DEPARTMENT OF STATE AGENCY FOR INTERNATIONAL DEVELOPMENT WASHINGTON, D.C. 20523 UNCLASSIFIED AID-DLC/P-1096 June 15, 1973 MEMORANDUM FOR THE DEVELOPMENT LOAN COMMITTEE SUBJECT: El Salvador - Grain Marketing Attached fnr your review are the recommendations for authG-ization of a loan in an amount not to exceed $6,500,6::0 to the Government of El Salvador to assist in finaxicing the United States Dollar and local currency costs of their program to establisl a basic grain marketing program within the Republic of El Salvador. This loan proposal is scheduled for consideration by the Development Loan Staff Committee at a meeting on Wednesday, June 20, 1973. Development Loan Committee Office of Development Program Review Attachments: Summary and Recommendations Project Analysis ANNEXES I - VI UNCLASSIFIED UNCLASSIFIED AID-DLC/P-1098 CAPITAL ASSISTANCE PAPER AGRICULTURAL DEVELOPMENT LOAN PHASE II: MARKETING Page PART ONE: SUMMARY AND RECOMMENDATIONS ............... 1 PREFACE TO LOAN PAPER ................................. PART TWO: THE ECONOMIC SETTING ....................... 3 SECTION I - Economic Trends and Government Policies - The Last Decade .............. 3 A. Financial Developments ................... 3 B. Growth and Employment ........................ 3 C . Wage and Tax Policy....................... D. Investment 4 Trends ............................ 5 E. Development Policy.......................... 7 F. The Five Year Plart - 1973-77 ........... 8 1. Investment Levels and GNP Growth Rates... 9 2. Exports ................................. 9 3. Income Distribution Effects of the GOES Fiscal Program ........................... 9 4. Population Growth Rates ................... 9 SECTION II - The Agricultural Economy-Development Trends and Policies................... 1.0 A. History.................................. B. GOES 10 Agricultural Strategy ................... 13 C. Present Status............................. 15 1. Administrative Reorganization............ 15 2. CENTA ................................... 15 3. Marketing ...................... ......... 4. 18 Credit .............................. .... 19 5. Irrigation...............................19 6. Land Reform .......................... D. AID ....20 Stragegy and Programs .................... 21 UNCLASSIFIED 2 UNCLASSIFIIeD Page PART THREE: THE PROPOSED GRAIN MARKETING PROGRAM..... 27 SEPTION I - gescription of the Existing Grain Marketing Program ...................... 27 SECTION II -Program Description ...... s............ 30 A. The Storage Network ......................... 30 B. Working Capital ............................. 31 C. Training and Technical Assictance ............ 31 SECTION III- Program Goals and Objectives ......... 31 SECTION IV -Program Justification4 ................ 32 SECTION V - Financial Plan ......................... 37 SECTION VI - Special Statutory Considerations ...... 40 A. Consistency of Loan with Regional Integration 40 B. *Impact on U.S. Economy ....................... 40 C. Effect on El Salvador's Balance of Payments.. 41 D. Consistency with ClAP Review ................. 41 E. Opinions of Other International Institutions 41 F. USAID Directors Certification ................ 42 PART FOUR: ANALYSIS OF THE PROPOSED GRAIN MARKETING PROGRAM ................................... 43 SECTION I - Pricing ................................ 44 A. Analysis of the Price Model .................. 44 1. Year to Year Fluctuations ................. 44 2. Intra-Year Fluctuations .................. 46 3. The Model ................................ 47 B. Other Aspects of Pricing ..................... 50 1. Differentials in Buying Prices by Loca­ tion ..................................... 50 2. Quality Price Differentials .............. 52 3. Tourist Grains ........................... 52 SECTION II - Location Analysis ..................... 53 A. Determination of Storage Capacity Needs ...... 53 B. Determination of Storage Capacity Location... 54 C. IRA Transportation Needs ..................... 59 UNCLASSIFIED 3 UNCLASSIFIED Page SECTION III - Facility Design and Related Items .......................... 63 A. General ................................ 1. 63 Site Requirements............ ... 63 2. Grain Drying Considerations ........ 64 B. Country Buying and Storage Facilities.. 66 C. Terminal Storage and Buying Facilities. 67 D. Existing Grain Storage and Grain Drying Facilities in IRA ...................... 68 E. Other Related Items .................... 68 F. Engineering Conclusions ......... 69 1. Monitoring of Engineering and Construction ...................... 69 2. Facility and Maintenance........... 69 3. Summary .......................... 70 SECTION IV - Financial Analysis.............. 70 A. Financial Profile - IRA ................ 70 I.. Balance Sheets ..................... 70 .2. Profit:'- Loss Statements ........... 72 •. Profitability of Operations ........ 75 B. Administration of the Working Capital Fund ................................... 78 SECTION V - IRA Organization and Management.. 80 A. Brief Pistory .......................... 80 B. Changes in Operations .................. 81 C. IRA Operntions in the Future .......... 82 D. Technical Assistance Needs ............. 85 1. Background ......................... 85 2. Techpical Assistance Needs ......... 86 3. Budget for Technical Assistance .... 87 4. Budget for Engineering Services .... 88 Budget for Grant Funded Technical Assistance ...................... ... 88 E. Suggested Training Program ............. 88 1. Background ...................... ... 88 2. Training Needs - Loan Funded ....... 88 3. Training Budget - Loan Funds ....... 89 4. Trainipg Needs - Grant Funding ..... 90 5. Training Budget - Grant Funds ...... 90 PART FIVE: LOAN ADMINISTRATION .................. 92 UNCLASSIFIED 4 UNCLASSIFIED Page SECTION I - Implementation A. Loan Agreement. Plan ... ................. B. Implementation Plan...................... C. EstimatedjEstinmtedime. Timetable ab.. ...................... ... SECTION Il - Loan Implementation.... A. USAID Responsibility ............... B. Disbursements ............. C. Procurement Procedures• E. Conditions and Covenants ............. " I. General Conditions .................. 2. Conditions ment Prior to Initial Disburse­ .. 3. otherConditn than TechnicalPrior to DisbursementAssistance and for Training Costs 4. Conditiona;Prior.......... ...... ment ...........to Speci.i. D*r...... ... 5. Covenants .............. ANNEXES ANNEX I - EXHIBIT A - Mission Director's Certification EXHIBIT B - Letter of Request from the GOES EXHIBIT C - IRR Approval ANNEX II - Statutory Check List ANNEX III- Financial Exhibits ANNEX IV - Economic Exhibits ANNEX V - Technical Exhibits ANNEX VI - Draft Authorization UNCIASS II-' I,:Ii A11D-DW/1- loi PART ONE: SUMMARY AND RECOMMENDATIONS 1) BORROWER: The Borrower will be the Government Signatories of the of El Salvador. loan will be the Ministry Ministry of Finance, of Agriculture, the the National Planning the Central Bank. Council (CONAPLAN)tan The Ministry of Agriculture overall responsibility will have the for the administration coordination of the program with the Central Bank in Abastecimiento and the Instituto Regulador (IRA: The National Price de The IRA was established Stabilization Institute). in 1950 and is a semi-autonomous of the Ministry agency of Agriculture and Livestock. 2) LOAN a) Amount: Not to exceed US$6,500,000 b) Terms: Minimum statutory terms: amortization forty (40) over a period years including a grace of an interest period of ten (10) years, rate of two per with cent (2%) per annum during period and three percent the grace (3%) per annum thereafter. c) Local Cost Coponent: Approximately per cent of $4.5 million or about the loan will be used 69 for local currency expenditures 3) BACKGROUND: Due to the poor harvestsin decline I i7 and 1968 and a in the prices of major significa revise export crops, the GOES the Five Year Plan decided to (1968-72) with a new programs which would view towards initiating stimulate the laggard USAID assistance agricultural economy. was requested and provided the R. Nathan through a contract Assqciates for a with analysis major sectoral analysis. completed in 1970 identified The Nathan major income and employment rural problems and recommended as the these an action program issues. Ministry re-organization addressed to introduction the development of new technologies, and credit, marketing land reform were indicated changes, and as actions required problems. Unable to alleviate the to undertake this comprebnsive ately the Ministry strategy immedi­ of Agriculture adopted strategy. USAID a multi-phase, multi-year committed itself to assist particularly that in its implementation, part dealing with small and medium sized commercial operators. The first phase of this improve development program was the organization and designed to operations of the Ministry and simultaenously expand of Agriculture and improve the National cultural Technology Center for Agri­ (CENTA) to produce a relevant to the labor-abundant, small farm technology land-scarce conditions An A.I.D. loan for of El Salvador. $4.0 million was authorized in FY 1972 to assist U.S. $1.00 = 02.50 UNCLASSIFIED ii UNCLASSIFIED in financing this first phase program. In view of the development of CENTA and its ability to undertake loan financed assistance, the focus of USAID technical assistance to that institution was appropri­ ately shifted from one of broadly gauged institution building to the development of in-depth research related to