land Distribution by Tenure and Size, 1970 62 T. 3 - Total and Agricultural Credit, 1973-76 63 T. 4 - Banco Nacional de Panama (BNP) Comparative Balance Sheets for Fiscal Years 1973-77 64 T. 5 - Banco Nacional de Panama (BNP) Source and Application of Funds for Fiscal Years 1976/77 65 T. 6 - Banco de Desarrollo Agropecuario (BDA) Comparative Balance Sheets for Fiscal Years 1973-77 66 T. 7 - Banco de Desarrollo Agropecuario (BDA) Income Statement for Fiscal Years 1973-77 67 T. 8 - Banco de Desarrollo Agropecuario (BDA) Source and Application of Funds for Fiscal Years 1973-77 68 T. 9 - Corporacion Bananera del Pacifico (COBAPA) Source and Application of Funds and Change in Financial Position 1976/77 69 T.10 - Corporacion Bananera del Pacifico (COBAPA) Balance Sheet, Fiscal Years 1976/77 70 TABLE OF CONTENTS (Continued)

3. Supporting Tables (Continued)

T.11 - Technical Assistance 71 T.12 - Monitoring and Evaluation - Cost of Surveys 72 T.13 - Phasing of Lending and Investment 73 T.14 - Total Project Costs by Main Investment Items 74 T.15 - Technical Assistance Requirements and Phasing of Incremental Staff for Cocoa and Coffee Development 75 T.16 - Supply, Demand, Imports, and Exports 76 T.17 - Financial and Economic Prices 77 T.18 - Project Cash Flow - Banco de Desarrollo Agropecuario (BDA) 78 T.19 - Project Cash Flow - Banco Nacional de Panama (BNP) 79

4. Related Documents and Data Available in Project File 80

MAP

IBRD 13675 - Project Areas

PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

I. BACKGROUND

A. The Agricultural Sector

Agriculture in the Economqy

1.01 Over the last five years (1972-77), the total GDP increased at an average annual rate of 4.1% (1960 prices) whereas the agricultural sector increased at an annual rate of only 2.1%. Agriculture's share of the GDP was 16%, including 13% from the crop subsector, 2 to 3% from the livestock, and the balance, less than 1%, from forestry and fisheries. Fifty percent of the Panamanian population lives in rural areas and 30% of the national labor force is employed in the agricultural sector.

1.02 During the three-year period 1975-77, 53% of all exports of goods (US$238 million per annum) and over 85% of non-petroleum merchandise exports (US$147 million) were of agricultural or marine origin for a total of about US$127 million. Bananas and sugar alone accounted for, respectively, 34% and 18% of non-petroleum exports, shrimps for 15%, and coffee and beef for about 2% each. In spite of the low overall rate of growth, the agricultural sector has been able to supply most of the food products required by the domestic market. Total imports of agricultural products during the 1975-77 period averaged about US$53 million, equivalent to 8% to 10% of total imports. Apart from wheat and wheat products, temperate fruits and vegetables, the main imports, which could be replaced by domestic production, are meat, dairy products, vegetable fats and oils, feed grains and concentrates, and wood products.

Performance

1.03 During the 1960s, agricultural GDP increased at an average rate of 5% per annum. Since 1970, however, overall performance has been more modest and erratic, with an average annual growth rate of 3.1% between 1970 and 1972; -1.5% in 1974, 4.8% in 1975 0% in 1976 and an estimated 1.1% in 1977. The overall performance of the sector is quite sensitive to fluctuations in banana production, which accounted for 35% of GDP of the crop subsector in 1972 and 27% in 1976.

1.04 Although the production of rice and sugarcane has been increasing rapidly, performance of the sector was adversely affected in 1974-76 by a substantial fall in banana production and exports, which resulted from dis- agreements between the Government of Panama (GOP) and United Brands Corpora- tion (UB) 1/ over land tenure and the Level of export taxes on bananas (both resolved in January 1976 para 2.02). Although banana production subsequently increased it still has not regained its 1970-72 level. In addition, prices of beef decreased substantially in 1974 and 1975 and a severe drought in the

1/ United Brands and its subsidiary companies in Panama, Chiriqui Land Company, Corporacioiide Ia Cruz and Compania Caronas. -2-

1976/77 crop year affected grain production. In 1977, low sugar prices and the generally stagnant economic situation were not conducive to substantial gains in spite of the recovery of livestock production (Annex 3, Table 1).

1.05 Despite the relative smallness of the sector, agriculture continues to receive much attention from the authorities for three main reasons. First, there is a serious problem of poverty in rural areas. Second, excluding revenues from the service sector, agriculture is the main source of foreign exchange earnings. Third, with appropriate policies, the sector could make a greater contribution to output, the balance of payments and employment than it does at present.

Land Resources and Uses

1.06 Out of a total land area of 78 million ha (including the Panama Canal Zone), farmland is estimated at 2.3 million ha. However, the land resource base of Panama is very limited. There are no class I soils, only 170,000 ha of class II soils and 683,000 ha of class III soils, or a total of 853,000 ha (1% of total land area) with moderate limitations for agricultural production. In spite of substantial regional differences, the general land use is rather extensive. It is estimated that only 21% of the potential crop land and 46% of the potential grazing land are in actual use. This relative abundance of available land has led to a lack of concern with formal ownership rights. Overall, 72% of the farms and 44% of the farmland were untitled in 1970 (Annex 3, Table 2).

Land Tenure

1.07 Almost all rural families in Panama own or occupy a parcel of land, and virtually all is owner-operated, with only 5% of the land being rented. According to the last census, there are 34,000 holdings in the 1-ha to 5-ha category and 51,000 holdings of over 5 ha in size. The distribution of farms (1970 census) according to size is given below:

Total Average Percentages of

Farm Size Farms Farm Land Farm Size Farms Farm Land (ha) (No.) ('000 ha) (ha) … -- --(%) …

0.5- 4.9 41,216 75.7 1.8 44.8 3.6 5 - 9.9 13,937 90.0 6.5 15.1 4.4 10 - 19.9 14,179 182.5 12.9 15.4 8.7 20 - 49.9 14,138 415.0 29.3 15.3 19.8 50 - 99.9 5,526 363.4 65.8 6.0 17.3 100-199.9 1,920 252.3 131.4 2.1 12.0 200 and over 1,172 717.0 612.4 1.3 34.2

Total and Average 92,088 2,096.7 /a 22.8 100.0 100.0

/a Excludes land owned by indigenous communities and farms of less than 0.5 ha in size. B. Agricultural Sector Development Strategies and Policies

Land Reform

1.08 Although a Land Reform Law was passed in 1962, efforts at agrarian reform started only in 1968. Between 1969 and 1977, the State acquired about 502,000 ha for this purpose and distributed it to 18,260 families. By the end of 1977, about 87,000 ha were assigned to 215 asentamientos, benefitting 5,000 families and 57 Juntas Agrarias de Produccion 1/ (2,000 families), and the balance was distributed to small-scale and medium-scale farmers. The tenure arrangements that will finally emerge from the asentamientos is not yet clear since so far the members have only informal and collective temporary rights. While the GOP policies and programs encourage collective management of the asentamientos land, the actual subdivision of the land is up to each asentamiento. At present, land management in the asentamientos ranges from primarily individual to totally collective.

Institutional Developments

1.09 Given the limited administrative capacity and budgetary constraints in the public sector, the emphasis appears to be on the consolidation of holdings and concentration on strategic areas. The institutional set-up of the sector has been restructured for that purpose. The Ministry of Agriculture was reorganized in 1973 to become the Ministry of Agriculture and Livestock Development (MIDA), and more recently, MIDA has been decentralized, with its planning and implementation sections being transferred to Santiago (Veraguas Province). Various departments of the former Ministry with similar functions were regrouped into two new autonomous agencies: the Agricultural Development Bank (BDA) in 1973 and the Agricultural Marketing Institute (IMA) in 1975. Also, the GOP initiated a complete revision of the organization and structure of the public agricultural research activities and created in 1975 a semi- autonomous Agricultural Research Institute (IDIAP). All funds and personnel previously assigned for agricultural research purposes to a number of different public institutions were transferred to IDIAP with the exception of those assigned for agricultural research at the National University.

Current Government Strategy

1.10 The Government's basic program includes minimum and support prices, import and export controls, retail price ceilings and direct market operations. Current development goals and strategy for the agricultural sector are defined in the 1976-1980 National Development Plan. The general policy objectives focus on:

(a) the maximization of agriculture's contribution to the economy through import substitution and exports;

1/ Juntas Agrarias de Produccion are group farming cooperatives of small- holders. - 4 -

(b) raising of employment, income and living levels of the sector, with special emphasis on the rural poor;

(d) recuperation and conservation of natural resources; and

(e) promotion of a land property structure, regrouping marginal farmers in order to incorporate them into modern production systems.

1.11 The proposed project would fit closely into these development objectives by: promoting banana production, the main source of foreign exchange; diversifying exports by increasing production of coffee and cocoa; and encouraging import substitution of vegetable oils and fats. At the same time, it would help to meet the objectives of employment generation, increase of rural incomes, and the integration of asentamientos and small farmers into modern production systems.

C. The Banking System and Agricultural Credit

The Banking System

1.12 Panama has a well developed banking system which is unlike that of other Latin American countries; there is no central bank of issue and the monetary system is linked to the US dollar, which is the only paper currency in circulation. The absence of foreign exchange controls and Panama's liberal banking laws have allowed it to develop into a regional financial center for Latin America. The money supply is determined by Panama's balance of payments and its ability to attract dollar deposits into its banking system, which is dominated by large non-Panamanian banks. These banks are active in the domestic economy but their primary interests are in offshore business. The banking system consists of 81 privately owned commercial banks, of which 47 are licensed to carry out domestic and offshore operations, 25 are licensed for offshore business only, and nine are licensed as representative offices. In addition, there are five Government-owned institutions: the National Bank of Panama (BNP), primarily a commercial bank; BDA, an agricultural development bank; the Savings Bank; the National Mortgage Bank; and the National Financial Corporation (COFINA), a development finance company.

1.13 In the absence of a central bank, BNP, which operates mainly as a commercial bank, serves also as a depository and a fiscal agent of the Govern- ment of Panama. The National Banking Commission (CBN), which is chaired by the Ministry of Planning and Economic Policy, fulfills some of the supervisory functions normally associated with a central bank. It authorizes new branches, collects and publishes financial data on the banking sector and participates in the formulation and execution of monetary policies. In addition, all public sector operations not covered in the current budget, including public sector domestic and foreign borrowing, and capital expenditures are regulated through the National Finance Commission (CFN), which is chaired by the Minister of Finance. - 5 -

1.14 Interest rates for domestic lending are based on the Eurodollar rates. Lending rates for non-government entities range from 2% over LIBOR to a flat rate of 14% to 15% for smaller, riskier operations. Lending terms are relatively short, and, only recently, because of the wide acceptance of adjustable interest rates in the domestic market, have commercial banks been willing to lend for medium terms (five to seven years). Interest rates on time deposits are set by the market forces and are similarly based on Eurodollar notes. However, for savings deposits of less than US$14,000, the CBN has set a maximum rate of 4-1/2% p.a. and a maximum of 5-1/2% p.a. for mortgage bank time deposits.

Agricultural Credit

1.15 Institutional credit to the agricultural sector is provided mainly by a limited number of private banks and, to a lesser extent, by the official banks, BNP and BDA. The most important private banks operating in the agricultural sector are: Bank of America, Chase Manhattan Bank, Banco Fiduciario, Banco de Colombia and Banco de Bogota. In addition to direct lending, private banks have indirectly financed the sector through medium-term loans to BDA (US$13.1 million during the 1974-77 period) to finance MIDA's agricultural credit programs. BNP and BDA provide lower levels of institutional credit, but are, nevertheless, the most important sources of medium- and long-term development credit for the sector and are the only ones accessible to small farmers and asentamientos (paras 2.19 to 2.31).

1.16 During the 1973-76 period, total institutional credit and new loans (excluding lending to the public sector) increased by 22%, from US$1,352 million in 1973 to US$1,645 million in 1976. In the same period, total lending for crops and livestock increased by only 16%, from US$118 million to US$138 million; thus, the proportion of agricultural to total domestic credit decreased from 9% to 8% during this period (Annex 3, Table 3). Total lending by private banks rose from US$82 million in 197.3to US$99 million in 1976, as compared with an increase from US$36 million to only US$38 million in BNP and BDA. However, all of the increase in lending by private banks was in the form of short-term credit for production, processing, and marketing, generally benefitting large producers and agroindustries associated with beef fattening, sugarcane, rice, coffee and tobacco production.

1.17 BNP's lending to the sector during the 1973-76 period remained at an annual average of US$14.8 million. The average size of loans in 1976 was about US$11,100 for crops and US$13,500 for livestock, benefitting a total of 1,380 farmers. Although total lending from BDA represents only 21% of all credit to the sector, it is the most important source of funds for small-scale farmers and it is the on:Lysource of credit available to asentamientos. BDA's average annual lending for the period 1973-76 was about US$26 million. During 1977, BI)Alent to about 4,710 individual producers with an average subloan size of US$3,100 and made about 241 loans to group production schemes with an average subloan size of about US$26,500. BDA's overall average subloan during 1977 was US$4,200. - 6 -

1.18 Most interest rates in Panama are determined by the market (para 1.14). However, the lending interest rates of BDA are set by its Executive Committee, independently of market considerations, and based mainly on the socio-economic conditions of its well-defined clientele and on its relatively low average cost of funds (para 2.26). Special rates apply to development programs regulated by international contracts such as Bank operations through BNP under Loan 901-PAN, for which the annual on-lending interest rate was 10%, 11% under Loan 1397-PAN, and 11.5% under Loan 1398-PAN. Interest rates charged by private banks for agricultural lending are reported to be 1% to 3% per annum higher than those currently charged by BNP. The annual interest rates, fees and commissions for the agricultural lending operations of BNP and BDA are summarized below:

Interest Rate % Commissions and Fees

BNP Technical Supervision Fee

All borrowers 11.0 First US$150,000 0.50 Amount above US$150,000 0.25

BDA Commissions on loans by BDA to all categories of borrower

Organized groups 8.0 Up to US$500 0.00 Individual small-scale US$501 to US$1,000 0.50 farmers 9.0 US$1,001 to US$5,000 0.75 Individual medium- Above US$5,000 1.00 scale farmers: (a) Short-term 11.0 (b) Medium- and long-term 10.0 Large-scale farmers and corporations 12.0

1.19 Although the general banking law does not specify the kind of collateral required for agricultural lending, long-term development loans are generally against first mortgages with additional chattel mortgages, if these are required. To qualify for long-term loans, it is important for borrowers to have clear, legal title to land, but the requirement is a drawback in Panama (para 1.06). However, according to BDA's current operational procedures, subloans for a period of less than three years can be granted on the basis of chattel mortgages alone, which, in the absence of other assets, can be on the investment financed with the proceeds of the subloan and/or the outputs generated by the investment. Therefore, farmers without title can obtain long-term credit from BDA, but they are required to obtain clear title to their land within three years after subloan approval. On the other hand, asentamientos that have not received title to the land (para 1.08) obtain long-term funds under a general guarantee of MIDA. - 7 -

Previous Bank loans for livestock development (901-PAN and 1397-PAN) have addressed this problem by including, in the farm investment plan, whenever necessary, resources to finance the cost of land survey and other expenses required by sub-borrowers to obtain title to the land.

II. THE SUBSECTOR AND THE PROJECT AREAS

A. The Subsector

Bananas

2.01 Historically, bananas have been Panama's most important crop from the standpoint of both their contribution to the value of production of the sector (18%) and their share of foreign trade; foreign exchange earnings from bananas amount to about US$60 million per year, equivalent to 41% of the total agricultural sector exports. Bananas also provide work for approximately 23% of the labor force utilized in the crop subsector and provide the national budget with substantial export tax revenues of about US$10 million per year (3.5% of all taxes in 1976).

2.02 Until July 1975, about 12,300 ha, or 93% of the total land area under commercial banana plantations, was owned and operated by UB, accounting for 100% of Panama's banana exports. The balance of the land under bananas (7%) was owned by 21 independent producers, most of whom are former employees of UB, selling their production to UB. In January 1976, an agreement was signed whereby UB sold to the Government all the land owned by the company in Panama (43,000 ha). In the same contract, the Government leased back to UB 15,700 ha under bananas or required for the company operation. The lease agreement has a duration of five years and it is renewable annually. Most of the land purchased from UB has been converted into asentamientos producing subsistence crops. Some 1,280 ha in the Pacific area (Chiriqui province) and 450 ha in the Atlantic area (Bocas del Toro province) have been developed under bananas by two autonomous state corporations: the Banana Corporation of the Pacific (COBAPA) and the Banana Corporation of the Atlantic (COBANA). Recently, both plantations have been placed under the management of COBAPA. Panama's total commercial banana production (measured on export basis) has been increasing gradually from 419,000 m tons (23.0 million boxes) in 1974 to 526,000 m tons (28.9 million boxes) in 1977. Plantations are generally well managed and the average production per ha of 35.5 m tons (1,950 boxes) is comparable with the productivity of the rest of the Central American countries. The country's share of the world market for bananas from 1972 to 1974 was 7.8%.

Oil Palm

2.03 With the exception of small amounts of copra produced in the San Blas area and mostly directly traded by Indian communities with Colombia, Panama is currently importing almost all its requirements, some 18,000 m tons - 8 - per year of vegetable fats and oils, mostly as unrefined soybean oil, for a total value of about US$10 million. The country's potential for producing oil crops in sufficient quantity to satisfy the needs of the local market has not been determined exactly, but lands suitable for these crops are known to be scarce. However, a study carried out by the Research Institute for Oils and Oil-bearing Crops (IRHO)/MIDA in 1976 identified four areas considered to be suitable for oil palm development. Based on ecological conditions, topography and available infrastructure (roads, railroad, and power), first priority was given to the District of Baru in the Chiriqui Province, which is the area proposed for the subproject.

2.04 There are some 1,000 ha of oil palm in the area of Icacal, Province of Colon, and a mill capable of processing 5 m tons of fresh fruit bunches (ffb) per hour, both abandoned by Compania Agricola Amsterdam because of land tenure and labor problems. This plantation and adjacent land was subsequently formed into an asentamiento (Cooperativa Agro-Industrial Icacal), which planted an additional 1,020 ha of oil palm (tenera x melanococca hybrid) that should start commercial production in 1979. In addition, there is an abandoned plantation of 400 ha of coconuts in the Province of Veraguas, and COBAPA planted, on an experimental basis, 26 ha of oil palm in the project area in September 1976.

Coffee

2.05 Accounting for about 2% of total agricultural production value, the average coffee production over the period 1972-76 has remained at around 4,800 m tons per year, not enough to fill Panama's indicative export market allocation of the International Coffee Agreement (para 6.08). Only about 1,360 m tons were exported for a total value of US$4.4 million in 1977. Coffee growing in Panama is essentially a small farm operation. The national average size of coffee plantations is 0.7 ha, although in the Chiriqui Province, which accounts for 52% of the country's production, the average size of a coffee plantation is 1.1 ha. However, excluding coffee planted in family gardens, the average size of commercial coffee plantations in Chiriqui is about 2.2 ha. Density of stand is low, about 1,000 to 1,200 trees per ha, and yields are about 227 kg/ha (5 quintals) of parchment coffee, which indi- cates a generally low level of technology and the old age of the plantations.

Cocoa

2.06 From 1972 to 1976, cocoa production has averaged 620 m tons per year and exports, about 600 m tons. Foreign exchange earnings from cocoa exports have been usually slightly less than US$1 million per year but have recently doubled, due to increases of international prices. The project area (Province of Bocas del Toro) accounts for 85% of total area planted in cocoa and for all of Panama's cocoa exports. Most of the farms are in the northwestern corner of the province and are plantations originally established by UB during the 192 0s on land from which bananas had been eliminated by the Panama disease. In addition, a considerable amount of cocoa is grown by small farmers farther to the east and south along the coast along the banks of rivers and creeks. Many of these farmers, including members of indigenous communities, are relatively new to the crop and often appear more receptive to technical advice than the traditional growers. The cocoa produced by Panama is of the Trinitario population, including the selected material introduced by MIDA from Costa Rica. It falls within the category of "flavor cocoa," which obtains a premium price on the international market.

B. Subsector Development, Strategies and Policies

Banana and Oil Palm

2.07 The Government's development strategies and policies for the banana subsector are the responsibility of the National Banana Council (CONABA) established in December 1977. CONABA is also responsible for Government relations with UB and independent producers and represents the Government in the Union of Banana Exporting Countries (UPEB) as well as other international agencies concerned with the banana industry. In addition, CONABA is responsible for development policies, supervision and control of the activities of the two Government autonomous enterprises for banana production and marketing, COBAPA and COBANA. The executive committee of CONABA is chaired by the Minister of Agriculture and Livestock Development; other members of the committee are the Minister of Commerce and Industry, the General Manager of BNP and members of the executive committees of COBAPA and COBANA. The National Directorate of Production of MIDA is responsible of oil palm development in Panama.

Coffee and Cocoa

2.08 In 1973, a special department, the Department of Coffee and Cocoa, was created within the National Directorate of Production of MIDA. Since then, national development programs for coffee and cocoa have been formulated and, because of inadequate funding, only partially implemented. These programs, in addition to the definition of areas of development and beneficiaries, include the importation of improved seeds, establishment of nurseries and the provision of technical assistance and credit to small-scale farmers. The main aspects of the Government's current development strategies and policies are given below:

(a) Coffee. Government policy for coffee is defined in the framework of a "Five-Year Plan for Coffee Renovation, 1976-80." The main objectives of this plan are to improve productivity and to obtain substantial increases in coffee production to enable Panama to meet its internal demand and take full advantage of its available share of the export market. More specifically, the production objective is to replant or renovate 4,600 ha of old plantations belonging to some 2,000 small-scale and medium-scale farmers in nine of the most productive districts of the country.

(b) Cocoa. Implementation of a "Six-Year National Cocoa Program 1974-80" was started in 1974 by the Department of Coffee and Cocoa in coordination with BDA for the credit aspects of the program. The goals during these seven years were to plant or renovate a total of 3,250 ha in the province of Bocas del Toro. - 10 -

C. The Project Areas

Location, Climate and Soils

2.09 Except for the coffee area, which extends over part of the highlands of the Veraguas and Cocle provinces, the proposed project activities would be located in the provinces of Chiriqui and Bocas del Toro. Oil palm and banana development would take place on the Pacific Coastal Plain of Chiriqui, cocoa development along the Atlantic Coast of Bocas del Toro, and coffee development in the Central Cordillera above altitudes of 1,000 m (Map IBRD 13675).

2.10 Banana and oil palm development would take place in the western part of the Chiriqui province (Baru District), about 40 km west of David, capital of the province. Annual rainfall is about 2,500 mm, with two or three months (January-March) having less than 60 mm of precipitation. Temperatures range from 22 to 30 C and evaporation from 3.8 mm to 7.0 mm per day. Minimum direct sunlight per month is 97 hours and the maximum is 247 hours, for an average of 176.3 hours. Topography is exceptionally uniform, with an average slope of 0.2% from north to south. The soils of this area have been listed as class II, adapted, with no major limitations, to a wide range of crops. About 8,300 ha of the district of Baru are under banana plantations, while the rest is under rice, maize, sugarcane, sorghum, plantain and patches of natural forest.

2.11 The cocoa area in the province of Bocas del Toro lies within the humid tropics, with a portion along the southeastern edge of the Laguna de Chiriqui in the very humid premontane tropics. Minimum rainfall is 2,500 mm, with about 3,500 mm along the western edge of the Laguna de Chiriqui and a maximum of about 4,000 mm in the area from Miramar to Man Creek. Average annual temperature is 26 C°and average relative humidity, 84%. Bocas del Toro province contains some 157,000 ha of land in classes II, III, and IV, representing 18% of the area of the province, upon much of which cocoa could be grown. The soils in use at present are deep and friable, with good aeration. Because of the heavy rainfall, provision must always be made for drainage and precautions must also be taken to avoid erosion.

2.12 The climate of the coffee growing areas (highlands of Chiriqui, Veraguas, and Cocle) is somewhat variable, depending on altitude. Rainfall ranges from about 2,500 mm to 3,500 mm with a three-to-four-month dry season. Mean annual temperatures range from about 18°0 to 22°C.0 Average rainfall can vary abruptly from one valley to the next, with one having good growing conditions and the next suffering from a moisture shortage.

Resources and Resource Use

2.13 Chiriqui. In 1970, there were 15,655 farms in the Province with more than 1 ha, more than half of which had less than 10 ha. Almost all farms are owner-operated, but more than 80% do not have property titles. Seasonal internal migrations are pronounced, particularly from the isolated indigenous communities of the Highlands of Chiriqui and the neighboring province of Veraguas toward the coffee and sugarcane areas. According to a preliminary - 1 1 -

study made by the International Labor Organization on the basis of the 1970/71 census, even at the peak agricultural season, there was a 13% excess of labor force availability over requirements; during the slack season, this excess is close to 65%. Due to differences in topography within the province, its agricultural production is quite diversified. The contrast is sharp between the large modern sector of the Coastal Plain, where 54% of the country's banana production is grown, together with sugarcane and rice, and medium-size livestock activities are concentrated, and the traditional sector in the highlands, where predominantly small farmers grow 50% of the country's tobacco and coffee production, vegetables, potatoes and grains for subsistence and maintain a small number of animals.

2.14 The 1,000 ha of the Baru District to be developed with bananas under the project are held by four asentamientos (para 4.05). A recent (December 1977) socioeconomic study of these asientamientos revealed a very low utilization of the land and labor resources. The land is being used only partially for the production of mechanized rice, corn and sorghum, with low yields and gross value of production below the direct cost of production. The average per family income derived from the asentamientos' operation is only about US$250 per year (equivalent to about 60 days of full employment elsewhere). Because of the negative results of the farm operation, income to settlers comes almost exclusively from payments to labor financed through BDA, which is an integral part of the lines of short-term credit provided to finance asentamientos. In addition, these asentamientos have several debts in arrears with BDA which will amount to a total of about US$1.1 million as of December 31, 1978. The asentamientos currently have about 170 settlers and their families. The additional labor force required by the banana plantation, about 240 laborers, would be incorporated into the asentamientos with rights and conditions equal to those of existing settlers (para 4.05). The oil palm plantations would be developed on about 16 asentamientos, holding a total area of about 5,000 ha. The current cropping pattern and the results of the operation of these asentamientos are similar to those of the asentamientos to benefit from banana development. The main problems affecting the performance of the asentamientos are: the absence of adequate production-oriented technical assistance and management training programs; emphasis on capital-intensive cropping patterns, which limits the employment of available labor; and the relatively small (5.9 ha) land area available per family. The proposed project would eliminate the above constraints through the development of bananas and oil palm, high value and labor-intensive crops, adequate provision of technical assistance, and management training for the land reform beneficiaries.

2.15 Bocas del Toro. The total area of farms, including the banana area, amounted to 49,543 ha in 1970, or 5.5% of the total land area. There were 720 farms of more than 1 ha and almost half were under 10 ha. Seventy-five percent of all farms and about 85% of those holding less than 10 ha have no formal titles. Land use is very extensive, a large proportion of farmland being unused or in fallow. Agricultural activity is concentrated in the Almirante-Changuinola banana area, close to the border with Costa Rica, and further to the south within a few mileEs of the Atlantic Coast. Much of the farmland along the coast is cultivated by small farmers and indigenous communities who grow some grains and plantain for subsistence purposes, with cocoa as their only cash crop. Because of the stable nature of employment on banana - 12 - plantations, absence of communications infrastructure, and, to a lesser extent, employment on cocoa plantations, seasonal internal migration is relatively small. Manpower surplus has been estimated at 13% at peak season and 16% at the slack season. However, these data are biased by the relative importance of the banana sector in total agricultural employment in the area. Under- employment is likely to be much more substantially cyclical on non-banana farms.

Infrastructure and Services to the Subsector

2.16 The two provinces are at opposite extremes in terms of communications infrastructure. The Chiriqui province, with 1,020 km of roads, has the greatest length of all-weather roads in the country. The coffee growing areas of Chiriqui are well connected by all-weather roads to the rest of the country through the Panamerican Highway. The banana areas are connected to the Port of Armuelles by railroad. On the other hand, Bocas del Toro is linked to the rest of the country only by air or sea. Its internal permanent road network is 23 km and more than 90% of its population is outside its area of influence. Internal transportation of merchandise is, to a large extent, through an old railroad track between the banana port of Almirante and the Costa Rican border and by coastal shipping. Almirante is also the port from which goods are carried in and out of the province from or to Colon.

2.17 No significant Government research has been carried out on the proposed project products: cocoa, coffee, bananas and oil palm. The cocoa and coffee development programs currently implemented by MIDA rely on imported seed material and adaptive research developed by the Center for Research and Education on Tropical Agriculture (CATIE) in Costa Rica. Technical assistance to the oil palm plantations of Icacal (para 2.04) is provided by MIDA and by periodic visits of IRHO technicians from Colombia. Research and extension in bananas is provided by UB, COBAPA, the Tropical Agricultural Research Service (SIATSA) in Honduras, and Rohm and Haas Company in Costa Rica; in the near future, the Multinational Banana Marketing Corporation (COMUNBANA) will also provide assistance.

2.18 Of considerable importance to the cocoa subsector is the Cooperativa de Cacao Bocatorena founded in 1956, which now has a total of 600 members and markets 60% of Panama's cocoa exports. In 1964 it contracted several loans with BDA which fell in arrears. In 1973, management of the cooperative was taken over by the state marketing agency (IMA), which operated it as a cocoa trading post until 1976, when the debt was completely repaid. Since then, the operations have reverted to the cooperative and its management completely reorganized with assistance from BDA, IMA, MIDA and specialized cooperative promotion institutions; in 1977, the accounts of the cooperative showed a net surplus of US$27,000. Besides marketing its members' output and providing limited technical assistance, the cooperative has also initiated the sale of inputs, which it can import free of duties and internal taxation, at prices sometimes 40% lower than at local stores. Although not participating directly in the project, the cooperative would purchase the cocoa production generated by the project and it is expected that a large number of project beneficiaries would be members, or become members, of the cooperative. - 13 -

D. Institutions Participating in the Project

National Bank of Panama (BNP)

2.19 BNP is by far the most important Government bank and the country's largest commercial bank. It serves as fiscal and fiduciary agent for Govern- ment, performs functions for the Treasury. The general manager of the bank has an influential role in policy decisions on economic matters, similar to the one that, in other countries, is played by the heads of the central banks. He is an ex-officio member of the CBN.

2.20 As of June 30, 1977, BNP had about 30% of total local deposits of the banking system, of which about 60% were Government or public entity deposits. The bank competes in the market for time deposits and, in many cases, it sets the pattern for the rates to be paid by the rest of the banking system. The large number of branches (62) that the bank has all over the country also contributes to the obtention of deposits. Lending to the government, as a percentage of BNP total portfolio, increased from an average of 17% in the 1970/71 period to 52% in the 1976/77 period. BNP does not collect interest from the overdraft facility it grants to the Central Government, known as "Government Account 215." This facility amounted to US$108.6 million as of May 8, 1978. For the rest of the loans granted to "public productive enterprises," interest rates are charged. BNP, however, will in future capitalize its profits instead of transferring them to the Government as compensation for the lack of interest accrued on Government loans.

2.21 BNP has taken important steps to improve its financial situation (Annex 3, Tables 4 and 5). Its debt equity ratio was reduced from 9.1 in 1976 to 7.6 in 1977, and, as a result of iLmproved loan collection procedures, the percentage of loans in arrears was reduced from 11.6% in 1975 to 5.5% in 1977. It has also reduced its operating costs through an austerity program and improvements in cost control. Net profits thus increased from US$0.4 million in 1975 to US$2.0 million in 1977, equivalent to 0.2% and 0.7% of its total productive assets (loan portfolio) for the years 1975 and 1977, respectively.

2.22 BNP, through the Development Banking Section, is responsible for the implementation of three ongoing Bank loans for the agricultural sector (Loan 901-PAN, Loan 1397-PAN and Loan 1398-PAN), and except for a recent increase in arrears of the livestock portfolio (Loans 901-PAN and 1397-PAN), due mainly to the 1976/77 drought, overall performaLncein implementation has been satisfactory.

Agricultural Development Bank (BDA)

2.23 BDA was established as an autonomous Government agency in 1973. It is required by law to direct its lending to (a) small farmer associations and cooperatives; (b) small- and medium-size farms; (c) agroindustrial projects sponsored by MIDA; (d) national and local Government groups that have agriculture, fishery, livestock, and agro-industry activities; and (e) any person whose production activity is in accordance with MIDA's policy. - 14 -

2.24 BDA's Board is chaired by the Minister of Agriculture and Livestock Development and its members are the Minister of Commerce and Industry, the General Manager of BNP, one representative of individual farmers, and one representative of organized farmers. The General Manager of BDA is appointed by the President of Panama.

2.25 BDA, which is organized along functional lines, is divided into nine departments, six of which report directly to the General Manager: Finance, Planning, Administrative and Personnel, Legal Adviser, Internal Auditing and the Fisheries Cooperative Project. The remaining three departments, which are directly related to lending operations, report to the Deputy General Manager; these are (a) Projects, responsible for technical assistance, evaluation of projects, and subloan recoveries; (b) Organized Farmers, responsible for programs to asentamientos and cooperatives (representing about 50% of the BDA loan portfolio); and (c) Individual Farmers, responsible for programs for individual small-scale and medium-scale farmers. BDA has headquarters in Panama City, with a network of six regional offices and 26 local agencies distributed throughout the country. Subloan technical supervision and recoveries are a responsibility of the local agencies. On December 31, 1977, BDA's agricultural technicians and field inspectors numbered 166, equivalent to about 27% of its employees (622).

2.26 BDA is an agricultural development fund rather than a full service bank. Its resources come from: equity; borrowing from multinational and bilateral agencies and from the capital market; issues of bonds; and Government grants. Since its inception, the bulk of funds for lending to agriculture and livestock has come from IDB and USAID. Private banks have also jointly arranged to provide short-term credit to BDA to finance its activities. On December 31, 1977, BDA's net worth was US$39.0 million, representing about 60% of its total liabilities, and, due to the resource structure of BDA, its overall weighted average cost of money was only 2.4% during 1977 and 6.2% for its external borrowing from USAID, IDB and private banks.

2.27 As of December 1977, the weighted average interest rate of BDA's total outstanding portfolio was 8.3% per annum. Interest collections, however, are low, representing only about 80% of total interest due in 1977. Subloan ceilings are in effect for different sub-borrowers; US$5,000 for small-scale farmers; US$25,000 for medium-scale farmers; US$100,000 for large-scale farmers or corporations; and US$250,000 for farmer organizations. Small- scale farmers are entitled to loans of up to 100% of project costs, while medium-scale farmers have to contribute 10% of total project costs. Subloans of less than US$2,500 are authorized by local agency managers, while those between US$2,500 and US$5,000 require approval by a local loan committee. Subloans up to US$25,000 can be approved at the regional loan committee level, and those exceeding US$25,000 require the approval of the central office.

2.28 BDA's loan portfolio increased rapidly from 1973 to 1977. Total outstanding portfolio as of the end of each of these years is given below: - 15 -

1973 1974 1975 1976 1977

Outstanding loan portfolio (US$ million) 22.9 33.7 43.4 47.1 52.9

Annual rate of growth (%) - 48 28 9 12

Arrears and bad debts are the main problems affecting BDA's performance. Total arrears as of December 1977 represented about 15% of the total outstanding portfolio, but comparison of 1977 arrears with 1976 short-term loans and current maturities of long-term loans gives a total arrears of about 30%. This situation, however, reflects the impact of the drought of the 1976/77 crop year and a subsequent moratorium authorized by the Government. Average age of the arrears increased from 16 months in 1974, to 20 months in 1976, and to 21 months in 1977. The total amount of arrears written off during the last four years was about US$1.0 million, and, currently, the legal department of the BDA is taking measures against beneficiaries of 400 past-due loans amounting to about US$0.7 million.

2.29 As of December 1977, BDA's loan portfolio represented 81% of total assets, US$65 million (Annex 3, Table 6). The ratio of current assets to current liabilities, 2.8:1, is satisfactory, reflecting both the bank's relatively large equity and the long-term borrowing. Total equity amounted to US$39 million, while external liabilities accounted for only US$26 million, of which US$12 million were short term, reflecting a relatively stable financial situation through continuous Government contribution to its equity (Annex 3, Table 7). BDA has suffered losses every year since it was established. Those in 1976 and 1977 were about US$2.2 million annually which reflected relatively high administrative costs (salaries) that were almost equal to BDA's interest income. BDA annual losses during the 1974-77 period were equivalent to 5.5% to 8.1% of BDA's equity, or 4.5% to 6.3% of its loan portfolio. The annual gross income as a percentage of annual average assets was about 5.4% and reflects the poor financial return. Annual Government subsidies (which were not charged to the income statement but transferred directly to BDA equity) helped the bank to maintain its financial structure. Since BDA's establishment, the Government subsidies and direct contributions to the equity total US$37.0 million (Annex 3, Table 8). This sizable contribution of financial resources enabled BDA to cover its accumulated losses (US$9.0 million) and sustain its large increase in loan portfolio (US$35.0 million). Borrowing from international agencies and in the domestic and foreign capital market amounted to US$13 million.

2.30 The Government of Panama is well aware that BDA, although an important instrument of MIDA's agricultural development programs for the small- scale farming sector, has not been efficiently managed. Therefore, a complete administrative and financial reorganization of BDA, based on a study financed by IDB, is currently being implemented with the active participation of IDB. Changes have been made to the administrative structure, the accounting and management reporting system and the budgeting procedures. More recently (October 1978), following negotiations between IDB and the Government of - 16 -

Panama on a US$15.0 million loan for general agricultural credit 1/, the Government of Panama has agreed to the following changes in BDA's operations and procedures: to increase lending interest rates and interest rate spreads; to increase the volume of operations, and assign funds obtained from private banks would be lent only to medium- and large-scale farmers at commercial interest rates; to introduce improvements in the arrears collection procedures and to eliminate non-recoverable debts; to assume the repayment of US$6.0 million of BDA's borrowing from private banks; to make an annual contribution to BDA equity of at least US$1.3 million during 1978 and 1979 and of US$1.5 million in 1980 and 1981 to cover BDA's projected operating losses during the adjustment period; and to increase the autonomy and level of decisions of local and regional agencies. The above changes were initiated during 1978.

2.31 These changes, together with the US$12.0 million increase of BDA's equity (Government counterpart funds to the IDB loan and the private banks' debt to be repaid by the Government), would improve substantially BDA's development capacity and financial situation. Therefore, given that BDA's participation in the project would be mainly that of a disbursing and collecting agency and that operations would be centralized in the specific project areas, no problems are anticipated in BDA's participation in the proposed project. The assurances obtained by IDB have been reviewed by the Bank and found to be satisfactory. No further covenants are therefore considered to be necessary.

Banana Corporation of the Pacific (COBAPA)

2.32 COBAPA started operations in 1974 and was legally established by Law No. 4 of January 1977 as an autonomous Government institution, subject to Government policy guidelines exercised through CONABA. COBAPA's principal functions are to produce and market bananas on Government land, formerly owned by UB (para 2.02). COBAPA is managed by an Executive Committee with the participation of its General Manager, one member designated by CONABA and a delegate of the laborers. The General Manager of COBAPA, appointed by the Government, is the former's legal representative and is responsible for administrative and technical management. COBAPA headquarters and plantations are located in the David District, Province of Chiriqui.

2.33 Currently, COBAPA has a total staff of about 750, about 700 of whom are laborers. The rest are field supervisors, technicians and office staff responsible for day-to-day operation of the plantation. In addition to salaries and social benefits, the workers and employees of the plantation receive a share of the profits generated by COBAPA. Overall, COBAPA is a well-managed institution, with a computerized reporting and accounting system, and it is regularly audited by independent certified public accountants. Therefore, no specific problems are envisaged in regard to COBAPA's participation in the proposed project. Tables 9 and 10 of Annex 3 provide details of COBAPA's financial position.

1/ Programa de Credito Agropecuario IV, 554/SF-PN. - 17 -

III. THE PROJECT

A. Introduction

3.01 The Government of Panama has requested a Bank loan to help finance an investment program designed to improve and develop the tree crop subsector in Panama. The feasibility study for the proposed project was prepared by the Government with the assistance of an FAO/Bank Cooperative Program mission (Report No. 48/77 PAN 5) that visited, Panama in October-November 1977. The study was submitted to the Bank in February 1978.

B. Brief Description

3.02 The proposed project would finance, over a three-year commitment period, subloans for long-term investment to be disbursed by participating institutions over a period of six years, with Bank disbursements extending over six years. The Bank loan would partially finance a lending program to:

(a) renovate about 600 ha and establish new plantations of cocoa on about 1,900 ha;

(b) renovate about 1,300 ha of coffee plantations;

(d) finance the development of a 3,000-ha oil palm plantation, including the first stage of the palm oil processing facilities.

3.03 The project would provide about 2,000 small commercial coffee and cocoa farmers with credit, improved planting material and technical assistance on the basis of technically and financially viable investment plans. All lending for coffee development (1,300 ha) and about 24% of cocoa development lending (600 ha) would be for replanting existing but low yielding and un- profitable plantings. The remainder of the cocoa development would be to establish new areas (1,900 ha) under this crop. About 410 beneficiaries of the banana development (1,000 ha) and 640 on the oil palm plantation (3,000 ha) would be mainly agrarian reform beneficiaries, currently having rights only to the use of land and landless laborers. In addition to the investments associated with field establishment of bananas and oil palm, the project would finance machinery, equipment and other infrastructure required for the operation of those two components, including the first stage of the oil palm processing plant. Finally, the project would finance technical assistance for on-farm development and monitoring and evaluation of the cocoa and coffee components and training of local technicians. - 18 -

3.04 The proposed loan would be made to BNP, with the guarantee of the Government of Panama. The banana and oil palm components would be disbursed directly through BNP, which also would be responsible for overall project implementation. Funds for cocoa and coffee development would be disbursed by BNP through BDA, acting as a participating bank. Other participating agencies would be MIDA and COBAPA.

C. Detailed Features

On-farm Development

3.05 Cocoa Development. Under this component, about 1,000 subloans would be made to develop cocoa plantations of I to 5 ha in size, with an estimated average of 2.5 ha per sub-borrower. Investments for cocoa development would be made over a three-year period. Cocoa plantings would take place during the first year, followed by planting temporary shade (plantain), constructing drainage channels and purchasing a hand-operated sprayer. Investments during Years 2 and 3 would be for the purchase of inputs required for the maintenance of the new plantation. Average investment has been estimated at US$1,840 per ha, equivalent to a total investment of US$4,600 per sub-borrower.

3.06 Coffee Development. The project would finance the renovation of the old coffee plantations and their maintenance during the first three years. All the work would be done by hand labor; other investments would include the purchase of inputs, small tools and a hand-operated sprayer. About 1,000 small-scale farmers are expected to benefit from this component. The size of the coffee plots to be renovated would range between I and 3 ha in size, with an estimated average of 1.3 ha per sub-borrower; total investment per sub- borrower would be about US$4,400, or US$3,415 per ha.

3.07 The cocoa plants would be produced in nurseries established on each farm. Seed would be imported by MIDA from Costa Rica, and inputs and technical assistance for the nurseries would be provided by extension staff of the Cocoa Program of MIDA; the labor required for the establishment and maintenance of each nursery would be provided by the farmer. The technical staff of the Cocoa Program would maintain control of the nursery until planting time. Coffee plants would be produced in central nurseries established in the project areas, operated by the Coffee Program of MIDA. Cocoa and coffee plants would be delivered and sold at cost to farmers participating in the project.

3.08 Banana Development. A 1,000-ha banana plantation would be developed over a two-year period. Main investments would be the construction of 20 km of internal roads, 25 km of main drainage canals, 85 km of secondary canals and 210 km of tertiary drainage canals. Improvements would be made to 4-1/2 km of the railroad tracks passing the site of the plantation and running to the shipping port (Puerto Armuelles). Four packing sheds, each with a capacity to process bananas from 300 ha would be constructed and fully equipped, and four warehouses would be built to store boxes, tools, and inputs. The project would also provide 120 houses for technicians, supervisors and laborers. - 19 -

Investment in irrigation equipment would include the purchase of six 180-hp pumps and electric motors, pipelines, and sprinklers. Aerial haulers to transport the banana bunches from the field to the packing sheds also would be purchased. The total investment in the banana plantation would be about US$4.5 million equivalent to US$4.490 per ha or US$10,975 per beneficiary.

3.09 Oil Palm Development. At the time of appraisal, there was no detailed study for this component, therefore the Bank prepared appropriate terms of reference (Annex 1) for a study to determine the feasibility and technical design for the oil palm plantation and to select the land suitable for oil palms from the area of about 5,000 ha available for the proposed plantation. The Government selected IRHO as the consultants for the study, The final report of the consultants was received by the Bank in February 1979.

3.10 Investments for the development of the 3,000 ha of oil palm plantation under the project would take place during a six-year period (1979-84). Two years would be required to raise planting material and prepare the land. Field planting of the first 400 ha would be carried out in 1981 (Year 3 of the project); the remaining area would be phased as follows: 800 ha in 1982; 900 ha in 1983; and 900 ha in 1984. Investments in infrastructure would include the construction of a drainage system, feeder and collecting roads, germinating house, warehouse, houses for technicians and the building to house the processing plant. Main investments in machinery and equipment would include the purchase of tractors and equipment for field work, dump trucks to transport the fresh fruit bunches (ffb) to the factory and vehicles for field technicians. The first stage of the palm oil processing plant (10 m tons of ffb/hour) would be financed in 1982-83 (Years 4 and 5 of the project). A second stage, 13 m ton of ffb/hour, would be installed in Year 7 of the project (1985). The total investment in the plantation and oil mill would be about US$13.0 million, equivalent to US$4,335 per ha or US$20,300 per beneficiary. Additional investments in Years 7 and 8 (1985-86) related to the maintenance and operation of the plantation and to the purchase of the second phase of the oil palm processing plant would be financed through BNP (para 3.15).

3.11 The table on page 20 summarizes the phasing of the lending program, and average investment values expected for the four project components.

Technical Assistance

3.12 The project would include financing for consultant services and foreign training for local technicians. It is estimated that about 245 man- months, spread over the six-year implementation period, would be required to assist and train local technicians working in cocoa and coffee development and in the implementation and operation phases of the oil palm plantations. An additional five man-months of consultant services would be financed during the third and fourth year to assist in establishing and operating an evaluation system to assess the impact of the cocoa and coffee components (para 4.19). - 20 -

Oil Palm Cocoa Coffee Bananas Plantation Oil Mill Total

Number of Subloans

Year 1 200 250 1 - - 451

2 350 350 - - - 700

3 450 400 - 16 - 866

4 - - - 1 1

6 -- - _ _-

Total 1,000 1,000 1 16 1 2,018

Total area (ha) 2,500 1,300 1,000 3,000 - 7,800

Total number of beneficiaries 1,000 1,000 410 640 3,050

Total investment (US$'000),(baseline cost) 4,600~' 4,440a/ 4,490 6,970 6,000 26,500

Average investment/ha (US$) 1,840 3,420 4,490 2,320 2,000 3,400

Average investment/beneficiary (US$) 4,600 4,400 10,950 10,890 9,380 8,690

a/ Excluding US$986,000 for investmentsto be made in Year 5. b/ Excluding US$2,755,000for investmentsto be made in Years 7 and 8. - 21 -

The total cost of consulting services has been estimated at US$1.2 million, or an average gross cost per man-month of about US$4,800. Funds would be provided to finance short study tours and on-the-job training of local technicians for a total of about 16 man-months. Finally, the project would finance the vehicles and equipment required by the cocoa and coffee extension staff. Salaries and other incremental operating expenditures related to cocoa and coffee technical assistance would be financed by MIDA (para 3.15). Details of investments in technical assistance are given in Annex 3, Tables 11 and 12).

D. Project Costs

3.13 Total project costs, including contingencies, are estimated at US$38 million including US$1.3 million of Local sales tax. The proposed Bank loan of US$19 million represents the cost of the imported component net of import duties and taxes. Project baseline costs have been estimated on the basis of prices of February/March 1978. A physical contingency of 15% for buildings and other infrastructure, and of 20% for machinery and equipment, has been included to the base cost of the bananas and oil palm component to allow for unknown site conditions and final design of these components. Price contingencies are based on the phasing of the investment over a six-year period (Annex 3, Table 13) and on the assumption that commitments, except for the oil palm component, would have started in April 1978 (para 3.17). Expected price increases for the imported component would be 7.0% for 1978, 6.5% for 1979 and 6.0% for 1980 to 1985; for local costs, it was assumed that the domestic price increases would be 8.0% for 1978, 7.5% for 1979 and 7.0% thereafter. Project costs by main investment items are summarized in Annex 3, Table 14. Project costs by component, which are summarized in the table on page 22, do not include the cost of family labor or investments which would be required in Year 5 for cocoa and coffee (US$986,000) corresponding to the third year investment of subloans committed in Year 3 of the project and in Years 7 and 8 for the oil palm component (US$2,755,000). These amounts would be financed by BNP from the cumulative surplus generated by the project (para 6.17). - 22 -

Imported Baseline Local Foreign Total Component Costs --- (US$'000) (%) …

Project Components

A. Crop Development

Cocoa 3,070 1,530 4,600 33 16 Coffee 3,020 1,420 4,440 32 16 Bananas 1,570 2,920 4,490 65 16 Oil palm plantation 3,760 3,210 6,970 46 25

Subtotal 11,420 9,080 20,500 44 73

Oil mill 2,210 3,790 6,000 63 21

Subtotal crop development 13,630 12,870 26,500 49 94

B. Technical Assistance

Consultants and training - 1,230 1,230 100 4 Vehicles and equipment 10 60 70 85 /a Incremental operating costs 450 - 450 - 2 Project monitoring 20 30 50 56 /a

Subtotal on technical assistance 480 1,320 1,800 73 6

Total baseline cost 14,110 14,190 28,300 50 100

Physical contingencies /b 770 790 1,560 51 6

Price contingencies 4,120 4,020 8.140 50 28

Total project cost 19,000 19,000 38,000 50 134

/a Less than 1%. /b For bananas and oil palm development only.

Note: Figures in this table have been rounded.

E. Financing

3.14 Financing of the project would be shared in the following amounts and proportions: - 23 -

(US$ million)

Total Sub-borrowers BNP Government Bank Investment Project Components Amount % Amount % Amount % Amount % Amount %

On-farm investments 1.8 9 8.8 43 - - 9.9 48 20.5 100 Oil mill - - - - 3.0 50 3.0 50 6.0 100

Subtotal 1.8 6 8.8 33 3.0 11 12.9 49 26.5 100

Technical assistance - - - - 0.5 27 1.3 73 1.8 100

Total baseline cost 1.8 6 8.8 31 3.5 13 14.2 50 28.3 100

Physical and price contingencies 0.2 2 2.9 30 1.8 19 4.8 49 9.7 100

Total project cost 2.0 5 11.7 31 5.3 /a 14 19.0 50 38.0 100

/a Including US$4.7 million of equity capital for the oil mill to be financed by the Government and/or the private sector (para 4.08).

3.15 The proposed Bank loan of US$19 million would finance the imported component of the project, which has been estimated at 50% of the total project cost. Project beneficiaries would finance US$2.0 million, representing 5% of the total project cost, and US$11.7 miLllion, or 31%, would be financed by BNP. An additional US$5.3 million, including US$4.7 million of equity capital for the oil mill and US$0.6 million for technical assistance, equivalent to 14% of total project cost, would be financed by the Government. MIDA would finance from its budget a total of US$600,000 distributed during the implementation period of the project as follows: Year 1, US$70,000; Year 2, US$120,000; Year 3, US$200,000; and Year 4, US$210,000. The annual cost to the Government after completion of the project would continue at about the level of Year 4. Complementary short-term credit to carry out the investment plans would be financed by BNP and BDA with resources other than those of the project. Assurances on the above were obtained during negotiations. Furthermore, BNP would finance the additional funds required for the cocoa, coffee and oil palm plantation from the cumulative surplus of the project cash flow (para 6.18).

3.16 A request for retroactive financing, which would allow COBAPA to plant 500 ha of the 1,000 ha of bananas to be developed under the project during the 1978 planting season (May to October), was made by the Borrower to the Bank on March 21, 1978. Later, in September 1978, the request for retroactive financing was modified to allow planting about 250 ha of bananas and about 250 ha of cocoa and coffee during the 1978 planting season. Currently, COBAPA, in order to maintain a technically viable operation and its external - 24 - market, has to purchase fruit from UB at an average FOB price 30% higher than the comparable cost of COBAPA's own production. Therefore, in addition to seasonal factors and availability of planting material, which had to be utilized during 1978, substantial financial and other non-quantifiable benefits would accrue to COBAPA and to the Government from the completion of the investment program in the shortest time possible. Additionally, this would lead to a reduction of total project cost and, given the relatively short repayment period of the banana subloan, it would generate a rollover of funds in later years to finance other components, which would therefore reduce the total financial requirements for the project (para 6.18). Retroactive financing for cocoa and coffee would allow BDA to gain time in the implementation of these components and utilize available planting material.

3.17 Retroactive financing is recommended for expenditures incurred in cocoa, coffee and bananas from April 1, 1978. BNP and BDA would provide the loan initially required to finance these components. Once the proposed loan became effective and provided that procurement procedures had complied with the Bank requirements (para 3.21), the Bank would reimburse BNP 53% of total investments for a maximum amount of US$1.5 million.

3.18 The project's lending program would be financed as follows:

(US$ million)

BNP Bank Total Lending Amount % Amount % Amount %

On-farm investments 8.8 47 9.9 53 18.7 100 Oil Mill /a - - 3.0 50 3.0 100

Total baseline 8.8 41 12.9 59 21.7 100

/a Excluding US$3.0 million, (US$4.7 million including contingencies) of equity capital to be financed by the Government and/or the private sector.

3.19 The Bank loan would be made to BNP at the Bank lending rate prevailing at the time of loan approval, for a term of 15 years, including four years of grace. The Government of Panama would guarantee the loan and would also bear the foreign exchange risk. BNP would onlend the proceeds of the Bank loan and the counterpart funds directly to beneficiaries for banana and oil palm development and it would disburse through BDA the project's funds for cocoa and coffee development. - 2.5-

F. Procurement

3.20 The purchase of on-farm investment items required for cocoa, coffee, banana and oil palm development would be procured over a six-year period by about 2,000 small-scale farmers and 19 land reform settlements. Inputs, small equipment and tools, valued at US$7.7 million, would be varied or limited for technological reasons (seeds) and not suitable for procurement through local or international competitive bidding. Therefore, sub-borrowers would purchase their requirements through local established commercial channels, including rural and farmers' cooperatives, representing a broad spectrum of international suppliers. International comparative shopping, subject to Bank approval, would be utilized in the procurement of the oil palm seeds (US$0.3 million).

3.21 Contracts for the acquisition of tractors, machinery, equipment and vehicles (US$7.3 million) required to develop the 19 land reform settlements to benefit from banana and oil palm, for purchase of the oil mill and for technical assistance, would be procured over a six-year period. Purchases of less than US$50,000 equivalent would be made directly through local commercial channels. Whenever an individual order for goods, work or services (other than consultant services) to be procured is expected to be the equivalent of between US$50,000 and US$100,000, price quotations would be obtained from at least three local suppliers. Orders exceeding US$100,000 equivalent would be through international competitive bidding, according to Bank procedures. Civil works for project facilities (US$3.8 million) would be carried out through force account and/or through locally advertised competitive bidding procedures, which are acceptable to the Bank. The remaining expenditures for the technical assistance component of the project (US$1.5 million) are not suitable for competitive bidding. Consultants and training expenditures would be financed on terms and conditions acceptable to the Bank. Foreign firms are adequately represented in Panama and there is a good network of competitive suppliers of agricultural inputs; facilities for maintenance of machinery and equipment are adequate. All inputs, machinery and equipment for the proposed investments are exempt from import duties and subject only, if purchased locally, to a 5% sales tax. Furthermore, there are no import restrictions which could affect purchases through existing local channels. Assurances were obtained during negotiations that the above procurement procedures would be followed.

G. Disbuirsements

3.22 The Bank would disburse over a period of six years:

(a) 53% of the amounts disbursed for farm development subloans for a total value of US$11.8 million;

(i) US$4.7 million for cocoEL and coffee development, and; (ii) US$7.1 million for bananas and oil palm plantations;

(b) 100% of the subloan for the oil palm processing plant for a total value of US$3.8 million (equivalent to 50% of the total cost of the component); - 26 -

(d) 100% of foreign expenditures for the training program for a total value of US$190,000;

(e) 100% of foreign expenditures for vehicles and equipment related to technical assistance, or 85% of local expenditures, if locally procured but previously imported, for a total of US$70,000; and

(f) 100% of the foreign expenditure, or 56% of total expenditures related to monitoring and evaluation, for a total value of US$40,000.

The above values include US$2.1 million of the US$4.0 million price contingencies; the balance of US$1.9 million would initially be unallocated.

3.23 The Bank would reimburse for farm subloans made for cocoa and coffee development against statements of expenditures, which would be certified by BNP and BDA. Supporting documentation for these expenditures would not be submitted to the Bank, but would be retained by BNP and BDA for review during the course of Bank supervision missions. Other disbursements for banana and oil palm development would be made against standard documentation. All other disbursements would be supported by standard documentation.

3.24 Expenditures for civil works for project facilities (US$2.7 million) that would be carried out by force account by COBAPA, would be reimbursed against statements of expenditures, the supporting documentation for which would be retained by BNP and made available for review by the personnel of Bank supervision missions. The estimated schedule of Bank disbursements, assuming that the date of loan signature of the proposed loan would be no later than April 1979, would be as follows:

Estimated Schedule of Disbursements (US$ million)

Bank FY 1980 1981 1982 1983 1984 1985

FY Semester 1 2 1 2 1 2 1 2 1 2 1 2

Disbursements during semester 1.8 1.3 1.0 1.2 1.3 1.3 1.9 2.0 1.8 1.9 2.5 1.0

Cumulative 1.8 3.1 4.1 5.3 6.6 7.9 9.8 11.8 13.6 15.5 18.0 19.0 - 27 -

IV. PROJECT I]MPLEMENTATION

A. Organization and Management

4.01 The Borrower would be BNP, which would also be responsible for the overall supervision and coordination of project implementation; its General Manager would be the Borrower's official representative in dealing with the Bank in all technical and financ:Lalmatters related to the project. Day- to-day management of the project wouLd be the responsibility of the Manager of the Development Banking Section of-BNP, assisted by a full-time qualified professional, acceptable to the Bank. to be appointed by September 30, 1979 (within two months of loan effectiveness) as project coordinator and financed by BNP. An assurance on this was obtained at negotiations. The project coordinator would remain in BNP for the implementation period of the project. The main duties of the project coordiLnatorwould be to assist in the implementation of policies and procedures required for project implementation in line with those followed by BNP in the implementation of the ongoing Bank projects (Loan 901-PAN, 1397-PAN and 1398-PAN). He would also collaborate and assist COBAPA's oil palm division, BDA and MIDA in the development and preparation for presentation to BNP and the Bank of the overseas training program for local technicians in cocoa, coffee and oil palm; terms of reference for consultants in cocoa and coffee development; and local training programs to be carried out by the above consultants. In addition, he would collaborate with BDA's Projects Department and the MIDA Cocoa and Coffee Programs in the preparation of the terms of reference for consultants and design of the system to be utilized in the impact evaluation of the cocoa and coffee components. Finally, he would be directly responsible for the collation of information and for preparation of quarterly reports on project progress and performance for timely submission to BNP, MIDA and the Bank. It would be a condition of disbursement of the Bank funds for technical assistance to MIDA that an agreement, on terms and conditions satisfactory to the Bank, for the repayment of the US$0.9 million of Bank funds, had been entered into by BNP and MIDA.

4.02 BDA's Deputy General Manager would have direct responsibility for the implementation of the cocoa and coffee components and serve as a liaison officer between BDA and BNP for all activities related to project implementation and management.

Cocoa and Coffee Development

4.03 BDA's Projects Department, which is directly responsible to the Deputy General Manager, jointly with MIDA's technicians of the Cocoa and Coffee Programs, would be responsible for implementation of the cocoa and coffee components through the regional offices and branches of BDA (Map IBRD 13675). As a participating bank, BDA would be in charge of the financial evaluation of subloan requests, disbursements and collection of subloans. Technical assistance, including promotional activities, subloan preparation, technical evaluation and supervision, would be provided by MIDA's technicians. BDA and MIDA have been jointly implementing the Cocoa and Coffee Programs for about three years (para 2.08) and the Minister of Agriculture and Livestock - 28 -

Development is also the chairman of the Executive Committee of BDA; therefore, no coordination problems that might affect project implementation are anticipated. However, in order to ensure that the lending targets are met and that adequate technical assistance is provided to sub-borrowers, MIDA would, during the four-year implementation period of the project, increase the total number of technicians working in the project areas from six to 16 in cocoa and from 14 to 20 in coffee (Annex 3, Table 15). Assurances on the above were obtained during negotiations.

4.04 The technicians currently working in cocoa and coffee development in the project areas, as well as their vehicles and equipment, would be assigned by MIDA to BDA for the four-year implementation period. These technicians would be engaged to work full time on project activities; their salaries and other expenses related to the operation, as well as those of the additional technicians, would be financed by MIDA. An assurance to this effect was obtained during negotiations. MIDA would appoint, from the existing staff working in the project areas in cocoa and coffee development, two field officers to assume responsibility for implementation of the respective components. A condition of disbursement of the funds for cocoa and coffee development would be that: (a) a technical assistance agreement, on terms and conditions satisfactory to the Bank, had been signed between MIDA and BDA, and (b) field implementation officers for the cocoa and coffee components had been appointed by MIDA.

Banana and Oil Palm

4.05 COBAPA would assume full responsibility for the investment, management, production, marketing, and provision of technical assistance and all other services required for the implementation of the banana and oil palm components. COBAPA responsibilities in the implementation of these components, including COBAPA's utilization of the technical assistance funds and other expenditures related to nurseries establishment and management, and the acquisition of machinery and equipment required for development of oil palm plantations, would be reflected in a technical assistance agreement to be signed between BNP and COBAPA. Main conditions of this agreement, relating to field implementation of the banana and oil palm components, would be reflected in each of the farm investment plans. Six hundred of the 1,000 ha of the Baru District to be developed with bananas under the project is held by two asentamientos - Unidad Indigena and Grupo de Oriente. The balance of 400 ha is held by the Chiriqui Banana Enterprise (EMBACHI), an autonomous private institution made up of the asentamientos Victoria de la Revolucion and Unifi- cacion del Baru. The asentamientos, through the farm investment plans, would give COBAPA full rights to develop, manage and market the bananas produced on the asentamientos lands until full development of the banana plantation. The plans would also make provision for asentamientso to incorporate the additional labor required for the plantation; these workers would be incorporated as permanent members of the asentamientos. The appointment of field managers and other key plantation personnel would be a joint responsibility of COBAPA and the asentamientos. The banana production would be purchased by COBAPA at the packing plant; price and conditions would be specified in the contract between the asentamientos and COBAPA. From the profits generated by the plantation, COBAPA would repay (a) to BNP the subloan utilized to develop the asentamientos - 29 - lands; and (b) to BDA the asentamientos debt in arrears, which it is estimated will be about US$1.1 million (December 31, 1978). The full cost of operation of the plantation, including the resources required for the repayment of the above obligations, would be discounted by COBAPA from the value of production. In addition, th- asentamientos would pay COBAPA a fee for each box of banana of export quality produced by the plantation to cover overhead expenses; for purposes of the financial analysis, it has been estimated at US$0.05 per box; however, the final amount would be specified in the farm investment plan to be signed by the asentamientos and COBAPA. The signing of the technical assistance agreement between BNP and COBAPA acceptable to the Bank, including the above terms and conditions, would be a condition of disbursement of the funds required for banana and oil palm development.

4.06 The 3,000 ha of oil palm plantations would be developed on about 16 asentamientos in the project area. Some of these asentamientos would operate under a system similar to that for banana development; the investments, and field management would be the responsibility of an oil palm division created within COBAPA until full development of the oil palm plantation. In addition, it is expected that some asentamientos would be developed under an outgrower system, with COBAPA providing the planting material and technical assistance for the implementation and operation of the plantation, and supervising the investment financed by the outgrowers. Both the asentamientos to be managed by COBAPA, and those to be developed under the outgrower system, would enter into contractual arrangements with COBAPA. The outgrowers' farm investment plans would commit the beneficiaries to follow the technical advice of COBAPA in matters related to oil palm establishment and management. In return, they would receive credit from BNP under the terms and conditions speciEied in paragraph 4.14. By October 1979, COBAPA would hire a manager for the oil palm division, one internationally recruited expert in oil palm production, and two local technicians to act as counterpart and field supervisors. Two other internationally recruited experts (plant protection and soils and oil palm fertilization) would be hired by June 30, 1981, on a part-time basis, to visit the plantation periodically during the implementation period. In addition to their technical responsibilities, the internationally recruited experts would train their local counterparts, laborers, nurseries workers and beneficiaries. A selective training program for local technicians abroad would also be implemented. It would be a condition of disbursement of the funds for the oil palm plantation that an oil palm division had been established within COBAPA, and that the experts on oil palm production had been hired by COBAPA. The final feasibility study (dated January 30, 1979), including the technical design of the oil palm component and a detailed description of the organization, management, and timetable for the implementation of the component, was received by the Bank on February 16, 1979.

4.07 COBAPA with MIDA's assistance, would provide technical and management training to prepare the banana and oil palm beneficiaries for the management of the plantations in the future. The improved financial situation of the beneficiari-s would probably result in a request for full title to the land, which, according to the Agrarian Reform Code of Panama would be granted by MIDA. Assurances were obtained during negotiations that: (a) the Government would provide adequate land rights, satisfactory to the Bank, to beneficiaries - 30 - of the banana and oil palm development for a period of not less than 30 years from the beginning of the execution of each farm investment plan; and (b) COBAPA would provide technical and management training to the beneficiaries of the banana and oil palm component.

4.08 The oil mill investment, which should be ready to start operations by the end of 1984 (Year 4 of the project), would be implemented and managed by the Government through COBAPA with equity participation of the private sector, including asentamientos benefitting from the oil palm component. The Government would be required to prepare, in coordination with BNP, a detailed study with the final specifications of the oil palm processing facility. The study would include detailed engineering designs and full particulars of the legal and financial structure and management of the entity to be responsible for the operation of the oil mill. Receipt of this study by the Bank would be a condition of disbursement under the oil mill category. Financial arrangements for establishing the mill, satisfactory to the Bank, would be made by the Government to provide equity capital equivalent at least to 50% of the investment required by the oil mill; the balance would be financed from the proceeds of the loan. Furthermore, the debt-equity ratio of the entity would not be allowed to exceed 3:1 without prior Bank approval. Once the palm oil processing entity had been established in a manner satisfactory to the Bank, no changes in ownership structure would take place without the prior agreement of the Bank. Assurances to the above were obtained during negotiations.

4.09 Approximately 95% of the cocoa and 5% of the potential coffee sub-borrowers under the proposed project do not have clear title to the land. MIDA's office of the National Directorate of the Agrarian Reform, responsible for the surveys, analyses and issuance of titles in the cocoa project area, has not been staffed adequately in the past, and therefore it cannot process land titling requests. During negotiations, assurances were obtained from the Government that it would maintain during the implementation period of the project an adequately staffed office of the National Directorate of Agrarian Reform in Bocas del Toro, and, that MIDA would issue titles to beneficiaries of cocoa and coffee development without clear titles, within one year of subloan approval. Whenever necessary, the cost of land surveying and titling of the areas to be developed with cocoa or coffee would be included in the farm investment plans.

Technical Assistance and Training

4.10 Four internationally recruited experts would assist local technicians with cocoa and coffee development activities during the four-year implementation period of the project. Short-term courses and seminars would be held for the benefit of the extension agents and farmers. The consultants would also assist MIDA's technicians in the establishment of research and demonstration plots. In addition, the project includes short-term overseas on-the-job training and study tours for about eight technicians working on the field implementation of the cocoa and coffee components. Assurances were obtained during negotiations that the Cocoa and Coffee Programs of MIDA, jointly with BDA and in consultation with IDIAP, would (a) prepare by October 31, 1979 (within three months of loan effectiveness) detailed terms of reference and the schedule for hiring the above consultants for presentation to the Bank, through BNP, and (b) the consultants would be appointed and the overseas - 31 - training programs would be initiated by December 31, 1979 (within five months of loan effectiveness). Detailed termas of reference for consultants required for the oil palm development have been included in the final feasibility study of the component (Annex 4).

B. Lending Policies and Procedures

Cocoa and Coffee Development

4.11 Credit applicants would be assisted in the preparation of their investment plans by field technicians of MIDA's Cocoa and Coffee Programs. In line with Government policy toward small-scale farmers, technical assistance would be provided free of charge:to the sub-borrowers. The evaluation of creditworthiness and the financial analysis of the investments would be carried out by BDA staff, which would also be responsible for subloan disbursements and collections. BDA and MIDA have been operating for about three years, on a limited scale, with cocoa and coffee development, and valuable experience has been acquired. Given the lack of complexity of the lending program, as only one crop would be financed in each of the project areas and the area to be developed by any one sub-borrower is small, a very simple procedure would be used for the preparation and technical and financial evaluation of the investment plan. Disbursements would be made, based on the progress of investments as reported by the field staff, directly to the sub- borrower or to commercial concerns providing inputs to sub-borrowers. Assur- ances were obtained during negotiations that the above lending procedures would be utilized and that the Bank would have an opportunity to review for comment the procedure to be used for the analysis of investment plans.

4.12 The minimum area to be financed for cocoa and coffee development would be 1 ha; the maximum area would be 5 ha for cocoa and 3 ha for coffee development. The maximum subloan value for cocoa development per sub-borrower would be about US$9,000 and about US$10,000 for coffee development. At the Borrower's request, these amounts would be reviewed from time to time to adjust for price increases during the implementation period of the project. All subloans would be approved at the closest BDA local branch or regional office. Therefore, BDA's subloan approval ceilings would be increased in order to approve all subloan requests locally. Assurances that these limits would be applied and enforced were obtained during negotiations.

Banana and Oil Palm Development

4.13 Detailed investment budgets and implementation schedules would be prepared by COBAPA and submitted to BNE"s Development Banking Section for approval. The banana and oil palm development on the asentamientos land would be financed by long term-loan from BNP, through COBAPA for banana development, and, for oil palm to the organization representing these beneficiaries. COBAPA would incorporate in each farm investment plan the applicable conditions specified in paragraphs 4.05 and 4.06, including the system to be utilized in recovering the investments financed uncLer the project and of any previous debt of the asentamientos with BDA. AssurarLces that the above approval procedures and contractual arrangements would be used were obtained during negotiations. - 32 -

Interest Rate and Repayment Terms

4.14 Subloans would finance not more than 80% of the total value of the investment plan; the balance, 20%, would be financed by sub-borrowers in the form of family labor and/or cash. However, given the income situation of the settlers to benefit from the banana and oil palm development (para. 2.14), subloans to these beneficiaries would finance up to 100% of the total value of the investment plan. The repayment terms would reflect the capacity of the sub-borrowers to repay, as estimated in the cash flow projections of the investment plans. Subloans for cocoa and coffee would be for a maximum period of nine years, including a grace period of up to three years. Subloans for banana development would be for a maximum period of seven years, including a grace period of up to two years. Subloans for the oil palm plantations would be for a maximum period of 13 years, including up to six years of grace. The subloan for the oil palm processing plant would be for a maximum period of 14 years, including a grace period of up to 8 years. Interest on the outstanding balances would be payable at a rate of not less than 12% per annum. The proposed lending rate would be positive; the index of wholesale price increases in Panama dropped from 14% in 1974/75 to 7.8% in 1975/76, and to 7.2% in 1976/77. Wholesale prices are projected to increase at 7.5% per annum in the period 1977-79, and at 7.0% per annum thereafter. The above rate is consistent with current interest rates for agricultural lending in Panama (para 1.18). Interest would be payable annually except for the subloans for oil palm development, in which interest amounts would be accumulated during the grace period of the subloans. Assurances were obtained during negotiations that the terms and conditions specified in this paragraph would be carried out.

4.15 BNP would enter into a subsidiary agreement with BDA, incorporating the terms and conditions of the lending operations specified in the preceding paragraphs and would specifically (a) incorporate terms, conditions and interest rates for rediscounts between BNP and BDA and for lending between BDA and sub-borrowers; (b) cover the obligation of BNP to provide BDA, in addition to Bank funds, with all the counterpart funds required for the lending program of BDA; and (c) include the obligation of BDA to provide sub-borrowers with complementary short-term credit required to carry out the investment plans financed under the project. The above subsidiary agreement, satisfactory to the Bank, would be a condition of disbursement for the cocoa and coffee components. Assurances were obtained during negotiations that the procedures, terms and conditions of the subsidiary agreement would not be changed or waived without prior Bank approval. However, the Government, the Bank and BNP would from time to time, at the request of any one of them, review the lending terms and conditions with a view to adjust them to the extent necessary to: (a) ensure the continuance of incentives to BDA and COBAPA to lend for the purposes of the project; and (b) ensure the compatibility of the interest rates under the project with other interest rates in Panama for lending for agricultural development, provided that the interest rates under the project would remain positive in real terms. - :33-

C. Accounts and Auditing

4.16 BNP would continue to maintain separate project accounts, as established for the ongoing Bank projects (Loans 901-PAN; 1397-PAN and 1398-PAN), in accordance with sound accounting principles consistently applied. Simi- larly, BNP, BDA and COBAPA would be required to maintain records and documentation relating to all financial transactions under the project, and these would be available for inspection by the Bank during the course of supervision missions. The project accounts and related financial statements would be audited annually in accordance with generally accepted auditing standards by independent auditors acceptable to the Bank. As required by current legis- lation, the Decentralized Audit Division (DAD) of the Comptroller General of the Republic is responsible for the external auditing of BNP and BDA. During 1978, at Bank request, DAD modified its auditing procedures, improving substantially the scope and quality of DAD audits for projects financed by the Bank. The existing independent external auditors of COBAPA would be. proposed by BNP for Bank approval.

4.17 The scope of the audit examination of the project accounts would be determined, following consultations between the Bank, BNP, BDA, and COBAPA, and incorporated in BDA's subsidiary loan agreement and in COBAPA's subloan agreement. Audited comparative financial statements and notes prepared from the project accounting records of each institution would include the balance sheet, a statement of income and expenses, and a statement of the source and application of funds, together with the opinion of the independent auditor. Supplementary data on operations, financial position and scope of work carried out by the auditors and such other additional information as the Bank might from time to time request would also be provided. All audit reports and statements would be submitted through BNP to the Bank not later than four months after the end of each fiscal year.

4.18 BDA would also present for Bank consideration no later than July 31, 1980: (a) a report indicating the details of the reforms which are scheduled to be introduced in the accounting system no later than December 31, 1979 and additional information required to malce a detailed analysis of its portfolio and financial results; and (b) a report indicating the results obtained by implementing a plan to regularize its financial situation and loan portfolio. The analysis and presentation of these reports would be based on the information and presentation used for the audit report on BDA as of December 31, 1977. Assurances on this point and those in the preceding two paragraphs were obtained at negotiations.

D. Progress Reporting, Monitoring and Evaluation

4.19 BDA would be responsible for establishing and maintaining a system for monitoring the progress of the cocoa and coffee components and collecting and analyzing technical and financial data to evaluate the impact of the investments and technical assistance. It is envisaged that field staff of the Cocoa and Coffee Programs, jointly with BDA's regional offices, would collect, on a - 34 - continuous basis, during the four-year implementation period of the project, production, marketing and financial data including credit use and recovery and extension performance of sub-borrowers. The information would be centralized, assembled and analyzed by the Project Evaluation Department of BDA and then transmitted to BNP. This institution would consolidate BDA's information and that of COBAPA (para 4.20) and would be responsible for submitting to the Bank the consolidated quarterly reports. In addition, two impact evaluation surveys (partially financed with Bank funds, para 3.12) of the cocoa and coffee components would be carried out, one in Year 3 and one in Year 4 of the project. These surveys would provide an assessment of the overall social and economic impact of the components with respect to project targets and to the effectiveness of achieving the basic objectives of these components (Annex 2).

4.20 COBAPA would establish within its Accounting and Computing Department an adequate monitoring and evaluation system for the banana and oil palm components. Under this system, adequate records of on-farm investments, purchases of inputs, sales, inputs and outputs, prices, and employment would be kept to provide detailed information on operational, administrative and management costs of the banana and oil palm plantations. It would also make possible an assessment of progress of activities compared to planned schedules, including the area in production, yield data, technology utilized and any natural phenomenon or other external events which might affect yields or progress of the plantations. These data would be available to COBAPA's management on a timely basis, and quarterly reports would be submitted to BNP for presentation to the Bank.

4.21 In addition, BNP would be responsible for preparing and presenting to the Bank a draft completion report. Assurances were obtained during negotiations that: (a) the above monitoring and evaluation procedures would carried out; (b) quarterly reports would be sent to the Bank within two months of the end of each quarter; and (c) a draft project completion report would be prepared by BNP no later than four months after the proposed project investments have been completed.

V. ILLUSTRATIVE INVESTMENT MODELS; SPECIFICATIONS AND ASSUMPTIONS

A. Production Coefficients

5.01 The production coefficients used in the illustrative investment models are summarized below. Yields of cocoa and coffee are based on those obtained by comparable farms in the project areas; allowances have been made for yield fluctuations over time. Banana yields are based on current productivity of COBAPA plantations. Production coefficients utilized in the oil palm component are those included in the preliminary report of the feasibility study (para 3.09), representing a weighted average of the expected yields in the project area. Yield assumptions utilized in the analysis are as follows: - .J) -

------Years with Project------1 2 3 4 5 6

Yields Cocoa (kg/ha) - - 334 545 1,000 1,000 Coffee (kg/ha) - 450 910 1,364 1,640 1,820 Bananas (m ton/ha) - 3.5 41 41 41 41

------Age of the Plantation------5 6 7 8

Oil Palm Fresh fruit bunches (ffb) (m ton/ha) 7.0 12.0 15.0 18.0 Palm oil (m ton/ha) 1.1 2.2 3.0 3.9 Kernel oil (m ton/ha) 0.2 0.4 0.5 0.5

Extraction Rates as Percentage of ffb ------%--- Palm oil 16.0 18.0 20.0 22.0 Palm Kernels 3.0 3.0 3.0 3.0

B. Illustrative Investment Models

Cocoa Development

5.02 The illustrative investment model for cocoa represents a small farm located near the coast in the Bocas del Toro Province. Rainfall is about 3,000 to 3,500 mm distributed evenly throughout the year. New cocoa plantings would be preceded in the first year by clearing forest trees and under- brush (new plantations) and old cocoa trees and shade trees (renovation), followed by planting temporary shade (plantain) and permanent shade (Inga sp.) and constructing drainage channels. Only hand labor would be utilized in the establishment and maintenance of the plantation. The cocoa plantations would be established with high yielding hybrids and open-pollinated selections, with a total plant population of about 1,300 trees per hectare. Attention would be given to chemical weed control, in addition to which the canopy of trees would be encouraged to close so that weeds would be shaded out. Appropriate fertilization would be carried out, and disease and insect control measures would be taken. At full development, the cocoa plantation would require, in addition to family labor, 44 man-days of hired labor per ha/year. Yield of plantains would start in Year I and continue until Year 4, when plantains would be eliminated. Cocoa production would start at Year 3 and is expected to stabilize at about 1,000 kg/ha of dry cocoa beans by the fifth year. - 36 -

Coffee Development

5.03 The coffee renovation illustrative investment model is representative of a farm located at an altitude of about 1,000 m, having about 3,000 mm of rainfall, with a dry season of about 3-1/2 months per year. The farm has 1 ha of old coffee "Arabica" trees (variety "Typica") under excessive shade and planted at a density of about 1,000 trees per ha. After clearing the area of old coffee trees and shade trees, it would be planted with the "Red Caturra" variety of coffee and with temporary and permanent shade trees. Some 5,000 trees/ha would be planted along the contours to diminish erosion problems and to facilitate cultural practices and disease and insect control. All the work would be done by manual labor. The average yield of coffee is expected to increase gradually from 450 kg/ha (parchment coffee equivalent) in the first year of production (Year 2) and stabilize at about 1,860 kg/ha in Year 6. At full development, in addition to family labor, the coffee plantation would require 140 man-days of hired labor per ha/year.

Banana Development

5.04 A 1,000-ha plantation would be developed by COBAPA over a two-year period. The first 250 ha were expected to have been planted between May and October 1978 and the balance of 750 ha from May to September 1979. Plant population would be 1,500 plants/ha; planting material would be obtained from COBAPA's existing plantation. Weed control and crowning would be carried out every three months; fertilizing would be done twice per year; thinning (six cycles per year) and deflowering would be performed at harvesting time. Sigatoka (Cercospora musae) would be prevented or controlled with oil. Insects would be controlled with lannate and diazinon, and nematicides would be applied locally wherever pathogenic nematodes are detected. Two-week-old bunches would be bagged in poly-bags. Harvest in the first 250 ha planted would begin in June 1979, and the entire 1,000 ha would be in full production by September-October 1980. The average yield of bananas at full development is expected to be 41 m tons/ha (export quality), or a total production of 41,000 m tons/year. The plantation would provide permanent employment for 410 beneficiaries.

Oil Palm Development

5.05 Some 3,000-ha of oil palm plantations would be developed. Imported seeds would arrive in the country during the last quarter of 1979. After germination, the seedlings would be planted in nurseries and, during the dry season (January to March) irrigated manually or with COBAPA's existing sprinkler irrigation equipment. Culling would be done at the end of the nursery stage when the 12- to 13-month-old plants would be large enough to be planted in the field.

5.06 Field planting of the first 400 ha would take place in 1981 (April to August) and the remaining 2,600 ha would be planted during years 1982-84 (para 3.10). Land preparation would include drainage preparation, limited bush cleaning, and weed control. Aligning and holing would be done during the last four to five months before planting. About two months before field - 37 -

planting,Pueraria japonica would be sown between the avenues. Some 143 plants, sited in a triangularpattern, would be planted per hectare. Standard maintenanceprocedures would be followed for immature plants. A circle around the plants about 1 foot in diameter (crown)should be kept clean by manual weeding, performed every three months; fertilizerswould be broadcast around the crown. Pruning would be limited to the removal of dried leaves when fruit setting starts. The first inflorescenceswould be removed when the trees are three years old. Standardmaintenance proceduresof mature plants would be followed during the economic life of the plantation (30 years). Yields would start at Year 5 and are expected to stabilize at about 18 m tons of ffb per ha by Year 8. At full developmentof the component (Year 13) total production is estimated at about 11,900m tons of palm oil and 800 m tons of kernel oil. At this stage, the operation of the plantation and of the oil processingplant would provide direct permanent employmentfor about 640 beneficiaries.

VI. PROJECT PRODUCTION,MARKETS AND FINANCIALANALYSIS

A. ProdtLction

6.01 At full development,incremental production from the project would be approximatelyas follows:

IncrementalProduction at Full Development National Production As % of 1976 Year of Full 1976 Total National Production Development ---- (m tons) ------%------Commodities

Coffee (parchment) 4,800 2,120 44.0 8 Cocoa (dry beans) 900 2,360 162.0 8 Banana 525,980 40,950 8.0 3 Palm oil (unrefined)a/ - 11,900 100.0 13 Palm kernel oil - 800 100.0 13 Plantains b/ 100,900 35,000 35.0 4 a/ 18,000 m tons, representingtotal Panama importsof vegetablesoils and fats. b/ Plantainswould be produced only during Years 1 to 5 of the project.

At full developmentand using the 1978 farmgateprices utilized in the financial analysis, the annual total value of the incrementaloutput generated by the project would be about US$23.0 million, excludingplantains, which would be eliminatedby Year 5. - 38 -

B. Markets, Marketing and Prices

Bananas

5.02 COBAPA initiated direct banana exports to Yugoslavia in 1975 under a one-year contract, renewed annually after price and volume negotiations. Starting in May 1978, however, COBAPA's production has been exported through the marketing agency of UPEB, COMUNBANA. The five-year renewable marketing contract signed by COMUNBANA and COBAPA states that COMUNBANA will buy all export quality bananas produced in COBAPA plantations for the duration of the contract. Bananas from Panama as well as from other COMUNBANA's member countries will be exported to Yugoslavia under a five-year renewable contract. Prices under the COMUNBANA - Yugoslavia contract are based on the current world market level to be reviewed annually to adjust for changes of world market prices.

6.03 Banana exports from Panama in 1977 amounted to about 610,000 m tons, 9% of world exports. Over the five-year period 1972-76, the main markets for Panama were the Federal Republic of Germany (26%), the United States (23%), Italy (21%) and the Netherlands (16%). Within the remaining balance 14%, the share of Yugoslavia, COMUNBANA's first export market, increased from less than 1% in 1972 to 5% in 1976. World imports and consumption of bananas are expected to increase approximately in line with population growth, at about 2% per annum. However, according to Bank projections, the share of centrally planned economies in total imports of bananas is expected to increase from about 3.5% in 1976 to 11% in 1990, and by about 11% per annum thereafter, representing an increase of 690,000 m tons over the 1976 import volume.

6.04 By 1981, international banana prices in constant terms are expected to decrease by about 10% from the 1977 level (US$214 per m ton), then increase tiO the 1977 level by 1985, and remain stable until 1990. The prices obtained by COBAPA in 1977 and early 1978 were US$262 per m ton CIF Yugoslavian port (USS4.76 per box). Under the new contract with COMUNBANA, COBAPA will receive US$2.80 FOB per box, equivalent to about US$2.60 per box ex-packing plant. Independent producers who market their output through UB receive an average price of US$1.45 per box. This price is equivalent to an FOB price of US$2.60 per box, or US$0.20 less than the equivalent price obtained by COBAPA.

Palm and Kernel Oil

6.05 Incremental oil production of the proposed project would substitute for an equivalent volume of imports. Total demand for vegetable oil and fats in the country is estimated at 18,000 to 20,000 m tons per year. Under the most conservative demand assumption (population increase of 3.1% per annum), total demand would be about 25,000 m tons in 1985 and 30,000 m tons in 1990 (Annex 3, Table 16). At full development (1990), total production from the proiect would be 12,700 m tons of unrefined oil per year (11,200 m tons of refined oil), equivalent to about one-third the total estimated demand and about equal to the incremental demand from year 1990 onwards (10,000 m tons per annum). - 39 -

6.06 There are two oil refineries in Panama City, which, in 1977, processed 18,400 m tons of imported vegetable oil, equivalent to 70% of their installed capacity (26,000 m tons per year); processing capacity is projected to increase to about 33,000 m tons by 1985. Therefore, refining facilities are adequate to process project production at full development.

6.07 The ex-plant price of unrefined palm oil was estimated at US$535 per m ton and kernel oil at US$305 per in ton, equivalent to the current CIF price and equal to the farmgate price obtained by the Cooperativa Agroindustrial de Icacal. InternationaL oil palm prices are projected by the Bank to remain in constant terms at or above their early 1978 level until 1982 and subsequently to decrease and become stable by 1990 at about 85% of their present level. Prices of palm kernel oil are projected to increase until 1982, decrease later on, and to stabilize at about 104% of the present level by 1990.

Coffee

6.08 Panama has traditionally given priority to satisfying its internal demand rather than exporting coffee. Internal consumption quotas are determined every year and exporters are required to sell a specified quantity of export quality coffee on the internal market for each m ton exported. Panama has not been able to meet its share of lhe indicative export entitlement allocated by the International Coffee Agreement. Actual exports have averaged 1,360 m tons since 1970 with no clear trend to either increase or decrease. Current annual domestic consumption (3,400 m tons) is projected to reach 4,500 to 5,000 m tons by 1986. National production has shown no clear trend to either increase or decrease since 1970; therefore, it is expected that, without the project, it would remain at its present level. Including the incremental production generated by the project, total coffee production of Panama would be about 6,800 m tons in 1986. Therefore, export availability could amount to 1,800 to 2,300 m tons per year (Annex 3.,Table lo), almost twice the present level of exports, but would still be within Panama's indicative market allocation (3,420 m tons by 1981/82).

6.09 The present price received by producers is the average of the export market price and a relatively low domestic price. Retail prices on the domestic market have been controlled at US$0.90 per lb since 1974, compared with the international price of US$2.06 per lb FOB Panama in 1977. The average producers' price for export quality coffee (parchment) in 1977 was US$0.90 to US$1.00 per lb of parchment coffee, equivalent to about 50% of the FOB price obtained by Panama exports, as compared with an average ratio of 75% for the 1970-75 period. The implicit price subsidy to the domestic market of the current system is a recent event in Panama (1976 to date) and due exclusively to the unusually high world market prices. However, the projected decline of the world market prices would soon offset this subsidy.

6.10 The system utilized by Panama operates satisfactorily, given the relatively high current world market prices, but it would run into difficulties if the Bank's five-year projections materialize. According to these projections, coffee prices will decrease by more than half between 1977 and 1980 and - 40 - then remain at levels more in line with their historical price. Based on the financial results of the illustrative investment model for coffee, it has been estimated that producer prices, for export quality coffee, should not be lower than US$0.65 per lb parchment coffee in constant 1978 currency. This price level is compatible with projected world prices.

Cocoa

6.11 From 1974 to 1976, Panama exported an average of 600 m tons of dry cocoa beans per year, mostly to the United States. Almost all the exported production is handled by two buyers: the Cooperativa de Cacao Bocatorena, which exports 60% of total production of the project area through IMA, and a private buyer for the remaining 40%. It is expected that most of the incremental production would be marketed through the cooperative (para 2.18), which offers to its members substantially higher prices than the private buyer.

6.12 The project is expected to increase by about four times Panama's cocoa exports by 1986, still representing a negligible share of the projected world exports (below 0.2%). According to Bank projections, the international price of cocoa will decrease to about half of 1977 prices and stabilize at US$0.51 per lb by 1990. Cocoa prices are known to fluctuate sharply and current Panama cocoa production is too small to support a local industry. However, total production at full development would support a small factory which would have a stabilizing effect on prices received by producers and increase the value added of cocoa exports. Panama imports a wide range of cocoa products, equivalent to about 2,900 m tons of cocoa beans annually, which cannot be readily substituted by local production.

Plantains

6.13 Plantains are grown mainly by subsistence farmers in the provinces of Darien (74%), Chiriqui (4%) and Bocas del Toro (3%). The lack of adequate transportation infrastructure in and out of producing areas and of price incentives have not encouraged production, which has remained at about 100,000 m tons per year since 1970. Since 1975, domestic prices have been more than doubled by the Government to give more incentives to producers, and IMA is currently buying all the plantain offered at its trading posts in Darien and Bocas del Toro at a minimum price of US$35 per m ton (US$0.50 per bunch).

6.14 Demand for plantain is substantial and production is limited more by the accessibility of producing areas than by lack of potential markets. Demand is projected at 135,000 to 143,000 m tons by 1985, or 35,000 to 43,000 m tons above 1976 production. In addition, substantial export markets exist in the rest of Central America; in 1975, Nicaragua alone imported close to 12,000 m tons. Assuming that all planted or renovated cocoa areas use plantains as shade trees, maximum incremental production of the project during the first five years would be 35,000 m ton per year, therefore, no marketing problem is anticipated. - 41 -

C. Benefits and Financial Rates of Return

6.15 Using the financial assumptions regarding investments, operating costs and income, the illustrative investment models were analyzed to assess benefits and rates of return. The principal results are summarized below:

Cocoa Coffee Bananas Oil Palm

Average plantation size, ha/beneficiary 2.5 1.3 2.4 4.6

------US$ ------

Total investment per beneficiary (baseline costs) 4.600 4,400 10,950 10,890 Annual income at full development /a (a) without project - family labor 193 180 - - cash 483 293 - - Total 676 473 250 250 (b) with project - family labor 508 566 920 1,016 - cash 1,454 2,010 5,263 3,614

Total 1,962 2,576 6,183 4,630

Debt service 738 920 4,435 3,152 Net income 1,224 1,656 1,748 1,478 Net income after full repayment of the debt /b 1,631 2,463 3,865 /c 4,630 Per capita income /d 326 470 773 926 Financial rate of return over 30 years 17% /e 23% 29% 17%

/a Full development is reached in Year 8 for cocoa, coffee and oil palm, and in Year 3 for bananas. /b Year 10 for cocoa, Year 8 for coffee, Year 7 for bananas and Year 13 for oil palm. /c After payment of export taxes. /d Assuming four dependents per beneficiary. /e Cocoa renovation. Financial rate of return for new cocoa plantations would be 43%.

6.16 The financial rates of return indicate that it would be financially rewarding to undertake the investment envisaged in the illustrative models. At full development, the income of beneficiaries of cocoa and coffee development would increase substantially over their current levels, but per capita incomes would be quite modest and close to one-third of the national per capita average, which was US$1,220 in 1977. During the implementation and - 42 -

repayment period of the subloan for banana and oil palm development, minimum labor income of settlers would be about $980 per year. Substantial surplus would be generated by the banana and oil palm plantation after debt repayment. Income of the banana plantation beneficiaries (410) would increase to about US$3,900 per year and that of the oil palm beneficiaries (640) to about US$3,700 per year. Given the poor financial results of the operation of the asentamientos which would benefit from banana development (para 2.14) and on the assumption that the same situation exists on the asentamientos which would benefit from oil palm, all financial benefits from banana and oil palm development were assumed to be incremental. Prices utilized in the financial analysis are given in Annex 3, Table 17. The financial rate of return for the oil palm plantations has been estimated assuming a producer's price of US$75/m ton of ffb. Under this assumption, the financial rate of return for the oil mill would be 16% and the return on equity of 13% p.a. In order to ensure that the financial rate of return could be achieved, assurances were obtained during negotiations that: (a) the Government would maintain measures and policies necessary to enable producers of the crops financed under the project to obtain a reasonable return on their investment plans; and (b) any new policies or measures, which may affect adversely the development of the crops financed under the project, would be presented to the Bank for comments before the application of such policies.

D. Financial Projections for Project Entities

Gash Flow of Participating Institutitions

6.17 Given the current average cost of funds for BNP of 8.5% p.a. and the Bank loan at 7.0% p.a. 1/, the blended average cost of funds under the project would be about 7.7% p.a. BNP would lend directly to COBAPA for banana and oil palm development and rediscount at 7.7% the total amount previously disbursed by BDA for cocoa and coffee development. Minimum lending interest rate to sub-borrowers would be 12% p.a. (para 4.14), leaving a gross margin on the on-farm lending of BNP and BDA of 4.3% p.a. Since technical assistance to cocoa and coffee beneficiaries would be provided by MIDA (para 4.03) and no technical assistance from BNP would be required by the banana and oil palm component, it is considered that the 4.3% gross margin would adequately cover lending risks and overhead costs of the lending program. The cash flow projections indicate that the 4.3% gross margin to BDA would amount to a total cumulative surplus of US$1.5 million by Year 11 of the project (Annex 3, Table 18). BNP's cash flow would generate a cumulative surplus of US$19.3 million; making allowances for the repayment of BNP's contribution of about US$12.7 million to the project, the net surplus would amount to about US$6.6 million by Year 17 of the project (Annex 3, Table 19).

6.18 The cash inflow of BDA would be derived from funds rediscounted from BNP (100% of the lending for cocoa and coffee development) and repayments of principal and interest by sub-borrowers. The cash outflow would consist of

1/ Rate in effect January-March 1979. 1- 4+ -- subloans to project beneficiaries and of repayment of principal and interest to BNP. The cash inflow of BNP would be made up of its own resources, withdrawals from the Bank loans and interest and principal repayments from BDA and COBAPA. Withdrawals from the Bank loan would be made over six years; withdrawals in the last semester of Year 6 represent a four-month time lag between rediscounts to BDA and/or lending for banana and oil palm development. In addition to the project funds, BNP would finance during the first eight years of the project: (a) US$1.1 million for investments in oil palm to take place during Years 7 and 8 of the project; (b) US$0.7 million corresponding to investment of subloans committed for cocoa and coffee development during Year 3 of the project; and (c) a US$1.3 million medium-term loan to finance incremental working capital required in Year I for the banana development. The total additional requirements, not included in the project costs would be US$3.1 million. Of this total, US$1.8 million, related to Year 5 investments in cocoa and coffee, and to Years 7 and 8 investments for oil palm, would be financed by BNP from the cumulative surplus of the cash flow of the project. However, the balance, US$1.3 million, incremental working capital for the banana component, would be financed with resources other than those of the project.

Fiscal Impact

6.19 Government's financial commitments to the project would amount to about US$3.5 million (or 5.3 million, with contingencies included) during the implementation period of the project (para 3.14). This total includes US$3.3 million of equity capital in the oil palm processing plant, which would be financed by the government and/or the private sector (para 4.08). The balance, US$600,000, represents the incremental local operating costs associated with the technical assistance services to be provided by MIDA to cocoa and coffee sub-borrowers, and monitoring and evaluation of these components. In addition, the Government would repay to BNP about US$1.6 million (including interest payments of 7.0% p.a.) for Bank resources, US$1.3 million, to be utilized for the purchase of vehicles and equipment, internationally recruited consultants and training abroad of local technicians. The Govern- ment participation would be offset by the incremental Government revenues from sales and export taxes, which are estimated to be about US$1.3 million per annum from Year 5 and US$2.1 million from Year 11 onwards.

Project Cost Recovery

6.20 BNP and BDA lending under theiproject, amounting to 80% of total investment, and the additional lending required for investments in Years 5 and 6 and any short-term credit required by sub-borrowers is expected to be fully recovered. In line with Government policy to the small-scale farming sector, technical assistance to beneficiaries of cocoa, coffee and oil palm plantations development would be providled by MIDA and COBAPA free of charge. Technical assistance costs for the oil mill development are included in the investment; therefore, they would be r,ecoveredwith other investment expenditures through the repayment of the subloan. - 44 -

VII. ECONOMIC BENEFITS AND JUSTIFICATION

A. Economic Benefits

7.01 The main benefits of the proposed project in cocoa and coffee development would be to increase productive efficiency, employment and income of small- scale farmers from currently unsatisfactory levels, which, given their farm size and environmental constraints and current status of technology, have no other viable development alternative. The main benefits from banana and oil palm development would be to increase substantially the productivity of land and labor and incomes of agrarian reform beneficiaries and landless laborers, utilizing one of Panama's most important resources - land - to its best alternative use. At country level, the proposed project would help the agricultural sector to continue to play a leading role as one of the main providers of foreign exchange savings through increases of export earnings (cocoa, coffee and bananas) and reducing import requirements (oil palm). At full development, the total value of incremental production generated by the project would be about US$23.0 million, including US$6.0 million from cocoa, US$4.0 million from coffee, US$6.0 million from bananas and US$7.0 million from oil palm (para 6.01), representing from Year 11 onward a net economic benefit to the country of about US$9.0 million per annum.

7.02 The direct beneficiaries of the project would be about 2,000 small- scale farmers (cocoa and coffee), with an average farm size to be developed under the project of less than 5 ha. An additional 1,050 agrarian reform beneficiaries and landless laborers would benefit from the banana and oil palm development. All 3,050 direct project beneficiaries, representing a total of about 15,300 persons, would fall within the Bank's relative poverty target group for Panama with an average per capita income of less than one-third the national average. The project contribution to employment would come mainly from regular job opportunities generated at the farm level. At full development, the project would require annually an additional 720,000 man-days of permanent and part-time labor, equivalent to 2,700 full-time jobs. About 25% of this total (670 man-years) would be provided by family labor of the cocoa and coffee farms, thus reducing substantially the underemployment of beneficiaries.

7.03 The proposed project has a large number of non-quantifiable benefits. In particular, it would further the development of COBAPA so that it would become a self-sustaining enterprise, with very important implications for national development strategies and policy decisions for the banana sub-sector. The project would develop and sustain an industry in asentamientos which would require an increase in the number of agrarian reform beneficiaries; asentamientos would be strengthened and, through their participation in the project, become financially viable organizations. The project would require the accelera- tion of land titling for both the small-scale farmers and asentamientos participating in the project. BDA and MIDA capabilities for delivering credit and technical assistance to small farmers would be strengthened, while the ongoing - 45 -- cocoa and coffee development programs of the Government would greatly benefit from the foreign technical assistance and the training components included in the project. Finally, given the price projections for coffee and cocoa and the almost certain possibility of the coffee leaf rust reaching Panama in the near future, it is imperative to increase productivity of these two commodities as soon as possible. Were the project not to take place, cocoa and coffee production would at best stagnate and, most likely, would decrease substantially through the abandonment of low yielding plantations. This, although not important for the economy as a whole, would have a very serious impact on small-scale farmers in the cocoa and coffee areas of the country.

B. Economic Rate of Return

7.04 The rate of return to the economy has been calculated for each component and for the project as a whole on the basis of the illustrative investment models for each of the project components, including the cost of technical support, monitoring and evaluation. Key assumptions and adjustments were as follows:

(a) All investments and operating costs utilized in the economic evaluation were calculated at February/March 1978 farmgate prices. No allowances were made for changes in real costs.

(b) The project incremental output has been valued, utilizing the world market price adjusted to farmgate or ex-plant equivalent. In estimating the future price trend, an index based on the Bank's projections was utilized. All prices have been expressed in constant 1978 US dollars (Annex 3, Table 17).

(c) Transfer payments have been excluded from costs and benefits. Main transfer payments affecting the project are given below:

(i) export tax on bananas, US$0.40 per box; and

(ii) sales taxes on local purchases of inputs, machinery and equipment, 5%.

(d) As in the case of the financial analysis, social benefits payments to unskilled labor were included in the economic analysis with the following adjustments:

(i) bananas and oil palm development, 12% of the base wage rate; and

(ii) cocoa and coffee development, 6% of the base wage rate, assuming that only half of the incremental labor requirements are permanently employed. According to - 46 -

current labor regulations, social charges payments are not mandatory for temporary labor, i.e., working less than 11 consecutive days per month.

(e) Due to the absence of adequate information, shadow wages for unskilled labor have been estimated using as proxy the estimated availability and seasonal variations in labor utilization in the project areas (paras 2.13 and 2.15). Adjustments have been made to take into account the seasonal patterns of the project activities; unskilled labor has been shadow-priced as follows:

(i) banana and oil palm development, 80% of the nominal wage rate;

(ii) cocoa development, 90% of the nominal wage rate; and

(iii) coffee development; 80% of non-harvest labor and 100% of harvest labor (no shadow price) of the nominal wage rate.

(f) A Standard Conversion Factor for non-tradable goods and services was calculated based on the average value of taxes and duties collected on imports and exports during the 1972-76 period. The Standard Conversion Factors thus obtained is equal to 0.94, representing a shadow exchange rate about 6% higher than the nominal exchange rate.

7.05 Based on these assumptions, the economic rate of return of the project over 30 years is estimated at about 30%. The economic rate of return calcula- tions for each component and for the project as a whole are given on page 47. The result of the economic analysis of the project components, based on three sets of assumptions, and the sensitivity analysis are summarized as follows:

Cocoa Coffee Bananas Oil Palm Total Project … ______% -- …------

Economic Rates of Return (a) Pricing outputs at their international value, excluding transfer payments and including the cost of technical assistance 27 25 37 12 25 (b) As (a) above and including shadow pricing of labor 30 27 39 12 27 (c) As (b) above and including the Standard Conversion Factor (best estimate) 33 28 41 13 29

Sensitivity Analysis (a) With a 10% decrease in benefits 26 25 33 11 23 (b) With a 10% increase in costs and a 10% decrease in benefits 21 22 25 9 19 - 47-

R N, 04i s|b

| cqvse~- --- I

2~~ - - - o Z-o Em ^-

. 2 000 000 00 Xb00g0

. 0 0> 0- 0n F< 0

' X x \0 < X O O O \~~~~0 010

000 04004 0000 0000 00 0 o 0m

2 o 2 - 48 -

C. Project Risks

7.06 Farmers' acceptance of changes in cocoa and coffee varieties and willingness to adopt improved technology has been satisfactorily tested through an ongoing program and there is strong demand for long-term funds for both cocoa and coffee renovation. Assurances would be sought during negotiations to ensure that adequate technical assistance is provided to sub-borrowers (paras 4.03, 4.04 and 4.07). Similarly, adequate technical assistance and management would be provided for banana and oil palm development, and no major risks with either production or marketing of output are envisaged. However, oil palm is a new crop in the project area and therefore asentamientos may not change readily into oil palm production. Nevertheless, the risk is reasonable and it has been taken into account through a slow build-up of the projected plantation. In addition, the Government has informed the Bank that an initial area of 2,000 ha, minimum area required to support economic operation of the oil mill, was available for oil palm development in the project area.

D. Environmental Impact

7.07 No long-term adverse environmental effects are expected as a conse- quence of the execution of the project. Fertilizers and chemicals to be utilized under the project are expected to have little effect on the local ecology, assuming that normal precautions are taken in their application and considering the relatively small area which would be covered by each farmer participating in cocoa and coffee development and the experience of handling chemicals in the banana subsector. Technical specifications and procedures to be utilized and the use of chemical controls of the oil palm plantation as well as oil mill effluent treatment and disposal would be detailed in the ongoing feasibility study and incorporated in the project at a later stage.

VIII. AGREEMENTS REACHED AND RECOMMENDATION

8.01 Assurances were obtained from the Government during negotiations that:

(a) the project would be financed as specified in paragraphs 3.14 and 3.15;

(b) procurement procedures specified in paragraphs 3.20 and 3.21 would be followed;

(c) a qualified professional, acceptable to the Bank, would be appointed by BNP as project coordinator by September 30, 1979 (para 4.01);

(d) MIDA would make available the services of about 16 technicians in cocoa and 20 technicians in coffee as well as the vehicle and equipment required to provide technical assistance in the project areas; technical assistance costs would be financed by MIDA (paras 4.03 and 4.04); - 49 -

(e) the Government would provide adequate land rights to beneficiaries of the banana and oil palm components; COBAPA would provide technical and management training to settlers benefitting from banana and oil palm development (para 4.07);

(f) the financial arrangements -and structure outlined in paragraph 4.08 would be used; no changes in the ownership structure of oil palm mill would take place without prior agreement of the Bank;

(g) an adequately staffed office of MIDA's National Directorate of Agrarian Reform would be maintained in Bocas del Toro during the implementation period of the project; titles to the land of cocoa and coffee sub-borrowers would be issued by MIDA within one year of subloan approval (para 4.09);

(h) MIDA and BDA would prepare by October 31, 1979 terms of reference for consultants and a schedale for their hiring for presentation to the Bank, and that the consultants would be appointed and the overseas training program would be implemented by December 31, 1979 (para 4.10);

(i) lending procedures as outlined in paragraph 4.11 would be used and the Bank would have an opportunity to review for comment the procedure to be used for the analysis of investment plans;

(j) lending limits as specified in paragraph 4.12 would be applied and enforced;

(k) approval procedures and contractual arrangements would be as specified in paragraph 4.13;

(1) lending terms and conditions specified in paragraph 4.14 would be implemented by BNP and B])A;

(m) the subsidiary agreement to be entered into between BNP and BDA would not be changed or waived without prior Bank approval, however, a provision would be made for periodic consultations between the Government, BNP and the Banlc on lending terms and conditions (para 4.15);

(n) accounting and auditing procedures specified in paragraphs 4.16 and 4.17 would be carried out; detailed reports of the reforms introduced in the accounting system and financial performance would be present:ed by BDA, for Bank consideration, no later than July 31, 1980 (para 4.18);

(o) a project monitoring and evaluation system would be implemented; quarterly progress reports would be submitted to the Bank within two months of the end of each quarter; and a draft completion report would be prepared by BNP wit:hin four months of project completion (paras 4.19 through 4.21); and - 50 -

(p) the Government would maintain measures and policies necessary to enable producers of the crops financed under the project to obtain a reasonable return on their investment plans; any new policies or measures, which may affect adversely the development of the crops financed under the project, would be presented to the Bank for comments, before the application of such policies (para 6.16).

8.02 It would be a condition of disbursement of the respective components that:

(a) an agreement, satisfactory to the Bank, for repayment of the funds for technical assistance to be utilized in cocoa and coffee development had been entered into by MIDA and BNP (para 4.01).

(b) a technical assistance agreement, on terms and conditions satisfactory to the Bank, for the implementation of the cocoa and coffee components had been signed between BDA and MIDA and field implementation officers had been appointed by MIDA (para 4.04);

(d) a division to implement the oil palm component had been created within COBAPA, and that the experts on oil palm production had been hired by COBAPA (para 4.06);

(e) the Bank had received a satisfactory study with the final specifications of the palm oil processing facility, including detailed engineering and full particulars of the legal and financial structure and management of the entity to be responsible for the operation of the oil mill (para 4.08); and

(f) a subsidiary agreement had been signed between BNP and BDA for the implementation of the cocoa and coffee components (para 4.15).

8.03 With the above assurances, the proposed project would constitute a suitable basis for a Bank loan to the National Bank of Panama for the equivalent of US$19 million. The loan would have a term of 15 years, including four years of grace, with interest at the rate prevailing at the time of the loan approval.

February 28, 1979 ANNEX I

PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Oil Palm Component

Terms of Reference for Production and Palm Oil Extraction Study

1. In reference to the Agricultural Credit Project proposed by the Government of Panama, technical assistance for carryig out a feasibility study for oil palm (Elaeis guineensis) production and palm oil extraction would be required. The study would cover a 3,000-ha area in the District of Baru, Province of Chiriqui, Republic of Panama. The oil palm would be developed under a plantation type of agriculture benefitting a group of farmers currently organized in asentamientos. The design of the organization structure should take into account the fact that the plantation, processing and marketing of palm oil would be managed, for about the duration of the repayment period of the subloan, by an autonomous Government agency.

2. The study would be performed by a qualified consulting firm. The participating consultants should be senior technicians with no less than 10 years of experience in all matters related to oil palm production and palm oil extraction, organization and management of oil palm plantations and palm oil extracting plants, and training of technicians. The consultants should read and write Spanish and English.

3. The would be responsible for calling bids for consultants interested in performing the feasibility study for oil palm and palm oil production. The Ministry of Agriculture and Livestock Development would provide local personnel to work with the consultants and administrative facilities such as office space, secretarial services, domestic transportation, and would serve as liaison with other Government agencies.

4. The consultants should prepare a detailed report with recommendations covering all the aspects of the project for submission to the Government. The report should include a map of the area to be planted, showing location of the oil extracting factory, water source, roads, and drainage canals.

5. It is estimated that the study would require a total of six man- months, including the report writing period. The report should be completed and received by the Government on or about September 1, 1978. The cost of the study would be borne by the Government of Panama.

6. A tentative outline of the table of contents of the feasibility study is attached. The study should provide: - 52 -

ANNEX 1

(a) a description of the project area, including communication facilities, availability of labor and other inputs, and an opinion of the general attractiveness of the project to potential participating beneficiaries, bringing out the relative advantages and disadvantages of the site;

(b) a description of the soil and climatic conditions of the site. The description of the soil should include details of classification, structure, texture, topography, pH, fertility, profile, deficiencies, degree of erosion, drainage, and depth of water table. Description of the climate of the site should cover the average conditions of the weather over a period of not less than 15 years as exhibited by the absolute extremes, means, and frequencies of given departures from the means of temperature, wind velocity, precipitation, effective hours of sunlight, and the history of floods, droughts or other natural phenomena that could seriously affect oil palm production. The compre- hensive soil and weather inventory should provide the basis for the consultants' opinion as to whether conditions in the project area are favorable for the production of oil palm. The consultants would prepare guidelines and recommendations on technical specifications of the plantation. The compre- hensive soil and weather inventory should provide the basis for the consultants' opinion as to whether conditions in the project area are favorable for the production of oil palm. The consultants would prepare guidelines and recommendations on technical specifications of the plantation. These guidelines should cover at least the period between ordering the seed and full development of the plantation, including recommendations on varieties, planting system, cultural practices and soil management;

(c) an identification of the specific area to be developed with oil palm, indicating current land tenure arrangement and ownership, number of families, procedure to be utilized in incorporating the additional workers required by the plantation, distribution of benefits among workers, and organization structure of beneficiaries;

(d) an assessment of the financial and economic viability of producing oil palm and extracting palm oil as one enterprise and they should identify the areas in which special attention would be required to ensure the commercial viability of the project throughout its economic life. Consultants should also prepare detailed estimates of investments and costs of establishment and operation of the 3,000-ha oil palm plantation and make conservative projections of yields and production of palm oil and kernels. In relation, thereto, they should determine the ex-factory (palm oil extracting factory) prices of project products; 5 3_

ANNEX I

(e) recommendations and preparation of specifications for the most efficient and economic type of palm oil extraction facilities (factory) to be installed for the project, taking into account the designated capacity of the project; also, consultants should establish and prepare specifications for the auxiliary facilities such as water and power generation needed to support the operation of the oil extraction factory. Additionally, they should determine the optimum capacity of the factory under the proposed project, approximate costs of imported and locally manufactured equipment and buildings which would house the equipment and the costs for assembling the equipment. The study should include specifications of the method and cost of effluent treatment and disposal to be utilized by the project and an evaluation of the environmental impact of the oil mill. The consultants should also determine and recommend the optimum system and capacity of bulk storage facilities for palm oil to be obtained under the project, the frequency of production and the capacity of bulk carriers to Panama City, and the laboraltory testing facilities which would be required for the project:;

(f) recommendation of a management organizational structure for carrying out the project economically and efficiently and assessment of the staffing and the training requirements for field production of oil palm and oil extraction, including labor needed for operating t:heoil extracting factory and the designs and location of buildings to house the oil extracting equipment, roads, and drainage. The consultants should assess requirements and prepare terms of reference for the experts needed to assist in the establishment and development of the plantation and of the oil mill, and a schedule for training local technicians;

(g) project income statements, projected profit/loss statements, projected cash flow statemerLts,projected balance sheets for the proposed project for at least the duration of the repayment period of the investment; the consultants should also assess the cost of staffing and training and incorporate this cost in the projected cash flow statement; and

(h) a realistic and detailed implementation schedule for the project to ensure the coordination of the various activities and completion of the project in the shortest possible time. Finally, the consultants should point out any constraints affecting the marketing of palm oil in Panama. - 54 -

ANNEX I

FEASIBILITY STUDY OF 3,000-HA OIL PALM PLANTATION IN PANAMA

TABLE OF CONTENTS

INTRODUCTION

SUMMARY AND CONCLUSIONS

I. THE EDIBLE OILS SUBSECTOR IN PANAMA

- Historical Background, Performance and Development Constraints. - Supply and Demand Situation (Current and Future). - Processing Infrastructure. - Future Development Potential. - Government Development Strategies and Policies.

II. THE PROJECT AREA

- Location. - Climate and Vegetation. - Soils, Topography and Hydrology. - Land Tenure. - Services to Agriculture. - Physical Infrastructure.

III. THE PROJECT

- The Project Proposal. - Detailed Features: (a) Plantation. (b) Oil Mill. - Project Costs. - Phasing of Investments. - Project Financing.

IV. PROJECT IMPLEMENTATION

- Institutional Framework. - Organization, Management and Ownership of the Plantation. - Beneficiaries Organization. - Implementation Schedule. - Staffing and Recruitment Procedures. - Training and Technical Assistance Requirements. - 55 -

ANNEX 1

V. PRODUCTION, MARKETING AND FINANCIAL ANALYSIS

- Production. - Markets, Marketing and Prices. - Distribution of Benefits and Income of Beneficiaries. - Financial Projections. - Financial Implications to Government.

VI. BENEFITS AND JUSTFICATION

VII. ISSUES

ANNEXES

1. Technical Coefficients and Specifications for the Plantation and Oil Mill. 2. Fruit Collection, Processing and Oil Marketing. 3. Sources and Uses of Funds During the Implementation and Operating Stages. 4. Terms of Reference for Technical Assistance and Training. 5. Map of the Area and of the Specific Site of the Plantation. 6. Bibliography. - 56 - ANNEX 2

PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Progress Reporting, Monitoring and Evaluation of the Cocoa and Coffee Components

A. Progress Reporting and Monitoring

1. Periodic Progress Reports would be submitted to the Bank to provide the following information for the Cocoa and Coffee programs.

Farm Credit

2. Information on the following should be collected from BDA records and sent to the Bank quarterly:

(a) number of applications received, number of hectares, total value;

(b) number of subloans approved, number of hectares, total value;

(d) rediscounting from BNP, total value; and

(e) IBRD disbursements, total value.

Three sets of figures should be given for each item:

(a) the cumulative figure from the beginning of the project to the beginning of the reporting period;

(b) the figure representing action during the reporting period;

For subloans to cocoa producers, information under items (a) and (b) should be further disaggregated according to areas newly planted and renovated.

Debt Servicing Performance

3. Information on the following should be collected from BDA records and sent to the Bank quarterly:

(a) interest due and paid - % in arrears; and

(b) amortization payments due and paid - % in arrears. - 57 - ANNEX 2

On-farm Investments

4. Quarterly (from farm investment 1/ plans in MIDA and BDA records). Information should be collected from investment plans in MIDA and BDA records and sent to the Bank quarterly:

(a) Distribution of areas financed by number of subloans, by farm size and by area financed under the project;

(b) Distribution of total value of investment plans approved by type of expenditures (total number of units financed and number of hectares to which they apply should also be specified):

(i) labor (hired, family); (ii) seeds/plantings - cocoa, coffee, shade trees; (iii) inputs by type; (iv) equipment and tools by type; (v) other; and

Prices

5. Information should be collected from farm investment plan records and from regular spot checks by MIDA or BDA officers in each area of the project. Average prices should be reported for the previous project years and at quarterly intervals for the current year as follows:

(a) Prices paid by producers inI the project areas for seeds and plantings (by type) and inputs, including the cost of labor. Information for inputs would be as follows:

(i) average prices paid by sub-borrowers; (ii) average price from commercial channels; (iii) average price from the cooperative (cocoa); (iv) average price from othLersources (MIDA, IMA, etc.);

(b) Prices paid to producers in the project areas by geographical area:

(i) by the cooperative (cocoa); (ii) by commercial channels; (iii) by IMA (plantain); (iv) by others (cooperatives, associations, etc.);

(d) Coffee: average retail prices in the country (from the Oficina Nacinal de Regulacion de Precios).

1/ Formularies utilized in the preparation of farm investment plans would be submitted for Bank approval. - 58 - ANNEX 2

Operations of the Cooperative of Cocoa Producers

6. Operations of the cooperative during the past three years and quarterly or monthly during the current year:

(a) production purchased and sold - in volume and value;

(b) inputs purchased and sold - in volume and value - by type;

(d) number of members - total; and

(e) number of sub-borrowers - members.

Technical Assistance

7. (a) number of staff assigned, by category;

(b) geographical distribution of staff;

(d) training received by staff: number of courses, seminars, study tours and the like and description of general contents;

From agents' visit reports: 1/

(a) number of farm visits: total, and total per agent for the previous year, and during the reporting period;

(b) number of visits per farm per year (past) and during the reporting period;

(d) reported incidence of diseases and other general problems affecting progress of investments (number of cases, type of problems, areas).

B. Impact Evaluation

8. Two surveys would be carried out, one in Year 3 and one in Year 4, at the time of harvest. Each would involve crop-cutting in sample areas, plus interviews with the owners. The questionnaire would include requests for the following information:

I/ Formularies utilized in supervision and technical assistance visits would be submitted for Bank approval. ANNEX 2

Farm area:

Total area;

Area in cocoa and coffee: total financed; and

Area in other activities.

Labor:

Permanent family labor on the farm (quantityand wages, if any);

Hired labor for cocoa and coffee cultivationand harvesting: (quantityand wages);

Permanent;and

Occasional.

Productionand yields:

Number of trees per ha;

From sample (crop-cutting);and

Reported quantitiesand prices - buyers.

Use of inputs:

Reported quantities by type - source of supply.

Technical assistance:

Frequency of visits by an agent;

Attendanceat group meetings;

Which practices that farmer rememberswere recommended by the agent;

Did he follow them? if not, why not? and

General rating of the extension service. - 60 -

ANNEX 2

C. Cost of Surveys

9. The costs of the surveys in the impact evaluation of the cocoa and coffee components have been calculated on the following basis:

Sample size: 10% of sub-borrowers,or a total of 200 farmers, would be surveyed in Years 3 and 4. This small sample size is justified by homogeneity of the groups in each of the two activities.

Field surveys: would require five man-months of field investigators,assuming:

(a) two to three farmers per day per field investigator;and

(b) 20 working days per month.

Data collection could be done in a month at harvest time (crop cutting) by five trained investigatorsand a supervisor. Investigatorswould receive prior training of about four days.

Transportationof the investigators: would be provided by project management at cost (fuel), or reimbursed to them or to their institutionfor costs incurred.

Processing of the data: would be done mostly by hand. Preliminarydata cleaning and tabulationwould be done with ordinary hand calculatorsand subsequent processing with a desk programmablecalculator. Manual processing is justified by the small sample size and the relative simplicityof tabulations(for each of the two activities,there is only one output and a few inputs).

Technical assistance: project management would need assistance from one or two consultantsin:

(a) design of the questionnaires;

(b) sampling procedures and selectionof farmers to be surveyed;

(d) supervisionof processing.

A total of four man-months (over two years) has been budgeted (Annex 3, Table 10). - 6:L - ANNEX 3 Table 1 PANiM

TROPICAL TREE CROP D)EVELOPMENTPROJECT

AgriculturalSector: Total Value of Production and GDP, 1973-77 (1960 Constant Prices)

Average 1L973-1977 Year 1977/a Annual Annual Rate of Rate of Amount Growth Structure Amount Growth (US$ mil) (%M (%) (US$ mil) (%) Value of Production

Crops:

Banana 37.5 - 2.0 18 38.7 2.1 Cocoa 0.4 20.5 * 0.5 18.7 Coffee 3.6 3.9 2 3.9 7.1 Other crops 107.4 1.2 50 105.2 - 1.8

Sub-total crops 148.9 0.4 70 148.3 - 0.6

Livestock 50.0 1.5 23 54.6 7.3 Fisheries 12.9 7.4 6 15.8 11.0

Forestry 1.2 - 4.0 * 1.1 -15.3

Total AgriculturalSector 213.0 1.2 100 219.8 1.7 Of which: Production for domestic market 169.1 1.8 79 174.3 1.8 Production for exports 43.9 - 1.3 21 45.5 2.4

Gross Domestic Product Agriculturalsector 180.8 0.9 16 184.7 1.1 Other sectors 951.2 1.3 84 930.8 1.8

Total 1,132.0 1.2 100 1,155.5 1.7

/a Provisional. * Less than one Dercent. Source: Direccion de Estadisticay Censos. June 19, 1978 - 62 - ANNEX 3 Table 2

PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Land Distributionby Tenure and Size, 1970 (as % of the total)

With Legal Without Title Rented Title Mixed Total

Total Land Or,-Farms 26.0 3.5 44.5 26.0 100

Farm Size (ha)

Less than 4.9 1.4 6.7 6.1 1.6 - 5 - 49.9 18.0 13.4 50.3 20.0 - 50 - 499.9 40.0 19.7 35.1 53.9 - 500 and over 40.6 60.2 8.5 24.5 -

Total 100.0 100.0 100.0 100.0 -

Total Number of Farms 12.3 4.4 71.6 11.6 100

Farm Size (ha) Less than 4.9 42.2 82.9 54.4 32.9 - 5 - 49.9 42.8 14.3 40.3 46.0 - 50 - 499.9 13.8 2.4 5.2 20.2 - 500 and over 1.2 0.4 0.1 0.9 -

Total 100.0 100.0 100.0 100.0 -

Source: Perspectivaspara el DesarrolloAgropecuario en Panama. June 28, 1978 - 63 - EX 3 Table 3

PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Total and Agricultural Credit, 1973-76 /a

Average 1973-1976 Year 1976 Annual Percentage Rate of of Amount Grcwth Structure Amount Change Structure (US$ m) (%) (%) (US$ m) % % Agricultural Sector

Crops 63 16.2 46 75 - 5.3 55 Livestock 74 -0.4 54 62 -18.4 45

Total agriculture 137 5.1 100 137 -11.7 100

Total domestic credit 1,672 6.8 - 1.646 - 3.1 -

Total value of production/b 320 - - n.a. -

Agricultural Credit As % of:

Total credit 8.1 - - 8.3 - Total value of production 42.8 - - n.a.

Institutional Distribution of Agricultural Credit

BNP 15 -22.7 11 9 -35.2 7 BDA 26 21.8 19 29 6.2 21 Sub-total 41 2.0 30 38 - 8.6 28

Private banks 96 6.8 70 99 -13.2 72 Total 137 5.1 100 137 -12.7 100

/a New loans to the domestic sector, excluding loans to the public sector, current US$. 7 Crops and livestock, average for the 1973-1975 period.

Source: Comision Nacional Bancaria.

June 28, 1978 - 64 -

PANAMA ANNEX 3 Table 4 TROPICAL TREE CROP DEVELOPMENTPROJECT

Banco Nacional de Panama (BNP)

Comparative Balance Sheets for Fiscal Years 1973-1977

(US1 ' 000)

1973 1974 1975 1976 1977 la

Assets

Cash and due from banks 49,029 69,365 68,321 96,933 116,328

Investment securities: Panamanian Government securities 1,897 2,330 2,300 3,266 3,277 Other securities 354 - 360 11 32,963

Productive assets - loans 148,502 188,068 214,103 256,514 289,451 Bank premises, vehicles and equipment (net of depreciation) 3,353 4,159 5,324 24,340 17,396 Payments in advance and other assets 4,550 3,572 6,882 6,622 6,760 Contingent assets - IMF 12,148 14,400 20,497 17,648 16,842

Total 219,833 281,894 317,787 405,334 483,017

Liabilities

Demand deposits - local and foreign 115,602 107,803 90,993 101,989 181,628 Term deposits - local and foreign 28,130 75,150 115,239 153,830 129,761 Savings deposits 10,601 10,695 11,207 11,524 12,980 Restricted deposits 2,760 2,014 4,372 6,450 11,806 Bank documents deposited 6,723 12,140 4,521 5,618 7,407

Total deposits 163i816 207,802 226,332 279,411 343,581

Borrowed Funds: Internationalorganizations 3,426 5,006 9,105 11,617 12,571 Foreign banks 11,426 8,004 7,789 11,900 18,969 National Government - - - 349 974 Other liabilities 7,129 6,309 7,606 7,647 9,351 Special reserves 1,505 1,835 1,243 4,256 4,705

Contingent liabilities - IMF 14,936 35,117 47,718 71,744 71,213

Total Borrowings and Other Liabilities 71,122 56,271 73,461 107,513 117,983

Capital funds: Capital 14,011 14,011 14,011 16,000 20,000 Reserve fund 3,584 3,810 3,983 2,410 1,452

Total Capital Funds 17,595 17,821 17,994 18,410 21,452

Total 219,833 281,894 317,787 405,334 483,017

/a Unaudited figures.

Source: 1973-76 - Financial statements examined by Comptroller Generalls office (restated). 1977 - Financial statements of Comptroller's Department, BNP (restated). June 27, 1978 PANAMA

TROPICAL TREE CROP DEIELOPMENT PROTECT

Banro Narional de Panama (BNP)

Source and Application of Funds for Fiscal Years 1976/77

(US$'000)

1976 1977 1976 1977

Source of Funds Application of Funds Increase in Assets Profit for period 592 2,062 Demand deposits - local 3,558 7,660 Depreciation 409 369 Demand deposits - foreign 499 6,499 Reserve for loan losses 814 2,100 Term deposits - local 13,715 Prior year's adjustments 155 - Term deposits - foreign 42,000 Revaluation gold and silver coins 43 368 Remittance in transit branches and agencies 1,534 579 2,013 4,899 Interim financing for construction 42,411 32,980 Increases in Liabilities Investments in state securities 966 Fixed assets 19,425 Demand deposits - local 8,767 66,678 Other assets 138 2, 587 Demand deposits - foreign 2,229 3,176 Cash 10,950 Other investments 34,585 Savings deposits 317 1,456 Sundry debtors 12 Term deposits - local 20,970 11,846 Term deposits - foreign 17, 620 - Total Increase in Assets 110.531 109,573

Restricted deposits 2,078 5,356 Decrease in Liabilities Commitments - bank documents 1,09b - Su-dry creditors 834 Commitments - IMF 24,026 - Term deposits - foreign 24,847 Loans - international agencies 2,512 907 Commitments - bank documents 762 - foreign banks 4,111 5,750 IMF 531 Government loans payable 349 625 Special reserves 2,200 449 Total Decrease in Liabilities 834 26,140 Other liabilities 875 4 Sundry creditors - 4,535 Decrease in Reserve Fund Capital transfers 1,989 3,000 Total Increase in Liabilities 87,150 100,780 Prior year's adjustments 102 125 Pension costs 271 264 Increase in Capital 1,989 4,000 Total decrease in reserve fund 2.362 3,389

Decreases in Assets Total Application of Funds 113,727 139.102 Cash 1,590 Time deposits - local 13,892 Furniture and equipment 3,498 Securities 350 1,623 Devaluation 1,408 Special drawing rights (IMF) 1,441 806 Sundry debtors 396 Time deposits - foreign banks 20,000 Net fixed assets 6,944 External loans 50

Total Decrease in Assets 22,575 29,423

Total Sources of Funds 113,727 139,102

,urce: BNP Comptroller's Department. June 21, 1978 PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Banco de Desarrollo Agropecuario (BDA) Comparative Balance Sheets for Fiscal Years 1973-77

(US$'oO0)

1973 1974 1975 1976 1977 /a

Assets

Cash & banks 2,533 2,528 3,057 2,080 3,036 Short-term loans 8,330 20,060 25,690 26,902 52,861 Long-term loans 14,529 13,666 17,722 20,206 Accounts receivable 312 6,657 5,742 2,969 2,973 Real estate for sale 1,661 1,629 1,559 1,538 1,532 v Fixed assets and other assets 3433,48 4,372 4,094 4,857 Total Assets 30,798 48,029 58,142 57,794 65,259

Liabilities

Short-term liabilities 1,306 3,139 2,432 4,838 11,992 Long-term liabilities 16,072 17,880 17,354 15,222 14,488 Other liabilities 701 1,186 1,409 823 - Subtotal liabilities 18,079 22,205 21,195 20,883 26,480 Equity 12,719 25,824 36,947 36,911 38,779 Total Liabilities and Net Worth 30,798 48,029 58,142 57,794 5,259

/a Unaudited figures.

Source: Banco de Desarrollo Agropecuario. June 27, 1978 PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Banco de Desarrollo Agropecuario (BDA)

Income Statement for Fiscal Years 1973-77 (US$'000) 1973 1974 1975 1976 1977 Income

Interest income /a 1,222 1,618 2,324 2,792 2,959 Rents from real estate 411 383 383 178 108 Sale of real estate 152 38 54 39 22 Other income 65 85 105 123 161 Proceeds of sale of untitled land (MIDA) - 260 203 70 - Total Income 1,850 2,384 3,069 3,202 3, 250

Expenses

Salaries 1,600 2,279 2,646 2,689 2,687 Interest and commissions /b 278 676 721 1,480 1,468 1 Cost of sale of real estate 124 20 33 35 22 Operation and other cost 600 867 1,n09 1,105 1,105 Expenses of administration 132 131 208 57 17 of real estate Depreciation 213 207 173 154 152

Total Expenses 2,947 4,180 4,790 5,558 5,451

Net Profit, Loss (-) -1,097 -1,796 -1,721 -2,356 -2,201

Government Interest Subsidy - - - 175 -

Net Profit Loss (-) After Government Interest Subsidy -1,097 -1,796 -1,721 -2,181 -2,201

Total Income as a % of Total Expenses 63 57 64 60 59

/a Cash basis. lb Accrual basis. m X Source: Mission July 23, 1978 PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Banco de Desarrollo Agropecuario (BDA)

Source and Application of Funds for Fiscal Years 1973-77

(US$'000) Total for the Period 1973 1974 1975 1976 1977/a Amount % A. Sources

Government annual subsidy 500 2,275 2,082 2,942 1,187 8,986 18 Government contribution to equity 1,710 12,587 10,769 -396 2,952 27,622 55 Short-term borrowing -270 1,833 -707 2,406 7,154 10,416 21 Long-term borrowing 4,170 1,808 -526 2,132 -734 2,586 5 Other liabilities 546 485 223 -586 -823 155 - Sale of real estate 48 32 70 21 6 177 - Depreciation 213 206 173 155 152 899 1 1

Total Sources 6,917 19.226 12,084 2,410 9,894 50,531 100 X B. Uses

Annual loss 1,097 1,796 1,721 2,357/b 2,201 9,172 18 Cash and banks -230 -5 529 -977 956 273 1 Accounts receivable 363 6,345 -915 -2,773 4 2,298 5 Short-term loans 646 11,730 5,630 1,212 5,753 35,436 70 Long-term loans 4,788 -863 4,056 2,484 ' 3 Adjustments for prior years' loss (profit) 2,344 -39 6 225 70 2,606 5 Fixed assets and other assets -1,365 262 1,057 -118 910 746 1 Total Assets 6,917 19,226 12,084 2,410 9,894 50,531 100.

/a Unaudited figures. /b Including Government interest subsidy in the amount of B 175,000 which was charged to operation and included in income statement. Source: Mission July 23, 1978 ¢ Z cDoX ANNEX 3 -69- Table 9

PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Corporacion Bananera del Pacifico (COBAPA)

Source and Application of Funds and Change in Financial Position 1976/77 (USS '000) Source and Application of Funds

Source

Operations 1976 1977

Net profit 421.3 106.6 Depreciation 107.0 149.8 Amortization of new plantations 71.3 104.2

Subtotal from operations 599.6 360.6

Long-term loans - 1,971.8

Total sources 599.6 2,332.4

Application

Acquisition of improvements and equ:ipment 603.6 3,788.1 Increase in cultivation and banana plantations 472.8 274.1 Rehabilitation costs - 142.2 Distribution of profits 57.4 61.5 Other applications 55.9 -

Total applications 1,189.7 4,265.9

Decrease in working capital 590.1 1,933.5

Change in Financial Position

Increase (decrease) in current assets:

Cash 5.3 (-6.6) Deferred accounts receivable - 1,215.3 Accounts receivable 189.3 342.2 Inventories 4.9 604.4 Prepaid expenses 21.6 (-20.5)

Subtotal current assets 221.1 2,134.8

Increase (decrease) in current liabilities:

Loans payable 1,147.0 1,721.6 Bills and accounts payable 728.6 1,187.5 Payroll withholdings 8.7 108.2 Other accounts payable 69.0 99.1 Income tax on profits 332.3 54.5 Amortization of long-term loans - 897.4

Subtotal current liabilitles 811.1 4,068.3

Decrease in financial position 590.0 1,933.5

Source: COBAPA's audited financial statements.

June 27, 1978 - 70 - ANNEX 3 Table 10

PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Corporacion Bananera del Pacifico (COBAPA)

Balance Sheet, Fiscal Years 1976/77

(US$'000) 1976 1977

Assets

Current assets: Cash 8.3 1.7 Deferred accounts receivable /a - 1,215.4 Accounts receivable 1,572.1 1,914.3 Inventories, at cost 280.8 885.1 Prepayments 22.8 2.3

Sub-total current assets 1,884.0 4,018.8

Building improvements and equipment, at cost less accumulated depreciation 1,808.3 5,969.1 Deferred assets - plantations 1,202.5 1,372.3

Total assets 4,894.8 11,360.2

Liabilities

Current liabilities: Loans payable 2,523.9 4,245.5 Bills and accounts payable 761.0 1,948.5 Payroll withholdings 34.8 143.0 Other accounts payable 8.6 22.0 Accumulated expenses payable 60.5 146.2 Income tax payable 698.7 753.2 Amortizations of long-term loans - 897.4

Sub-total current liabilities 4,087.6 8,155.8

Long-term liabilities - 1,971.7

Sub-total liabilities 4,087.6 10,127.5

Net Worth

Reserves from profits: Education 43.8 Community assistance and projects 87.6 Renewals 87.6 Replacement of improvements and equipment 87.6 General and contingency 245.5

552.1

Retained earnings 255.1

Sub-total net worth 807.2 1,232.7

Total liabilities and net worth 4,894.8 11,360.5

/a Up to May 1977, an amount equivalent to 30% of COBAPA's sales to Yugoslavia could only be utilized for the purchase of goods and services from that country. This amount is deposited in a Yugoslavian bank in a non-bearing interest account. Source: COBAPA's Audited Financial Statements. June 27, 1978 -71- ANNEX3 Table 11

PANAMA

TROPICALTREE CROP DEVELOPMENTPROJECT

Techns, 41itmce (US$S'O00)

No - - - Year ------Total Imported Component NO. 3. ~~ ~~23 4 Cost % Value (1979) (1980) (1981) (1982)

Coffee and Cocoa Foreign technical assistance 4 160.0 160.0 160.0 160.0 640.0 100 640.0

Coffee Incremental staff: Agricultural engineer 1 11.7 11.7 11.7 11.7 46.8 - - Technicians 5 7.1 21.1 35.5 35.5 99.2 - - Training (study tours) 6.0 6.0 6.0 6.0 24.0 100 24.0 Vehicles: 4-wheel drive I 10.0 - - - 10.0 85 8.5 Pick-up trucks 2 12.0 - - - 12.0 85 10.2 Motorcycles 5 1.2 2.4 2.4 - 6.0 85 5.0 Horses 4 1.4 - - - 1.4 - - Supplies and miscellaneous 6.0 6.0 6.5 6.5 25.0 - Total coffee 55.4 47.2 62.1 59.7 224.4 21 47.7

Cocoa Incremental staff: Agricultural engineer 1 15.6 15.6 15.6 15.6 62.4 - - Technicians 9 - 28.0 63.2 63.2 154.4 - - Training (study tours) 6.0 6.0 6.0 6.0 24.0 100 24.0 Vehicles: 4-wheel drive 1 10.0 - - - 10.0 85 8.5 Pick-up truck 1 6.0 - - - 6.0 85 5.1 3-ton truck 1 10,0 - - - 10.0 85 8.5 Boat (fiberglass) 1 6.0 - - - 6.0 85 5.1 Motorcycles 6 3.6 3.6 - - 7.2 85 6.0 Outboard engines 5 3.0 4.5 - - 7.5 85 6.4 Woodenboats 5 1.2 1.8 - - 3.0 - - Supplies and miscellaneous 'o-j 12.0 13.0 13.0 48.0 - - Total Cocoa 71.4 71.5 97.8 97.8 338.5 19 63.6

Oil Pali Specialist in production (full time) 1 - 70.0 70.0 210.01ta 350.0 0OO 350.0 Expert on plant protection 1 - - - 105.0t2 105.0 100 105.0 Visiting experts and training of local technicians abroad - 30.0 15.0 45.O/ 90.0 iOU 90.0

Total 01 Palh _- 100.0 85.0 360.0 545.0 100 545.0

Total Technical Assistance 286.8 378.7 404.9 677.5 1747.9 74 1,296.3

/a USS70,000per year, from years 4 to 6. /b US$35,000 per year, from years 4 to 6. 7/b US$15,000 per year, from years 4 to 6.

Source: Mission November 21, 1978. PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Monitoring and Evaluation

Cost of Surveys (us$'000)

No. of Total Imported Component Units 1 2 3 4 Cost % Total

Consulting time 5 man-months - - 15.0 10.0 25.0 100 25.0 Surveys:

(a) Staff

Field investigators: - Salary 5 months/year - - 2.9 2.9 5.8 - - s Training 20 man-days/year - - 0.6 0.6 1.2 - - Per diems (BW. 15/day) - - 1.5 1.5 3.0 - - Field supervisor 2 man-months/year - - 0.9 1.0 1.9 - _ Processing time 5 man-months/year - - 2.9 2.9 5.8 - _ Analysis and reporting 2 man-months/year - - 0.9 1.0 1.9 - -

Total staff - - 9.8 9.8 19.6 _ (b) Equipment

Hand calculators 5 - - 0.1 _ 0.1 70 0.1 Desk programming calculator 1 - - 0.8 - 0.8 70 0.6

Total equipment - - 0.9 - 0.9 70 0.7 (c) Transportation - - 1.0 1.0 2.0 50 1.0

Total costs - - 26.7 20.8 47.5 58 26.7 xR

Source: Mission December 4, 1978 - 73- ANNEX 3 Table 13

PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Phasing of Lending and Investment (Excluding Price Contingencies)

…_____-…__------Yetars ------… --- -…------Total 0 1 2 3 4 5 6 Comitments

Cocoa - 200 350 450 -- - 1,000 Coffee - 250 350 400 - - - 1,000 Banana - 3 - -3 Oil palm: on-farm development - - n.a. n.a. n.a. n.a. 16 /a Oil mill - - 1 1

Total - 453 700 851 - - 2,020

Total Commitments (US$'000)

Cocoa - 814 1,424 1,831 - - - 4,069

Coffee - 966 1,353 1,546 - - - 3,865 Banana - 4,920 - - - - - 4,920 Oil palm: on-farm development - i1,857 - 878 1,744 1,962 1,962 8,403 Oil mill - - 3,850 _ - - 3,850

Total _ 8,557 2,777 8,105 1 744 1,962 1,962 25,107 Disbursements of proiect funds (1US$'000)

Cocoa 232 443 918 1,445 664 - - 3,702 Coffee 232 542 928 1,,314 541 - - 3,557 Banana 2,360 2,560 - - - - - 4,920 Oil palm: On,farm development - 290 889 1,658 2,088 2,174 723 7,822 Oil mill - - 725 1,715 860 3,300

Total 2,824k 3,835 2,735 4,417 4,018 3,889 1,583 23,301

Total Xnvestments g (US$ t000)

Cocoa 290 554 1,148 1,806 830 - - 4,628 Coffee 290 678 1,160 1,642 676 - - 4,446 Banana 2,040 2,880 - - - - - 4,920 Oil palm: On-farm development - 290 889 1,658 2,088 2,174 723 7,822 7 Oil mill - - 1,450 3,430 1. 20 6,600

Total 2,620 4,402 3,197 5,L06 5,044 5,604 2,443 28,416

ka.Number of asentamientos per year is not available. Excluding US$675,000 for cocoa and coffee development to be disbursed in Year 5 and US$1,131,000 for the oil palm component to be disbursed in Years 7 and 8. /c To be financed retroactively. /d Including beneficiaries' contribution to cocoa and coffee development and equity contribution to the oil mill investment. Source: Mission

January 16, 1979. - 74 - ANNEX 3 Table 14 PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Total Project Costs by Main Investment Items

Foreign Foreign Baseline Local Component Total Component Cost - - - - (US$000)…------% - - - - - Farm Investments

Infrastructure 370 260 630 41 2 Buildings 2,150 1,050 3,200 33 11 Oil processing equipment 130 2,470 2,600 95 9 Machinery, equipment and tools 1,320 2,300 3,620 63 12 Irrigation equipment 130 1,130 1,260 90 4 Vehicles 30 250 280 85 1 Inputs 2,710 4,820 7,530 64 25 Labor 4,620 - 4,620 - 16 Contract works /a 210 210 420 50 1 Administrative and management 790 - 790 - 3 Operation and maintenance 240 120 360 34 1 Miscellaneous /b 1,700 1,050 2,750 38 9

Sub-total for farm investments 14,400 13,660 28,060 49 94

Technical Assistance

Consultants and training 20 1,230 1,230 100 4 Vehicles and equipment 10 60 70 85 * Incremental local costs 450 - 450 - 2 Project monitoring 20 30 50 60 *

Sub-total for technical assistance 480 1,320 1,800 73 6

Baseline cost 14,880 14,980 29,860 50 100

Price contingencies 4,120 4,020 8,140 49 27

Total project cost 19,000 19,000 38,000 50 127

Note: Figures in this table have been rounded. * Less than one percent. /a Aerial spraying and transportation of inputs.

__ Includes physical contingencies on infrastructure and buildings.

Source: Mission October 26, 1978 75 - ANNEX 3 Table 15

PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Technical Assistance Requirements and Phasing of Incremental Staff for Cocoa and Coffee Development

Incremental Staff Requirements

Existing ------Project Year ------Total Cocoa Development Staff 1 2 3 4 Staff

Agricultural Engineers 1 1 - - - 2 Middle level technicians (extension agents) 5 - 4 5 _ 14

Total 6 1 4 5 - 16

Total staff available per year 7 11 17 16

Coffee Development

Agricultural engineers 3 1 - - - 4 Middle level technicians (extension agents) 11 1 2 2 _ 16

Total 14 2 2 2 - 20

Total staff available per year 16 18 20 20

Estimated Number of Subloans per Extension Agent

------Project Year ------Cocoa Development 1 2 3 4

New subloans 40 39 32 n.a. Previous year subloans 8 27 42 74

Total 48 66 74 74 Coffee Development

New subloans 23 27 27 n.a. Previous year subloans 27' 56 55 82

Total _ZL 83 82 82

Source: Mission. June 14, 1978 ANNEX 3 - 76 - Table 16

PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Supply, Demand, Imports, and Exports

(m tons)

Coffee Cocoa Banana Edible vegetable (parchment) (dry beans) (commercial) oils or fats

Average For 1972/1976 1972/1976 1975/1977 1973/1977

Production 4,650 620 543,000 - Exports 1,650 5 70 1a 543,000 - Imports - 2,900 _ 15,400 Domestic disappearance 3,000 50 - 15,400

The Project

Total area to be developed (ha) 1,300 2,500 1,000 3,000

Total incremental production at full development (m tons) 2,360 1,930 40,950 12,690

At Full Development/b (1986) (1986) (1981) (1991)

Domestic demand /c 4,500 to 5,000 n.a. - 33,000 to 40,000 Supply 7,200 2,550 650 12,690 Available for exports 2,200 to 2,700 2,500 650

/a Estimated dry beans equivalent of chocolate products imports. Tb In brackets, year of full development. /c Mission estimates.

Source: Mission. July 10, 1978 PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Financial and Economic Prices la

(Year 0) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Cocoa (US$/q)

Financial 114 95 86 78 75 69 65 59 57 54 50 48 45 Economic 114 95 85 78 75 69 65 59 57 54 50 48 45

Coffee (US$/q)

Financial 90 75 68 66 66 68 70 72 73 73 74 75 76 Economic 140 103 84 78 71 74 78 81 83 85 86 88 90

Bananas (US$/box)

Financial 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60 Economic 2.60 2.55 2.57 2.52 2.55 2.78 2.78 2.78 2.78 2.78 2.78 2.78 2.78

Palm Oil (US$/m ton)

Financial 535 535 535 535 535 535 535 535 53 Economic 535 637 562 540 615 565 515 465 462 458 455 452 449

Palm Kernel (US$/m ton)

Financial 305: 305 305 305 305 305 305 305 305 305 305 305 305 Economic 305 308 335 345 378 365 352 338 334 330 326 322 317

Plantains (US$/m ton)

Financial 35 35 35 35 35 35 35 35 35 35 35 35 35 Economic 35 35 35 35 35 35 35 35 35 35 35 35 35

a In constant 1978 terms. m A

Source: Mission June 22, 1978. PANAMA

TROPICAL TREE CROP DEVELOPMENTPROJECT

Proiect Cash Flow - Banco de Desarrollo Agropecuario (BDA)

(US$S000)

(1978) ______Project Year ------Total 0 1 2 3 4 5 6 7 8 9 10 11

Tnflo

Rediscounts from BNP: (a) Coffee: - - - 3,557 BNP/IBRD 232 542 928 1,314 541 - - - - _ _ 309 Additional funds (BNP) - - - - - 309 _ _ _ _

(b) Cocoa: _ 3,702 BNP/IBRD 232 443 918 1,445 664 - _ _ _ _ 366 Additional funds (BNP) _ - _ - - 366

Sub-total 464 985 1,846 2,759 1.205 675 - - - 7934

Sub-borrowers repayment: Principal _ - 118 319 672 1,187 1,216 1,286 1,242 1,055 701 138 7,934 Interest (12%0 p.a.) - 56 174 380 674 737 676 531 375 227 100 17 3.974 11.881 Total Inflow 464 1.041 2.138 3.458 2.551 2.599 1.892 1.817 1.617 1,282 801 155

Outflow 7.934 On-farm lending 464 985 1.846 2,759 1.205 675 ------Rediscounts repayment to BNP: Interest (7.7Z pa.s) - 54 111 245 432 473 434 340 241 146 65 11 2,552 Principal _ _ 118 319 672 1.187 1,216 1.286 1.242 1,055 701 138 7.934

Total Outflow 464 1.039 2.075 3.323 2.309 2.335 1.650 1.626 1.483 1.,201 766 149 10.486

Annual surplus, deficit (-) - 2 63 135 249 364 242 191 134 81 35 6 - Cumulative surplus, deficit (-) - 2 65 200 449 813 1,055 1,246 1,380 1,461 1,496 1,502 1,502

/a Excluding price contingencies.

Source: Mission

January 15, 1979. PANAMAS

TROPICAL TORE CROP DEVELOPMENO PROJECT

(00$1 000)

O 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 06 17 Ttl (1978)

SEP eubloone for bo.a.o ..od oil polo:- - - - 9,668 IBMRD ooto lb - 2,169 787 716 1,456 2,425 1,706 399 ----- REP ro_rro0o1.427 449 906 1,039 1.119 406 496 649 - .z--7.505

Rob-total 1.110 3.596 1L236 1.522 2Ž495 3,4 2J24 697 649 ------17.173

ledleoccot to EBlA (.cff.. codot0) SEES re-ooe /b- 594 626 1,350 961 261 ------3,992 BNP .ooot. 218 463 868 1.175 543 675 ------3.942

Sub-.tota 218 1.057 1.694 2.525 1.504 9316 7,934

Totbeioal ecpp-rt: IBDE r-ocurto lb - 142 245 295 300 176 120 40 1,320

Sob-total1 142 245 295 300 178 520 40 ------1.320

sbort-t-, Sco- for b-on p-ohetlo (REP) - 1.30f-0------1300

SId-total - 1.3800 ------1.300

Sob-tctal L.odiog 1,328 6.053 3.175 4.342 4,299_ 4,658 2.244 937 649 - _ _ 27.727 - Seoometf Pleeeo aod Sotero- Pro. Sa fo c cod coffer de-1l2oeet /s - 54 229 564 1,104 1,924 1,658 1,626 1,483 1,201 766 149------18,750 Pr.beecdolpalo dovlop-.t /d - 1,097 1,636 2,503 1,817 1,507 1,598 1,292 796 1,270 2,307 3,689 3,954 4,043 3,161 1,824 989 366 33,739 Tehlelaelro fod 0- - 15 33 54 4R6 391 376 353------

gob-.totaRepayooe- 1.151 1.860 3,100 2L975 3.837 3.639 3.204 2. 632& 2s 471A 3% 073 2 3.a8A 3,954 4J 043. 3a 161 1. 82 988 366 46 116

TotalIofloc 1328 7 246 56055 7.42 7.274 8.495 5.883 4 141 23281 2.471 3_023 3_&..A.8 _±.20422._8..& 4 888 366 73 843

Redeo-cto to EMA for .oo.. cod ooffoo7, d_velpoec 464 985 1,846 2,759 1,205 6 75 ------793 Subloco foe ha.a. dov.lopoott 2,36R 3,860 - ,220 oIl palm plootatt.oc - 290 889 1,658 2,088 7,174 723 387 194 ------&,403 all mill - - - 725 1,715 860 95 455 ------3,850 T-oh.iccl oPPortIs 212 260 305 303 120 120 ------1,322 Coot of REP'eroocf- If I12 340 774 346 397 457 467 468 485 449 384 319 220 135 68 29 9 4,959 MAt ae-ylc on 185 oa:I Proft-pal- - - - 1,370 1,370 1,370 1,370 1,370 1,370 1 ,3770 1,3770 1,370 1,370 1,280 - - 14,980 Itetret - - 195 316 457 631 235 8R6 750 865 569 473 377 281 186 90-o 6,338 Coitt-t fee-- 91 78 63 45 23 5 - -- ___-- - 305

Sob-totalDbt0 Seroico- 286 394 520 2046 2J128 2,181 2,127 2035 1,939 1,843 1747 .1.65I 1,556 1.370 -- 21.823

Total Qo.flow 2_824 5,459 3,621 5 390 5,187 7 .127 4.288 3 130 3,244 2_520 2,388 2 227 206 18 871 1.691 1.438 29 54 509

Anc... eac.h -opl.e, defioit(- -1,496 1,787 1,434 2,052 2,087 1,388 1,590 1,011 37 -49 685 1,591 1,888 2,172 1,470 386 959 357 -

Gaolertio teh -orlo-, dof.ict I-7 -1,496 291 1,725 3,777 5,864 7,237 8,827 9.038 9,875 9,826 10,511 12,102 13,990 16,167 17,632 18.018 18,977 19,334 19,334

Eacoldlog Poioc Roti~ .og.role. le7.07, pe. -eoo ooItotadiog bolcotes Potoipo,l and Rotere. to At topold by the G- -root. 7b loldono foo mooh ti- lag bot-rr diobor-m-te by 7f 8.57,p-r OI 00otetoodiog bal1oo.. RPcd riboemoo by 1351 7j- Aaeoing a 15 yea Bolk I.a. (US014,980 ott of polco co.o.. ta) e It7,%ercco 0 oitcotdiog bc1l.ooeo. loldlegi tfoot Yooro of'grte oIntcotto of 0.75% percooo 7d 12.0% per oooc0ctotaodiog balre,co.a..te...tCoo 7.0%praoo

Soorto: MieOIoO Jon-oy 15, 1979. - 80 -

ANNEX 4

PANAMA

TROPICAL TREE CROP DEVELOPMENT PROJECT

Related Documents and Data Available in Project File

General Reports and Studies Relating to the Project

(a) FAO/World Bank Cooperative Program:

Preparation Report (2 Vol.), No. 48/77 Pan.5, December 19, 1977

(b) Institut de Recherches pour les Huiles et Oleagineux:

(i) Panama, Estudio de Factibilidad Tecnica y Financiera de un Projecto de Fomento de la Palma Aceitera Sobre 3,000 Has (2 Vol). Preliminary Report. IRHO, Doc. No. 1405, September 27, 1978.

(ii) Panama, Estudio de Factibilidad Tecnica y Financiera de un Projecto de Palma Aceitera de 3,000 Hectareas en Baru. Final Report. IRHO y Tejada Mora y Asociados, Doc. No. 1421, January 30, 1979.

Selected Working Papers

Appraisal Mission Working Papers:

(1) The Cocoa and Coffee Components

(2) The Banana and Oil Palm Components

(3) The National Bank of Panama

(4) The Agricultural Development Bank

(5) The Illustrative Farm Investment Models BRD 13675

PANAMA C r , b b e a r S e a

.- , TROPICALTREE CROP DEVELOPMENT PROJECT 0

r rLS%r.guinolE -XNrERAMttEcr: H GHWAs Lss X Pertoblo C O L O 1 - 1st rs DE SASr*N RLAEtA5~~~~~~~~IsL.5DE

C t jIA588 *tj N Y2 P D .2.mvPO8ThD INtE AtZIA fM:Y re zn J ARLCTee, ud nH , '| N ,R ""|' ~ -- i; EPORRE A - o o T.ADa

7t~ \o C T S '80,6 ~ ~ ~ ~ - Rvr s/1l RA NA A .. - W > Ep r PA<-00) P A NA M A \', 'N MAIULpO9 < ., ' (5 h rL: FoXtun:~~~~~~~~AL-a E,. / /C. i 0 x 3D33 4f ';U'ctr .- 3 -

OPC 13,1 L Fol. N' LAE T.b,C I PARTLO VEE * AGENCIE8 )

r .0' f3~ ,Iy¢ GMrUVaS °Assvv H*vo '1 0 1 ', SOD W' 03803rCr Collo / RELAS PE LA /:'1StLCE 'T \ - 3 onmol0 PARAgO ~~~~~~~~~~RAOVOR*K PRINAPAT,COFFEE AREAS~~~~~~~~c. 1- 006110 (2, / Lo$ 0. LO7CAS _R_ , T F mER77 OR 030. La~~~~~~~~~~~~~~~~~~~~~~~.A. . ODOAND O PALM E DM0 . s SNTO IAOTDISPOOOAIIAOIPR PAUNA TUOAIORS * 00101 RAM. RE . PROON; NATIOOALNANEAPEA3.AIJAI308I. JOTJR R- 5~~~~~~~~~El

GUNISTO TEANOMO '--'-A-- L bZEL -L-EEIT

m OIB~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ U,A~~~,_--bb...5- C 'C a 0 Na- PocoLc COLOMBIA3:007 038101 -NC,A OS OA NA RD~~~~~~~~~T- GU ARAGUA R 8 C 0 L 0 M SiEtSI A