World Bank Document...Supervision II )4/72 2 1 - - - Supervision III LO/72 2 1 - - - Supervision IV )2/73 1 2 - - - Supervision V 31/74 1 1 2 1 T, P Supervision VI )6/74 1 1 3 3 M,

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 3996

PROJECT PERFORMANCE AUDIT REPORT

BOLIVIA THIRD LIVESTOCK PROJECT(CREDIT 261-BO)

&

FIRST AGRICULTURAL CREDIT PROJECT(CREDIT 561-BO)

June 23, 1982

Operations Evaluation Department

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

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WEIGHTS AND MEASURES

1 hectare (ha) = 10,000 m2 = 2.47 acres1 kilometer (km) = 0.62 miles1 square kilometer (km2) = 0.39 square miles = 100 ha1,000 kilograms (kg) = 1 metric ton = 0.98 long ton

GLOSSARY OF ABBREVIATIONS

ALPD - Agricultural and Livestock Project Division

BAB - Agricultural Bank of Bolivia

BE - State Bank

CNECA - National Commission for Sugarcane Studies

CB - Central Bank

DESEC - Center for Social and Economic Development

IDB - Inter-American Development Bank

LPD - Livestock Project Division

MPAA - Ministry of Peasant and Agricultural Affairs

NIS - National Institute of Statistics

FOR OFFICIAL USE ONLY


BOLIVIA: THIRD LIVESTOCK PROJECT (CREDIT 261-BO)AND FIRST AGRICULTURAL CREDIT PROJECT (CREDIT 561-BO)

TABLE OF CONTENTS

Page No.

Preface ......................................... iBasic Data Sheet .. ... .. . .......... .... .... ........ ii

Highlights .... -..... ................. .. . ................... iv

PROJECT PERFORMANCE AUDIT MEMORANDUM

I. SUMMARY . ................ o ...... ...... 1 . ..

Background ..... ........ ......... ......... .......... 1The Projects ............ . . . ........... 2Implementation of the Projects ......... ......... 3Impact of the Projects ......... ........ 5

II. MAIN ISSUES -........ ........... 6

A. Institution Building .................... ....... 6B. Indexation of Subloans .............. .. ....... 8C. The Projects' Achievements ........ . 10

PROJECT COMPLETION REPORT

A. Third Livestock Project (Credit 261-BO) ........... 13

I. Project Background ............................ 17II. Project Formulation ............................... 19

III. Project Implementation ..... o ......... ...... 21

IV. Project Achievements ........................ 23V. Project Impact .-.................................... 27

B. First Agricultural Credit Project (Credit 561-BO) ....... 33

VI. Project Background ...... . ........ .............. 0 35

VII. Project Formulation -............ .............. 35VIII. Project Implementation ...................... 38

IX. Project Achievements ........................... 40

X. Project Impact .... ............. ............. 47

XI. Special Issues ............... ............ . .... . 50

XII. Conclusions ............. ........... ......... .. 56

Annex 1: Tables 1 - 5 .......................... .......... 58

Maps: IBRD 11241IBRD 2897R1

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



PREFACE

This is a performance audit of the Third Livestock Project and theFirst Agricultural Credit: Project, for which Credits 261-B0 and 561-BO wereapproved in June 1971 and June 1975 in the sums of US$6.8 million and US$7.5million respectively. Both projects sought to achieve the same objectives,were administered by the same project unit and were closed at the same time,in December 1980 after cancellation of US$170,000 (Credit 261-BO) andUS$60,000 (Credit 561-BO).

The audit report consists of an audit memorandum prepared by the

Operations Evaluation Department and a Project Completion Report (PCR) datedAugust 1981. The PCR was prepared by the Latin America and the CaribbeanRegional Office on the basis of a country visit in March 1980 and of a Com-pletion Report prepared by the Project Unit within the Agricultural Bank ofBolivia. The audit memorandum is based on a review of the Appraisal Reports(Nos. PA-51a and 695a-BO) dated May 11, 1971 and June 6, 1975, the President'sReports (Nos. P939-BO and 1653-BO) of May 1971 and June 9, 1975, the Projectand Credit Agreements dated June 25, 1971 and June 20, 1975, the audit report(OED report no. 537) of the First and Second Livestock Projects, dated Octo-ber 11, 1974, and the PCR; correspondence with the Borrower and internal Bankmemoranda on project issues as contained in relevant Bank files have been

consulted, and Bank staff associated with the projects have been interviewed.

A copy of the draft report was sent to the Borrower on April 22,1982 for comments. However, none were received. On the basis of this abbre-viated procedure, the audit finds that the PCR covers adequately the project'ssalient features, and the PPAM agrees with the conclusions. In addition to

summarizing the objectives and results of the projects, the PPAM expands upon

two main issues--institut:Lon-building and indexation of subloans--because oftheir importance to this as well as other agricultural credit projects in thesame region.

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PROJECT PERFORMANCE AUDIT BASIC DATA SHEET

BOLIVIA: THIRD LIVESTOCK PROJECT (CREDIT 261-BO)

KEY PROJECT DATAAppraisal Actual or Actual as % ofEstimate Estimated Actual Appraisal Estimate

Project Costs (US$ million) 11.0 15.9 145

Credit Amount (USS million) 6.8 6.6 97

Cancelled )- 0.2 -Repaid to ) December 31, 1981 - -

Outstanding to ) - 6.6 -Date Board Approval 06/01/71 06/01/71 -Date Effectiveness 09/15/71 09/15/71 -Date Physical Component Completed 12/31/76 12/31/79 155/a

Proportion then completed (%) 100 100Closing Date 06/30/77 12/31/80 172aEconomic Rate of Return (%) 18 10 -Number of Beneficiaries 400 1,282 320

CUMULATIVE DISBURSEMENTS

FY72 FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81

Appraisal estimate (US$ million) 0.7 2.4 4.2 5.6 6.4 6.8 - - -

Actual (US$ million) 0.3 1.9 2.5 5.4 5.8 5.8 6.0 6.0 6.0 6.6

Actual as % of estimate (US$ million) 43 79 60 96 91 85 88 88 88 97

Date of final disbursement 03/31/81

MISSION DATA

Date No. of Manweeks Performar7ce Types ofMission (Month/Year) Persons in Field Ra nb Trend/c Probleas/d

Appraisal L1/69 5 15 - - -

Supervision I )9/71 2 1 - - -

Supervision II )4/72 2 1 - - -

Supervision III LO/72 2 1 - - -

Supervision IV )2/73 1 2 - - -

Supervision V 31/74 1 1 2 1 T, PSupervision VI )6/74 1 1 3 3 M, 0

Supervision VII 12/74 1 2 2 1 TSupervision VIII 02/75 1 2 3 1 F, MSupervision IX L1/75 1 2 2 1 1, FSupervision X 05/76 2 2 2 1 P, MSupervision XI L/76 3 3 2 1 P, MSupervision XII 02/77 2 3 2 1 0, MSupervision XIII 08/77 1 2 2 1 0, MSupervision XIV LO/77 2 4 2 1 M, TSupervision XV 05/78 2 2 2 2 M, TSupervision XVI LO/78 2 2 2 1 P, TSupervision XVII L1/78 1 2 - - -

Supervision XVIII 02/79 1 0.5 2 2 P, FSupervision XVIX L0/79 2 2 2 1 P, TSupervision XX 05/80 1 1 2 2 P, TSupervision XXI 12/80 1 0.5 2 2 PCompletion 03/80 1 1 - 1 -

Total 53

OTHER PROJECT DATA

Borrower Republic of BoliviaExecuting Agency Banco Agricola de Bolivia (BAB)Fiscal Year of Borrower January 1 - December 31Name of Currency (Abbreviation) Bolivian Peso ($b)Currency Exchange Rate

Appraisal Year Average US$1 - $bll.88

Intervening Year Average US$1 - $b20.0O

Completion Year Average US$1 - $b25.00

Follow-on ProjectName First Agricultural Credit-ProjectCredit Number 561-80Credit Amount (US$ million) 7.5

Credit Agreement Date 06/20/75

/a Calculated from date of Board Apptoval./b 1 = Problem free or minor problemv; 2 - moderate problems; 3 - major problems.

/c 1 = Improving; 2 = Stationary; 3 . Deteriorating./d F = Financial; M = Managerial; T = Technical; P - Political; 0 = Other.

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PROJECT PERFORMANCE AUDIT BASIC DATA SHEET

BOLIVIA: FIRST AGRICULTURAL CREDIT PROJECT (CREDIT 561-BO)

KEY PROJECT DATAAppraisal Actual or Actual as % ofEstimate Estimated Actual Appraisal Estimate

Project Costs (US$ million) 11.0 11.3 103

Credit Amount (US$ million) 7.5 7.4 99

Cancelled )- 0.1 -Repaid to ) December 31, 1981 - -

Outstanding to ) - 7.4 -Date Board Approval 06/19/75 06/19/75 -Date Effectiveness 09/20/75 12/15/75 -Date Physical Component Completed 06/30/79 12/31/80 117 a

Proportion then completed (%) 100 100Closing Date 06/30/79 12/31/80 117,a

Economic Rate of Return (%) 22 10-15 -Number of Beneficiaries 4,000 1,139 28

CUMULATIVE DISBURSEMENTS

FY76 FY77 FY78 FY79 FY80 FY81

Appraisal estimate (US$ million) 2.1 5.5 7.0 7.5 - -Actual (US$ million) 0.1 1.7 3.2 5.0 5.0 7.4Actual as % of estimate (US$ million) 5 31 46 66 66 -99Date of final disbursement 03/31/81

MISSION DATA

Date No. of Manweeks Performance Types ofMission (Month/Year) Persons in Field Ratinit- Trend/ ProblemsZd

Identification 06/72 4 12 - -

Pre-appraisal 02/73 4 12 - -

Appraisal 06/74 6 12 - -Supervision I 11/75 1 1.5 1 2 MSupervision II 04/76 2 2 2 1 MSupervision III 11/76 3 3 2 1 MSupervision IV 02/77 2 2 2 2 F, MSupervision V 10/77 2 2 2 2 M, TSupervision VI 04/78 2 3 2 2 M, TSupervision VII 11/78 1 1 2 1 P, TSupervision VIII 02/79 1 /e - - -

Supervision IX 10/79 2 2 2 1 P, FSupervision X 06/80 1 1 2 2 P, FSupervision XI 12/80 1 /e 2 2 PCompletion 03/81 1 1 - -

Total 53.5

OTHER PROJECT DATA

Borrower Republic of BoliviaExecuting Agency Banco Agricola de Bolivia (BAB)Fiscal Year of Borrower January 1 - December 31Name of Currency (Abbreviation) Bolivian Peso ($b)Currency Exchange Rate

Appraisal Year Average US$1 - $b20.00Intervening Year Average US$1 - $b25.00Completion Year Average US$1 - $b25.00

Follow-on ProjectName Second Agricultural Credit/f

/a Calculated from date of Board Approval./b 1 = Problem free or minor problems; 2 = moderate problems; 3 = major problems./c 1 = Improving; 2 = Stationary; 3 = Deteriorating./d F = Financial; M = Managerial; T = Technical; P = Political; 0 - Other./e Less than one week./f At identification stage.

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HIGHLIGHTS

These were the third and the fourth projects assisting the BancoAgricola de Bolivia (BAB) credit operations in the agricultural sector. The

Third Livestock Project provided for lending to farmers for the purchase ofcattle in the lowlands and sheep in the Altiplano, technical services forlivestock development, and construction of new slaughterhouses and cold

storage facilities. The First Agricultural Credit Project, which aimed atdeveloping beef and sugarcane in the lowlands, annual crops and grapes in thevalleys and sheep in the Altiplano, concentrated on lending to less privilegedregions and the rural poor.

The projects included an important institution-building componentto remedy the main problems which had been identified at completion of the

first two projects: inadequate meat pricing and marketing policies and thedeteriorating financial situation and poor management of BAB. These problems

were expected to be resolved through consultant studies and subsequent imple-

mentation of their recommendations. Insufficient interest rates during

periods of rapid inflation and subsequent decapitalization of BAB were to betackled by indexing of loans extended to commercial farmers.

At completion of the two projects (three years behind schedule for

Credit 261-BO and 1-1/2 years for Credit 561-BO), 2,421 subloans had been madecompared with an appraisal estimate of 5,000. Credit allocations were close

to appraisal expectations, with beef production receiving about 70% of the

total lending, sheep production 18%, grapes 8% and annual crops 4%. Although

production impact at farm level is still difficult to determine since a

monitoring and evaluation system was only recently established, it can beconcluded that the projects had a positive impact on livestock and agricul-tural production. Overall ERR's were re-estimated at 10% for the Third

Livestock Project and LO-15% for the First Agricultural Credit Project,compared with appraisal estimates of 18% and 22% respectively.

While the two projects were successful in diversifying lendingoperations and increasing financial assistance to less privileged regions and

farmers, their institution-building objective fell short of expectations. Theprojected studies were carried out but produced no changes or had littleeffect on the beef industry or on agricultural credit policy and procedures.Continuous government intervention in BAB's operations was the main reason

for the failure to improve the institution's efficiency. At project comple-

tion, it was found that BAB was in a more difficult situation than at the time

of appraisal.

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The main lessons of these projects are:

- studies have a valuable role to play in development but it isunreasonable to expect that the Government and the Bank cancommit themselves to implement consultant's recommendationswithin a relatively short time (PPAM, paras. 24-26, and PCR,paras. 11-16);

- a simple agricultural credit project is not the appropriatevehicle to bring about changes of macro-economic policies (PPAM,para. 26 (b) and PCR, paras. 11.02-11.03);

- improving performance of a credit institution is difficult whenit lacks autonomy and is subject to political interventions(PPAM, para. 26 (c) and PCR, paras. 11.04-11.06); and

- indexing is doomed to fail unless it is fully accepted by theGovernment, understood by borrowers, and applied to all sectorsand to all credit resources (PPAM, paras. 27-31).

PROJECT PERFORMANCE AUDIT MEMORANDUM


I. SUMMARY

Background

1. Agriculture produces about 25% of the country's gross DomesticProduct (GDP) but employs more than half of the work force. One of theproblems affecting the agricultural sector is the imbalance between demo-graphic and natural resources in Bolivia's three main geographic regions:(i) the cold and dry Altiplano, which comprises 44% of the country's culti-vated land and holds 56% of the population, (ii) the temperate and humidValleys, with 33% of culcivated land and 30% of the population, and (iii) theTropical Lowlands with 23% of the cultivable land and 14% of the population(see map).

2. Livestock production is the most important agricultural activity;beef production is mostly concentrated in the tropical and little populatedlowlands of the east and the Andean foothills, while sheep production islimited to the Altiplano, where it is part of the subsistence small farm sys-tem practiced by the predominantly Indian population. Livestock developmentsuffers from the same general problems which adversely affect Bolivian agri-culture: Use of improved inputs is the lowest in Latin America; technicalassistance and credit reach no more than some 10% of all farmers; supportinginstitutions are weak and suffer from recurrent budgetary deficits.

3. The first two IDA credits for livestock development (Credit 107-BOof May 1977, for US$2.0 million, and Credit 171-BO of January 1970 for US$1.4million) helped finance a livestock development program in the Department ofBeni in the tropical lowlands. This program, administered by a speciallycreated Livestock Project Division (LPD) in the agricultural credit institu-

tion (Banco Agricola de Bolivia, BAB), helped finance on-ranch investmentssuch as fencing, corrals and breeding stock and provided short-term credit,especially for the purchase of fattening cattle. Most of the program objec-tives were achieved about. one year earlier than expected. Funds from the twocredits were used to make 300 loans to ranchers. The LPD has, on the whole,performed satisfactorily in appraising and supervising ranchers' investmentprograms, in spite of logistical problems in the Beni and difficulties inobtaining and retaining competent livestock specialists. The BAB providedlocal funds for the program, as stipulated by the Credit Agreement, undertookchanges in its accounting procedures and carried out the land tenure andbeef marketing studies required by IDA. However, BAB's financial situationsteadily deteriorated during project implementation, largely due to measurestaken by the government: imposition of unprofitable lending programs, reduc-tion in the interest rate and devaluation.

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4. The Project Performance Audit Report (PPAR) issued in October 1976(OED Report No. 537) concluded that the two projects had a positive impact oncattle management and beef production. The projects' ERR was found similar tothe 17-22% estimated at appraisal. The PPAR, however, concluded that theinstitutional impact of the projects was slight and that BAB's internalefficiency had not improved. In addition, other negative factors to livestockdevelopment, such as Government control on the price of beef and exportrestrictions, as well as marketing and air transport difficulties, remainedunresolved.

The Projects

5. The projects now under review were the third and the fourth withthe Banco Agricola de Bolivia for the purpose of expanding credit operationsin the agricultural sector. Although the Third Livestock Project becameeffective four years before the First Agricultural Credit Project, both soughtto achieve the same objectives, were administered by the same project unit,and were closed at the same time (December 1980).

6. In 1969, following completion of the first two credits for livestockdevelopment, IDA appraised the Third Livestock Credit Project (Credit 261-BO).The following key aspects distinguished it from its two predecessors: theextension of the beneficiary groups to include small farmers in the Altiplano;the concentration on problems of marketing and processing; and the attempt tocharge positive interest rates by indexation of the loan principal duringperiods of rapid inflation. As approved in June 1971, the project consistedof (i) loans for purchase of cattle and on-farm development to some 250ranchers in the Beni region; (ii) loans to some 150 sheep owners and small-holder cooperatives in the Altiplano for on-farm development and purchase ofimproved sheep; (iii) technical services for both sheep and cattle develop-ment; (iv) employment of consultants to make recommendations to the Governmenton meat pricing and marketing policies, establishment of an adequate meatgrading and inspection service, construction of additional slaughterhouses and

creation of transport and marketing facilities; and (v) finance for theconstruction of new slaughterhouses and cold storage facilities. Totalproject cost was estimated at US$11 million, with IDA contributing US$6.8million. The project was expected to be disbursed in 5.5 years and to beclosed by June 1977.

7. The interest rate to be charged on the loans was 12%, with a fouryear period of grace and repayment over 12 years. Assurances were obtainedduring negotiations that "if the rate of inflation in Bolivia should riseabove 8% per annum during the Credit commitment period, BAB would make nofurther loan commitments. . .until an agreement with IDA had been reached on

arrangements for indexing to be applied in respect of such further loans".1/

1/ Staff Appraisal Report, para. 3.38.

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8. A Livestock Project was scheduled by the Bank for FY76 and a sepa-

rate Agricultural Credit Project for FY74. In 1973, however, IDA decidedthat for project management simplicity, it would proceed with only one proj-ect. Therefore, the First Agricultural Credit Project (Credit 561-BO) wasappraised in June 1974 and approved by the Board in June 1975 in the sum ofUS$7.5 million. Project objectives were to develop beef and sugarcane in the

lowlands, annual crops and grapes in the Valleys and mutton and wool produc-

tion in the Altiplano. Total project cost was estimated at US$12 million.

The project somewhat differed from its predecessors by increasing its assis-

tance to the less privileged regions and the rural poor. Of a total of about

4,000 subloans, 3,600 were expected to be made to farmers belonging to thelowest income stratum of the population.

9. Organization and management were the same as for the ongoing ThirdLivestock Credit Project, with some expansion of supervision and technicalassistance capability to accommodate the wider range of activities and re-

gions. In addition, BAB agreed during negotiations to adopt an overallreorganization plan based on the recommendations of consultants. The major

financial innovation of the project was a new arrangement for indexing loans

to commercial farmers; the system agreed upon was to leave to the sub-borrowers the option of choosing between the two following alternatives:

"(i) interest rates of 4% calculated on the outstanding balances adjusted onthe basis of the cost of living index compiled by the National Institute of

Statistics or (ii) interest rates of 14% calculated on the outstanding bal-

ances adjusted on the basis of variations of the rate of exchange between theBolivian peso and the US dollar".!1 Subloans to subsistence farmers werenot subject to indexing and were to bear a nominal interest of 12%.

10. At Board presentation of the Third Livestock Credit Project, thefollowing main issues were discussed: (i) the limited impact of the projecton small farmers since most of the loans would be made to large ranchers

and (ii) the possible difficulty of introducing an indexing system. At Boardpresentation of the First Agricultural Credit Project the possible competition

between BAB and commercial banks was discussed.

Implementation of the Projects

11. The Third Livestock Credit Project started slowly as a result

of the then prevailing low beef price and disputes between the Beni ranchers,the Government and IDA on interest rates and indexing (see paras. 27-31).After two years actual disbursements only reached 10% of appraisal estimates.

In 1974 as beef prices rose sharply, credit demand increased despite the

continuing interest rate problem, but the ranchers refused to make interestpayments on the basis of the indexing system. The Bank then requested from

Government that no further withdrawal applications be submitted to IDA until

1/ Staff Appraisal Report, para. 3.34.

BAB had resolved the application of the indexing formula. The project enteredthe Bank's problem project list and remained almost continuously a problemproject until 1975. In September 1975, the new indexing system proposed underthe First Agricultural Credit was finally approved by the ranchers; disburse-ments then increased sharply, and the credit allocation for beef developmentwas fully committed by March 1976.

12. Credit for sheep development was delayed by the lack of land titles,which hampered the farmers' access to medium-term credit. In 1978, BABchanged its lending policy toward small farmers. Land titles as collateralwere no longer required and chattel mortgages were accepted as security. As aresult, actual disbursements as a percentage of appraisal estimates rose from44% in 1975 to 87% six months later.

13. Out of four studies financed under the project, three were imple-mented: the meat marketing and production study, the reorganization of BAB,and the study on new meat processing plants for Santa Cruz. The study onchanges in meat marketing was taken up by UNDP and is expected to be com-pleted by the end of 1982. Delays in implementing the studies were the mainreason for postponing the project closing date several times. The project wasfinally closed by end December 1980, 3-1/2 years later than expected atappraisal.

14. The First Agricultural Credit Project became effective in December1975, but disputes over interest rates slowed its initial progress as forthe Third Livestock Project. When the new indexing system (para. 11) becameeffective, the number of loans for beef and grape production rose sharply.No requests were received for sugarcane development because world sugar

prices were depressed and because competing lines of credit were availablethrough the Central Bank. Neither were loan applications received fromannual crop farmers because of unawareness of credit availability under theBank project, the existence of alternative sources of credit, and lack of landtitles; nor were applications submitted for sheep development, since suffi-cient funds were still available under the Third Livestock Project. In 1978following BAB's agreement to accept chattel mortgages, subloan commitments forsheep and annual crops increased substantially. The unused allocation forsugarcane was reallocated to support beef and sheep development. By the endof 1979 all project funds had been committed, but disbursements slowed downmostly because of the shortfall in Government counterpart funds. The consul-tants completed their study of BAB and produced detailed operational manualswhich were a solid basis for a reorganization plan. A commission was formedto study the report, but its findings are yet to come. The project was fi-nally closed, fully disbursed, in December 1980, 1-1/2 years behind schedule.

15. At completion of the two projects in December 1980, 1,282 subloanshad been made under the Third Livestock Project and 1,139 under the FirstCredit Project, compared with an appraisal estimate of 400 and 4,600 respec-tively. Credit allocations were close to appraisal expectations: beef produc-tion received 70% of the total lending (64% estimated at appraisal), sheepproduction 18% (20% at appraisal), grapes 8% and annual crops 4% (as projectedat appraisal). No subloans were made for sugarcane development.

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Impact of the Projects

16. Production impact at farm level is difficult to determine since amonitoring and evaluation system was only established at the end of the FirstCredit Project, and no farm records were kept during the first implementation

years.

17. About 45% of the beef loans were used for the purchase of livestock;more funds than expected were allocated for fattening operations; and some

funds were used for unspecified and relatively non-productive purposes.

Fencing, pasture improvement and machinery also constituted important invest-ments. The economic rate of return (ERR) on beef development is estimated at

9 to 17%, according to farm size and type of investment, compared with an

overall 22% expected at appraisal.

18. For the sheep component, the size of sub-borrower farmers proved tobe larger, consequently credit needs per borrower greater, and the number of

beneficiaries smaller than anticipated. The major investments were purchaseof breeding sheep. The recalculated ERR on sheep development varies from 13%to 20% (27% estimated at appraisal).

19. For vineyards, the average size of loans was smaller than antici-

pated at appraisal. Most of the loans financed vineyard establishment

(172 ha) and rehabilitation (35 ha). The ERR on investments in vineyardsis now estimated at 26: to 49% (27% anticipated at appraisal) mostly due

to a rise in prices paid to producers as demand for grapes expanded.

20. For annual crops, some 60% of the credit was used for expanding

potato production, 20% for purchase of oxen and the remainder for agricultural

equipment. Most of the Subloans went to small farmers. No rate of return was

recalculated for annual crops.

21. The overall rate of return of the projects is expected to be less

than the individual returns indicated above, mostly because the level ofarrears remains high (about 20%) and beneficiaries in arrears may be consid-ered as not fully realizing expected profits. In addition, some funds werediverted from intended use. Overall ERRs were re-estimated at 10% for the

Third Livestock Project (18% at appraisal) and 10-15% for the First Agricul-tural Credit Project (22% at appraisal).l'

22. The First Agricultural Credit Project succeeded in increasing lend-ing operations in less privileged regions but was less successful in itsequity objectives, since the total number of beneficiaries proved to besignificantly lower than. anticipated at appraisal. However, the fact that anumber of small farmers had access to credit for the first time can be consid-ered an important achievement of the project.

1/ OPS considers that farmers in arrears have received some of the expected

benefits and that the ERR should be intermediate between these and theones presented in the PCR.

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23. The institution-building objective of the two projects fell farshort of expectations (see paras. 24-26). The projected studies were carriedout but produced no changes or had little effect on agricultural credit policyand procedures. BAB remained in disarray. With one exception, the attemptto involve commercial banks in agricultural development lending failed, mostlybecause of the Government's discouraging interest rate policy.

MAIN ISSUES

A. Institution Building

24. The striking feature of these two projects is the contrast betweentheir relative success in terms of lending operations and increased assistanceto less privileged regions and farmers on the one hand, and their failure tosubstantially improve institutions and sector policies on the other. Develop-ment issues and weaknesses of agricultural credit policies, procedures andinstitutions were properly identified at the end of the first two livestockprojects (para. 3). As a result, the two follow-on projects included animportant institution-building component. The main issues identified were thefollowing: (a) inadequate meat pricing policy and absence of differentialprices for different grades and qualities of beef; (b) insufficient slaughter-ing and marketing facilities; (c) inadequate interest rates; and (d) deterio-rating financial situation and poor organization and management of BAB.

25. Remedial actions were proposed by the Bank and accepted by theGovernment at negotiations, and pertinent covenants were included in CreditAgreements. On issues (a) and (b), the Government was to engage consultantsto carry out studies and make recommendations within 12 months of the date ofCredit effectiveness. Within nine months of receipt of the consultant'sreport, the Government was expected to adopt a beef price policy acceptable toIDA to provide for differential prices for meat of different grades andqualities. The question of interest rates was tackled by a covenant (in theThird Livestock Project) stipulating that, if the rate of inflation shouldrise above 8%, BAB would make no further loan commitments until an agreementhad been reached with IDA on adopting an indexing system. Finally, BAB'sproblems were to be reviewed by consultants (under the First Credit Project),whose recommendations were to be implemented within six months after issuanceof their report.

26. In sum, with the exception of the indexing problem (see paras.27-31), all issues identified at appraisal were expected to be resolved

through studies and subsequent and rapid implementation of the recommendations

made by consultants. In fact, although the studies were carried out, anddespite IDA's efforts during supervision of the two projects, little or noaction was taken following completion of the studies, and the same main issuesare still unresolved. The lessons to be learned from this experience confirm

the observations already made in connection with other projects of the samekind:

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(a) Studies have a valuable role to play in development but it isunreasonable to expect that both the Government and Bank can committhemselves to implement consultants' recommendations in a givenrelatively short time. Past experience shows that conclusions of astudy are not necessarily accepted by the parties involved, andoften raise important institutional and policy matters which needextended discussions, changes in legislation and involvement ofseveral ministries. By imposing a time frame to implement policyreforms which go beyond the scope of the project and which could notbe clearly defined at negotiations, the project covenants provedtotally unrealistic.

(b) In the audit's view, a simple agricultural credit project is notthe appro riate vehicle to bring about changes of macro-economic

policies The case of these two projects does not substantiallydiffer from that of a number of other agricultural credit projectsaudited by OED.2/ The Government's perception of these twoagricultural credit projects was essentially that of a lendingoperation to farmers, aiming at improving agricultural productionand rural incomes. The Bank's objective, however, was somewhatdifferent. The Bank wanted to use the project as a means to re-

structure the entire beef industry. But many of the issues tobe tackled under these projects were simply beyond the control of

BAB, the main participating agency. Only strong Government commit-

ment would have permitted some progress in resolving sectoral

issues, but this commitment was obviously lacking since the very

beginning of the projects.

(c) Improvement of an agricultural credit institution is not an easy

task since it cannot be isolated from the country's political andeconomic environment. Although the project was successful in intro-

ducing some structural changes within BAB, continuous Governmentintervention in BAB's operations turned out to be one of the reasons

for the failure to improve the institution's efficiency; decrees to

lower interest rates in 1972 and 1978, uneconomic branches andarrears of other banks imposed on BAB, poor adherence to an indexing

clause, insufficient financial contributions, continuous turnover of

1/ It is worth noting that Structural Adjustment Loans (SALs) are now

considered by the Bank a more appropriate vehicle to bring about changesof macro economic policies, but SALs did not exist when these two proj-ects were appraised.

2/ Senegal--Second Agricultural Credit Project (0ED Report No. 3514, datedJune 25, 1981). Pakistan--Third Credit for the Agricultural Development

Bank (OED Report No. 2126, dated June 1978). Costa Rica--Second Agri-

cultural Credit Project (OED Report, dated June 1981).

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managers and lack of action regarding issuance of land titles wereall Government measures--or lack thereof--which hampered bothproject implementation and BAB reorganization. At project comple-tion (1980), it was found that BAB was in a more difficult situationthan the one prevailing at the time of appraisal of the ThirdLivestock Project (1971), but most of these shortcomings weredue to intervention and the lack of autonomy.

B. Indexing of Subloans

27. It was a common practice in the early 1970s to introduce an indexingclause in Loan/Credit Agreements of credit projects, particularly in LatinAmerica where inflation rates were high. The objective of indexing is tosustain a positive rate of interest and prevent decapitalization of lendinginstitutions. Covenants on indexing (see paras. 7 and 9) were included inboth the Third Livestock Project and the First Agricultural Credit Project.

28. Soon after start-up of the Third Livestock Project, increasinginflation rates in Bolivia triggered the need to apply the indexing clause,but since indexing mechanisms were not then defined, lengthy discussionstook place between Bank staff and Government officials. Agreement on indexingwas finally reached in March 1973. The agreement, aiming at a real interestrate of 6% on subloans, provided for a nominal interest rate of 9% and foradjustment of the outstanding principal by a price index!/ less 3 percentagepoints. However, ranchers strongly opposed any indexing mainly on the groundsthat (i) on-going credit for livestock development from the Inter-AmericanDevelopment Bank was not subject to indexing, (ii) the official cost of livingindex was based on expenditures of the urban population, whose outlook and wayof life are different from those of farmers, and (iii) the price of meat wasfixed by Government and never related to the La Paz cost of living index.

29. It was not before June 19751/ that the indexing issue was finallyresolved, when an option was offered to farmers between (i) 4% interest onloan principal adjusted to the cost of living index or (ii) 14% interest onloan principal adjusted to the peso-dollar rate. With a few exceptions allbeef cattle ranchers expressed their preference for the dollar clause option.The agreement, however, was not fully respected either by the Government,which in 1978 unilaterally lowered interest rates, or by farmers, who aftertwo devaluations responded by increased defaults on repayments.

1/ Either the index of food prices established by the National Instituteof Statistics, or the index of meat prices established by the Ministryof Industry, whichever is lower.

2/ By then the IDB loan for livestock development had been fully disbursed.

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30. The indexing experience gained under these two projects can becompared with similar experiences in Latin America and other agriculturalcredit projects audited by OED:

(a) In Brazil under the First and Second Livestock DevelopmentProjects.! and the Grain Storage Project,2/ indexing arrange-ments were made with the Government after lengthy discussions. TheGovernment, however, was under strong pressure from farmers tointroduce softEr lending terms and finally acceded to their demandby establishing new lending programs without monetary correction orBank participation.

(b) The Uruguay Fourth Livestock Development Project-/ introduced anindexing arrangement based on an option between (i) the averageincrease in beef price during a 12-month period or (ii) the annualrise in the cost of living index. The system was accepted by theGovernment but was not properly applied since increases were notcompounded, as they should have been, but added to calculate theadjustment of the outstanding balance of subloans. The Bank andthe Government were aware that the system as applied weakenedthe effectiveness of indexing under conditions of high inflation(50% at that time). However, since Government policy was to keepbeef prices substantially below those which would have prevailed ina free-trade situation, the Bank agreed that the application of theindexing clause would not be changed until Government policy nolonger discriminated against the livestock sector.

(c) Under the Paraguay Fourth Livestock Credit Project-4 the indexingof subloans was accepted by the Government despite the fact that itwas a new practice in Paraguay. There were minor reactions to thesystem by farmers, who accepted the indexing principle because(i) there were no alternative funds available for medium- and long-term lending for livestock development and (ii) beef prices, whichwere not controlled by Government, were high during the projectperiod.

31. From these experiences and that of the two projects in Bolivia,some lessons can be learned on indexing of subloans in the agriculturalsector. First, there is no doubt that indexing is doomed to fail unless the

1/ OED Report No. 2402, dated April 1979.

2/ OED Report No. 2590, dated June 1979.

3/ OED Report No. 2572, dated June 1979.

4/ OED Report No. 3457, dated May 1981.

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Government fully accepts and understands the monetary correction principle andstrongly supports its application during the project life. Second, indexingcannot be applied only in a particular sector or subsector; the Bolivian andBrazilian experiences mentioned above failed partly because by applyingindexing to livestock and grain storage the interest rates of these twosubsectors soon became the highest in the country except for housing.I.Third, indexing is unanimously rejected by farmers when prices of outputs arecontrolled by government and generally distorted in favor of urban consumers.Fourth, alternative sources of financing which do not require indexing forsimilar programs (IDB and USAID in Bolivia and local sources in Brazil) provedto hamper introduction of an indexing system; coordination between the Govern-ment, the Bank and other financing institutions-/ appears to be a prerequi-site for successful introduction of a sound monetary correction system.Finally, moving from zero to full indexing on a gradual basis might be desir-able in countries which have no indexing experience.

C. The Project's Achievements

32. When compared with the first two IDA credits for livestock develop-ment, the Third Livestock Credit Project and the First Agriculture CreditProject appear a failure to achieve all their objectives. Such a failure,however, is relative because the objectives of the two series of projects wereentirely different. Under the first two IDA credits, project objectives weremainly restricted to lending for livestock development and to commercialfarmers. The institutional aspect was limited to the establishment within BABof the Livestock Project Division, which performed satisfactorily. Althoughthe Bank had recognized the financial and managerial deterioration of BAB, noaction was proposed or taken under the first two projects to remedy thesituation. When the projects were closed, they were considered successfulbecause disbursements took place faster than expected and the projects' ERRswere satisfactory.

33. By contrast, the two follow-on projects tackled institutionaland sectoral issues which were and remained beyond their control. Howeverthe failure to restructure a major industry and to significantly improveinstitutions should not mask some of the projects' achievements like theagreement to accept chattel mortgages for smallholders instead of land titles,the reinforcement of the Agriculture and Livestock Project Division of BAB andthe establishment of an evaluation and monitoring system. The projects werealso successful in diversifying lending operations from the Beni Province withits large farms to smallholders in the Altiplano and Valleys regions. The

1/ In Bolivia, interest rates for livestock development were higher (in1978) than for mining or industrial enterprises.

2/ in Bolivia, IMF appears to have disliked indexing in contrast to theBank's preference for this mechanism.

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project achievements in terms of number of subloans (more than 2,400 comparedwith 300 during the first two projects) and diversification of beneficiariesare not negligible either. In conclusion, it can be said that the projectswere too ambitious in their expectations; but despite their failure to achieveall their objectives their impact on the economy proved to be greater thanthat of their predecessors.

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BOLIVIA

THIRD LIVESTOCK CREDIT PROJECT (CREDIT 261-BO)

AND

FIRST AGRICULTURAL CREDIT PROJECT (CREDIT 561-BO)


August 31, 1981

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BOLIVIA



PART A

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PART A



I. PROJECT BACKGROUND

Sector Setting

1.01 Agriculture is the largest sector in Bolivia accounting for almost

half of the value added in commodity production. Despite a decline in the

share of agriculture's contribution to GDP, Bolivia's economy remains

agrarian in terms of source of personal income, provision of jobs and manner

of social organization. Out of the total population of 5.5 million some

52% make their living directly from agriculture. The majority of farm

families are of Indian extraction and their economy is based on subsistence-

type agriculture.

1.02 Although the growth rate in sectoral output has been some 3.5%

per year over the long run, per capita production of food has apparently

declined. The value of agricultural imports, mostly cereals, vegetable oils

and dairy products, now exceeds the value of sectoral exports, mainly sugar,

timber, coffee end cotton.

1.03 Livestock production continues to be the most important activity,

contributing 34% to the value of farm output. Beef production accounts for

55% of the value of livestock, with dairying and sheep being 14% and 7%,respectively. In addition to value as a final product, oxen are the

dominant draft power inlut in crop husbandry.

1.04 Sheep production is concentrated in the Altiplano where it is an

integral part of the subsistence small-farm system practiced by the

predominantly Indian population. Dairying is also common near the urban

centers of the highlands but is more specialized in the sheltered valleys.The major areas of beef production are the tropical lowlands of the eastand the Andean foothills. In the former area, extensive grazing on large

properties is the usual form of enterprise management whereas integratedlivestock production, using improved pastures and crop residues, isbecoming common in the Santa Cruz district.

1.05 The livestock industry suffers from the same general problems of

Bolivian agriculture. Use of improved inputs is the lowest in Latin America

and among the lowest i. the world. Technical assistance and credit supplyreach no more than some 10% of farmers. Supporting institutions are weak

and suffer from recurrent budgetary deficiencies.

1.06 In addition, farms in the crowded Altiplano are small and soils

are poor with a frequently hostile climate. Although the low standards oflivestock husbandry provide opportunities for gains in productivity, theseconditions necessarily limit development in the highlands to little more than

poverty alleviation. On the other hand, the lowlands offer considerable scopefor expansion of farmed area as well as major productivity gains. The bindingconstraint on lowland development has been the physical difficulty associated

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with cattle transport. Large areas of seasonally flooded plains imposeunusually high cost on road building and maintenance. Because of low popula-

tion density and poor extraction rates, the supply of an adequate roadnetwork has not been economically worthwhile. As a result, the movementof finished cattle has been difficult and costly, with high weight loss

and mortality. The lack of roads also restricts farm credit supervisionand the delivery of technical services. The demand for these services is

also weak because of the high incidence of absentee ownership.

1.07 Despite frequent changes in Government, public policy for agricul-

ture has remained largely unchanged over the past two decades. Policy objec-tives are the usual intentions to increase exports, decrease imports, and helpthe rural poor. Policy instruments are the familiar provision of technicalservices and farm credit as well as price controls, direct state trading andinvolvement in agricultural development projects. In general, policy management

has not been successful because the goals have been too ambitious for theavailable financial and human resources. For instance, price control manage-ment has not been based on sufficient analytical input and institutionalimpact has been severely reduced by budgetary difficulties. As a result,Bolivian agriculture is unusually dependent upon external aid flows and onforeign development institutions working within the country.

The Project

1.08 The project addressed productivity issues in the livestock subsectorby providing technical assistance linked to farm credit. Issues in processingand marketing were dealt with by providing funds for construction and renova-tion of slaughterhouses and for consultant studies of meat marketing. Projectobjectives were to (a) increase beef exports from the Beni and nearby areas,(b) increase wool production in the Altiplano, and (c) increase mutton produc-tion for local consumption.

1.09 Because of the structure of farming in the two areas, the Altiplanosheep component was essentially to be a small-farm development effortwhereas the Beni beef component would serve extensive grazing properties.

1.10 The project was large in size yet small in anticipated coverage.At the time of appraisal, total farm credit available was in the order ofUS$20 million for 500,000 farmers. The proposed project of US$11 millionwas expected to reach 250 individual cattle ranchers and 150 sheep propertiesin cooperatives of some 20 to 50 members, to give a total of around 3,000beneficiaries. At an overall average investment of only US$2,500 per farm,these figures reflected the inadequacy of credit resources available.

1.11 The credit was the third livestock project supported by IDA inBolivia. The previous '.wo Credits 107-BO of 1967 for US$2 million and 171-BOof 1970 for US$1.4 million, helped finance a livestock development program inthe Department of Beni in the lowlands. This program, administered by aspecially created Livestock Project Division (LPD) 1/ in the Bolivian

1/ The Livestock Project Division (LPD) later became the Agricultural andLivestock Project Division (ALPD) to incorporate the First AgriculturalCredit Project into the credit program.

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Agricultural Bank (BAB), helped finance on-farm investments such as cattle

purchase, fencing and yards, as well as short-term credit. The ProjectPerformance Audit Repori: (SEC M74-710, October 11, 1974) concluded that

most of the program's production objectives were achieved, but that institu-

tional gains had been slight. The present project, 261-BO, was initiated to

continue the program, but with a broader perspective.

II. PROJECT FORMULATION

Identification and Preparation

2.01 Toward the end of 1968, when lending under the First Livestock

Credit (107-BO) was in full operation, it became apparent that funds would

be committed faster than anticipated. Bolivia approached IDA for an

interim credit of the same type while a more comprehensive project was

prepared. The Interim Credit (171-BO) was approved by the IDA Board

without an appraisal as the Second Livestock Project. The Project Directorthen prepared the Third Livestock Credit, which was to become Credit 261-BO.

Appraisal and Approval

2.02 In contrast to the speedy passage of the Interim Credit, theproject took 18 months to go from appraisal in November 1969 to Boardapproval in June 1971. The delay in presenting the project was due to

country conditions, wh:'ch made it difficult for the Bank to develop a

constructive dialog with the Government on difficult policy issues. During

one period in 1970, Bolivia had five presidents in four days. The issues

to be resolved were:

(a) adequate compensation payments for nationalization of

assets of GuLf Oil Corporation and two US-owned miningcorporations;

(b) arrears in Bolivia's US dollar bond payments to the Bank;

(c) the budgetary support which the GOB could be expected to

give to the BAB;

(d) the level of interest rates and the terms and purpose of

operating credit to be provided; and

(e) the effect of state intervention in marketing particularly

through beef export controls and unprofitable charter ratesfor air transport operators.

None of these issues was entirely settled, but sufficient progress was

thought to have been made by June 1971 for the project to be approved by

the Board, despite a last minute attempt for postponement over the

compensation item.

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Project Description

2.03 The project consisted of two subprojects:

(a) Beef and Sheep Property Development, providing for:

(i) subloans for on-farm development on some 250 Beniarea properties;

(ii) subloans to some 150 property owners, generally as

cooperative groups; and

(iii) technical services for both sheep and cattle development; and

(b) Cattle Slaughtering and Meat Marketing, providing for:

(i) employment of consultants to make detailed recommendations toGovernment on meat policies, establishment of an adequate meatgrading and inspection service, construction of additionalslaughterhouses and creation of adequate transport and othermarketing facilities; and

(ii) finance for construction of new slaughterhouse andcold storage facilities and for renovation of existingones and for training up to six meat inspectors.

2.04 The interest rate to be charged on the subloans was 12%, with a12-year repayment period and four years' grace. Assurances were obtainedduring negotiations that, if the rate of inflation in Bolivia should riseabove 8% per year during the life of the credit, the Government would makearrangements with IDA for indexing of future subloans.

2.05 Key aspects of the project distinguished it from its two predecessors.These were (a) the extension of the beneficiary groups to include smallfarmers in the Altiplano, (b) the concentration on problems of marketing andprocessing, and (c) the attempt to charge positive interest rates by provisionfor indexation of loan principal during periods of rapid inflation. For thefirst time in the program, credit was made available for sheep development.The Credit Agreement required the GOB to make important changes in its beefprice policy, meat inspection services and grading system within nine monthsafter the submission of the consultant's study of these problem areas. Itfurther required that the Borrower should abolish beef export restrictionsexcept for temporary emergencies.

2.06 Some 74% of total project c3st was allocated to on-farm investmentwith a further 12% to provide incremental working capital. Of the balance,some 6% was to be used for technical assistance to farmers, 7% for slaughter-house construction and renovations, with a final 1% for consultant services.Two-thirds of the farm credit was to go to beef enterprises, and one-third tosheep enterprises. The total project cost was estimated at US$11 million,with IDA's contribution of US$6.80 million being the expected foreign exchangecomponent of expenditures under each category. BAB's share was set at US$2.49million, with the balance to come from beneficiaries' own funds.

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2.07 Ranch development was to continue the lending program of the

IDA's previous projects. Subloans would pay for improved breeding cattleand property improvements such as fences, water facilities, yards, barns,

housing, pasture improvement and equipment. Sheep farm development was tofollow the same strategy with replacement of "criollo" animals by heavier

bodied improved breeds and with replacement of overgrazed native pastures

with introduced species. Provision of technical services would be continuedthrough the Livestock Project Division of BAB established under the earlier

projects.

2.08 The organization and management system was a continuation of theprevious arrangement. The Government was the borrower. All on-lending wasto be done through BAB, assisted by a Loan Committee, for the approval offarm plans. A new item was the establishment of a Project Commission for theimplementation and supervision of consultant studies and for the preparation

of recommendations for expenditures under the processing and marketing

components of the project.

2.09 Financial and economic rates of return for both sheep and cattledevelopment were estimated at around 18%. Incremental production was

2xpected to rise to 10,400 tons of carcass beef, 1,450 tons of carcassmutton and 575 tons of wool worth some US$6 million annually at farmgateprices for an investment: of US$11 million.

HII. PROJECT IMPLEMENTATION

3.01 The project started slowly, with actual disbursements reaching only10% of appraisal estimates after two years. The previously high level ofdemand for livestock credit had fallen suddenly because of an interest ratedispute between the Ben". ranchers, the GOB and IDA. Funds left from theearlier project proved sufficient to cover disbursements during the firstproject year. Although these were fully utilized by the second year, theinterest rate dispute wi.dened over the indexation issue.

3.02 As export prices rose sharply in 1974 local price increases werepermitted by the state. Credit demand then rose despite the continuinginterest rate problem. By mid-1974, Beni ranchers had still not begun tomake interest payments on the basis of indexed principals in accordance withthe Supreme Decree of December 5, 1975, and in compliance with Section 4.03of the Credit Agreement.. In July 1974, IDA wrote to the Government 1/ andrequested that no further withdrawal applications be submitted to IDA underthe project until (i) BAB resolves the confusion among beneficiaries regarding

the application of the correct indexing formula; and (ii) BAB collects theadditional interest payments due from sub-borrowers since November 1, 1973.

1/ Letter from G.K. Wiese to Victor Castillo Suarez, Minister of Finance,July 9, 1974.

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3.03 This situation continued for more than one year until September1975 when the indexing system agreed for the new Agricultural Credit Project(561-BO) was applied to the Third Livestock Project. Actual disbursementsas a percentage of appraisal estimates rose from 44% in September 1975 to87% some six months later, by which time almost all credit for on-farm beefdevelopment had been committed. A number of extensions of the closing datefrom June 30, 1977 to December 31, 1980 were granted to allow completion ofthe sheep development aspects and of the market study.

3.04 Credit for sheep development was finally fully used in 1979 as aresult of changes in BAB's lending policy toward small farmers whereby landtitles for subloan guarantees were no longer required and as a result ofreallocation of part of the sheep credit to beef. In order to close theCredit, the responsibility for a study of an implementation plan to restructuremeat marketing was passed to the UNDP as executing agency. By the end of May1981, the study terms of reference had been written a second time in orderto conform to UNDP specifications and invitations to bid had been advertised.

Table 3.1 - Loan Allocations by Category

InitialAllocation Final Actual

(at signature, Allocation DisbursementsJune 1971) (June 1978) (May 1981)

---------------- US$ millions ---------

1. Beef ranch development 3.300 3.930 3.92. Sheep property development 1.500 1.301 1.43. Incremental working capital 0.600 0.657 0.74. Technical services 0.200 0.210 0.25. Consulting services 0.100 0.702 0.56. Slaughterhouse construction

and renovation 0.400 - -7. Unallocated 0.700 - -

Total 6.800 6.800 6.7

Source: Project files.

3.05 The major movement was the transference of US$500,000 from unallo-cated, Category 7, in 1974 to incremental working (.apital, Category 3, foremergency loans due to flooding in the Beni (Table 3.1). Little demand evermaterialized for these funds since other long-term credit was made availableto meet this need and, in 1975, the unused portion was moved into beef ranchdevelopment credit, Category 1. Similarly, US$200,000 of the funds forsmallholder sheep development, Category 2, was moved into beef development in1978 because of relative demand differences. A supplementary trend was thereallocation of funds toward consultant studies. In 1975, a study of BABfinanced by this project, but not foreseen by it, became a condition of

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Board presentation of :he First Agricultural Credit Project, Consequently,almost US$200,000 was cransferred to consultant services, Category 5, fromtechnical services, Cai:egory 4, and from the unallocated funds. In 1978, thetotal of US$400,000 provided for slaughterhouse construction or renovation wasmoved into consulting services. At various stages, the GOB requested thatthis sum be reallocated to beef development but this was refused on thegrounds that ample credit for this purpose was available from the AgriculturalCredit Project and that restructuring of beef markets was a prime intent ofthe Livestock Project.

3.06 The balance of US$171,743 remaining after final disbursements wascanceled in May 1981 and the project. management unit, the ALPD, was absorbedinto BAB's general staff. The First Agricultural Credit Project (561-BO)was also closed at that date.

IV. PROJECT ACHIEVEMENTS

4.01 By completion date of December 1980, 641 subloans had been madefor a total of US$7.70 million. Of these, 534 were for beef cattleinvestments, costing US$5.90 million, and 107 were for on-farm sheepdevelopments costing US$1.80 million. Another US$0.20 million was used tosupport the administration and technical services of the Project Unit. Atotal of US$0.50 million was spent on consultant studies of BAB and afeasibility study for a new abattoirs at Santa Cruz, as well as two meatindustry analyses.

On-farm Investments - Beef Production

4.02 Livestock purchases accounted for 45% of investment costs inthis category (Table 4.1). Of these, three-quarters were for breedingand one-quarter for finishing. Fencing was second in importance, being13% of the total. Pastures, stockyards, buildings and machinery accountedfor another 20%, with a further 8% divided between provision of wateringfacilities, roads and airstrip construction and meat refrigeration equipment.Of the balance of 14%, a little over half was used for subsistence loansfollowing serious flooding in the Beni in 1974, a purpose not authorizedby the Credit. The rest was lent for miscellaneous items within the projectintention except for the amount canceled.

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4.05 The majority of the 570 subloans were for surprisingly small amounts.This was because of the use of the credit as working capital for steerpurchase. Some 68% of subloans were for less than US$10,000, with only16 being for amounts in the US$50,000 to US$70,000 class, the highest group.The majority of subloans fall into the US$2,500 to US$5,000 class, being 46%of the total.

On-farm Investments - Sheep Production

4.06 In contrast to the structure of subloan demand for beef development,the major investment item was farm machinery, reflecting the mixed enterprisetype of farming in the Altiplano.

Table 4.3 - Sheep Development - Investment Items

Item Units No. Units Amount % of Total(US$ '000)

Tractors and equipment no. 117 456 23Sheep head 21,000 336 17Pasture ha 6,289 339 17Buildings no. 861 195 10Fences, watering facilities, etc. no. - 658 33

Total 1,984 100

About 21,000 head of generally improved sheep were bought to improve flocksand some 6,289 ha of pasture were established. The rest of the subloan fundswas used for fences, watering facilities, veterinary equipment and minoritems.

4.07 An impressive feature of the sheep component was the relativesuccess of group subloans (cooperatives or precooperatives) in channelingfarm credit to many small enterprises. Of the 107 subloans made, over halfwent to groups reaching some 849 beneficiaries through only 61 subloans(Table 4.4).

Table 4.4 - Sheep Development - Subloans by Farmer Organization

Individuals Groups Total

Number of subloans 46 61 107Number of beneficiaries 46 849 895Amount (US$ '000) 749 1,235 1,984% of total 38 62 100

4.08 Some 84% of holdings classified as large (more than 500 breeders).were cooperatively managed for credit operations. Most of the individualfarmers obtaining subloans were classified as small (less than 100 breeders).Subloans were concentrated in the Department of Oruro (87%), with lesserparticipation in the La Paz (13%) and Cochabamba (7%) areas. Much of thisdistribution is due to presence of competing credit lines.

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Results Compared with Appraisal Estimates

4.09 The 45% cost overrun for the project as a whole is largely explained

by the strong demand for credit for cattle ranch development in the Beni. The

number of subloans granted almost doubled the 250 expected at appraisal (Table

4.5). This, combined with the increase in average subloan amount for beef

from US$15,300 to US$22,800, led to an increase in the cost of this component,from US$5,700 million to US$7,027 million. Despite the rise in the number of

subprojects, the total area reached no more than 1 million ha projected

because the average property size was almost one-half that expected.

Table 4.5 - Comparison of Expected with Actual Achievements

Beef SheepExpected Actual Expected Actual

Enterprise size (ha) 4,000 2,856 2,000 345

Number of subloans 250 459 150 107

Number of families 250 459 3,790 895Area (ha) 1,000,000 992,000 140,000 105,000

Total investment (US$ '000) 5,700 7,027 2,500 1,984

Average subloan (US$) 22,800 15,300 16,600 18,000

Source: Completion Report of Project Unit.

4.10 On the other hand, all the coefficients for the sheep component

turned out to be much less than originally thought. For example, the

number of families reached through group loans totaled only 895, which is

scarcely 25% of the 3,790 anticipated. Similarly, the estimates for averageenterprise size, the number of subloans and, hence, the total area to be

covered, proved overoptimistic and were not achieved. However, it must bestressed that such numerical goals can be no more than illustrative,particularly where census data are inadequate.

4.11 The compositi.on of investments actually financed also differedmarkedly from expectations. The major change was a shift away from long-termdevelopment items such as breeding cows, fences, pastures and water facilities

and a move to the purchase of store cattle for fattening to take advantage ofseasonal surplus of feed. At appraisal, it was thought that some 22,500breeding cows would be bought. Instead, property owners only invested in9,770 of these, preferring to substitute an almost equal number of unfinishe(cattle for fattening. The "one time" nature of the fattening operation, as

compared to the long-run gains from building up breeding herds, accounts formuch of the shortfall in reaching production targets. The major change insheep investments was the movement away from pastures into animals. The6,000 ha of pasture actually planted was one-quarter of that hoped forto relieve the chronic overgrazing problems of the Altiplano. The 21,000sheep financed was almost double the number expected.

Technical Services

4.12 Corresponding with the expansion of the Project Unit's credit

activity, the number of technical personnel rose to 42. These specialists

assisted farmers under both 261-B0 and 561-BO in drawing up farm plans,making subloan applications and implementing projects. The project supplied

the technicians, as well as the office support staff, with six vehicles,

five motorcycles, five radio communication sets and office equipment, as well

as veterinary materials. Two courses were held with participation of foreign

experts in training of farm extension personnel of the Project Unit.

Consulting Services

4.13 Four studies were financed by the project:

(a) Meat Marketing and Production Policy;

(b) Reorganization of BAB;

(c) New Meatworks for Santa Cruz; and

(d) Implementation of Changes in Meat Marketing.

In 1974, an international consulting firm working with a local firm produceda comprehensive and exhaustive diagnosis of all aspects of the Bolivian meat

industry. The work was of excellent quality and provided a sound basis for

authorities to plan a rational meat industry policy. The total cost was

US$156,000, against which US$130,000 was disbursed. The major recommendations

were:

(a) establishment of a beef industry regulation

commission, to decide policy details;

(b) establishment of a technical secretariat to

provide analytical input for commission decisions;

(c) preparation of a plan for a meat inspection system;

(d) formulation of a grading system and a price policy; and

(e) initiation of a specific investment program for

construction and renovation of slaughterhouse facilities.

4.14 A study of BAB was undertaken in 1976 by an international consulting

firm associated with a local company, for a cost of US$90,000, of which

US$76,000 was disbursed by IDA. The study analyzed and made recommendations

on the finencial position, organization and management, accounting system and

staff development of BAB. Thirty detailed manuals on organization and proce-

dures were produced and accepted by BAB management. BAB implemented many of

the recommended reorganizations, which were designed to alleviate structural

deficiencies, define and decentralize authority, integrate functions, and

transfer the responsibilities of day-to-day operations from the Genaral

Manager to the operational departments and the regional offices.

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4.15 The funds from Category 6, US$400,000 for slaughterhouse construc-tion and renovation, were reallocated to Category 5, consulting services, inJune 1978. This was to enable the National Meat Commission to define a meatproduction and marketing policy for Bolivia and to finance feasibility studiesfor new meatworks. EvEntuaLy, interest was shown *i studies fr- meatworks atSanta Cruz and at Trinidad. rhe Trinidad study was finally financed by theArgentinian Government.

4.16 In 1980, a local consulting group produced a two volume report recom-mending construction of new meatworks at Santa Cruz. The report recommendedagainst rehabilitation of the present facility, based on market projections.The study projected a 27% rate of return to a meatworks costing some US$4.5million, but pointed out the need for changes in Government policy for themeat industry. The consultants further recommended that, under the presentsystem of marketing without proper refrigeration and hygiene facilities,as well as arbitrary price controls, no system of differentiation of meat byclass, type or cut should be introduced at the abattoir level. The study costUS$72,250, against which IDA disbursed US$68,000.

4.17 Following from the recommendations of the 1974 meat industry study,the Government established an "Interinstitutional Commission" in 1975 toexamine the proposals put forward. No changes were made, as proposed, untilthe establishment of a Technical Secretariat (Comite Nacional de Carnes)in March 1977. The Comite was to be funded by the Ministry of Finance(Article 5 of Supreme Decree 14415) and was charged with drawing up classifi-cation norms, quality control standards and inspection systems, particularlywith a view to expanding meat exports. However, the Comite de Carnes stillhas no operating budger, travel funds, vehicles or equipment and is grosslyunderstaffed. As a result of the 1978 reallocation of funds from Category 6,the Comite entered into an agreement in 1980 with the Andean Group (Junta delAcuerdo de Cartagena) to finally execute the meat study. The study was to bein two parts: (a) an update of the 1974 study but adding to it a series ofspecific and implementable recommendations; and (b) a retail trial marketingof precut meats differentiated by type of cut and quality. However, followingpolitical differences with the new Government of Bolivia in July 1980, theAndean Group withdrew their support before the work had begun.

4.18 In February L981, the UNDP became executing agency for the study,to cost US$250,000. Terms of reference were drawn up and invitations to bidwere advertised in May 1981. The study is expected to be completed in late1982, some 11 years after the credit was signed.

V. PROJECT IMPACT

Production Effects - Beef Components

5.01 Twenty-one thousand head of cattle were purchased with projectfinances. Of these, almost 10,000 were store cattle purchased from neighborsfor fattening. For this group, the incremental production of meat is thedifference between the weight of the finished cattle at slaughter and the

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weight of those same cattle if slaughtered before fattening. Accordingly,the production impact from this item is small at around 100 tons of meat peryear out of a total annual production of 70,000 tons. Of more importance isthe contribution of the 9,000 improved breeding cows, which were puichasedfor reproduction instead of slaughtered. The slaughter of females of breedingage has been identified as a major impediment to development of the industry.Similarly, the contribution to improved productivity of the 2,500 improvedbulls, mostly Zebu Nellore from Brazil, raised performance coefficients whenthe use of improved sires was combined with complementary measures, such asparasite and disease control. Almost 200 dip and spray facilities wereestablished for control of ectoparasites.

5.02 The production impact at the farm level was difficult to establishfor two reasons. First, because of the age of the project (appraised in1969), no system of farm record-keeping or surveying was set up to monitorthe project impact. Second, over the project life the number and compositionof herds belonging to beneficiaries fluctuated with the incidence of seriousflooding and changes of ownership. The monitoring unit set up under the laterCredit Project (561-BO) is currently attempting to quantify production effects.If it can be validly assumed that the productivity gains under both projectsfor similar investments are of the same order, then incremental rates ofreturn to individual borrowers who followed through with the developmentproposed would have reached close to the 18% projected.

Production Effects - Sheep Components

5.03 About 21,000 sheep were purchased with project funds. With anational inventory that grew from 7 million to 8.2 million during the projectperiod, the overall production impact was small. The project monitoring groupof the Agricultural Credit Project (561-BO) estimated rates of return in theorder of the projected 17% to 20% for this component under the same assumptionsabout productivity gains as for beef.

Income Effects

5.04 Although individual farm models showed 18% rates of return toinvestment in cattle activities, the models were made under the assumptionof (a) a constant relation between the prices of factors and those ofproducts; and (b) an uninterrupted series of average seasons. Neither ofthese assumptions proved valid and the discrepancy became the basis ofprotracted disputes between IDA, BAB, the Government and producers. The18 months' delay in effectiveness was partly due to the dispute overinterest rates in which the producers claimed that the incremental incomecould not cover the interest payments proposed by IDA because of the aboveproblems. The passage of water draining from the Eastern Andes across theflat terrain of northern Bolivia to the Amazon renders the countrysidesusceptible to some degree of flooding every year. From time to time, suchas in 1974 and 1979, more serious damage occurred than usual coveringvaluable pasture for long periods, washing away fencing and roads andbringing movement to a halt.

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5.05 Producers' complaints about changing price relationships seem tohave some substance, as shown in Table 5.1, used to indicate the broad direc-tion of general trends only.

Table 5.1 - RelatLonship Between Beef Prices and General Price Level

kear CPI 1/ Beef Price Index 2/ Ratio

1973 100 100 1.001974 162 133 0.821975 176 133 0.761976 183 134 0.731977 198 140 0.711978 219 156 0.71

1/ Consummer Price Index, La Paz.2/ Official prize at meatworks.

Source: Computed.

If the change in the CPI is used as an indicator of the movement in thegeneral level of prices in commercial centers, then clearly the terms oftrade for beef producers deteriorated over the period shown - even allowinga wide margin for error. On the other hand, such a trend is not limitedto Bolivia but is worldwide. Many Beni producers remain caught in a profitsqueeze because they have been unable to make productivity gains faster thanthe deterioration in their terms of trade. The position has also been aggra-vated by the inability of the state to institute the market reforms envisagedby the project.

5.06 Perhaps the major achievement of the project was its success inchanging BAB's requirements for lending to small sheep producers. Priorto February 1978, sheep subloans were moving slowly because of BAB's insistenceon land mortgages as guarantees. Many small farmers wished to take outgroup subloans for items to be shared. However, many groups had no legalstanding, many farmers had no land titles and titles, under the Land ReformProgram could not be mortgaged. In 1978, BAB changed its security requirementsto acceptance of chattel mortgage (prendaria) which freed up this type oflending for the Agricultural Credit Project. The sheep component took sevenyears to disburse rather than the three years anticipated. Table 5.2 indicatesthe slow progress of subloan approvals.

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Table 5.2 - Subloan Approval, Sheep Component

Number of Approvals Cumulative Percent of Funds

1972 23 141973 16 281974 16 451975 14 651976 16 791977 14 951978 8 100

Total 107 100

The group loan method was successful in channeling credit to a large numberof small farmers with relatively few transactions and at lower cost. The107 subloans made benefited 895 individual families. Because of the experiencewith this project, many small farmers in the Altiplano received their firstopportunity to increase their meager incomes through the use of farm creditat reasonable cost for long-term development.

Production Support

5.07 A key inclusion in this project that differentiated it from itspredecessors was the large measure of production support. Experiences inthe previous First Livestock Project and Second (Interim) Livestock Projecthad pointed to the need for changes in beef industry conditions to be madein conjunction with provision of direct production credit. Support provisionsfell into four categories: (a) policy changes; (b) market studies; (c) marketfacilities; and (d) animal health.

5.08 Policy changes to be made resulting from agreements reached duringnegotiations were: (a) maintenance of adequate rates for air freight of beef(Section 4.01 of Credit Agreement); (b) maintenance of an adequate beef pricepolicy following a beef industry analysis (Sec. 3.02); (c) removal of exportrestrictions on beef trade; and (d) establishment of an effective procedurefor clarification of land titles (Sec. 4.05). Government price fixing was saidto be adversely affecting incentives to develop and low prices were claimed tobe the major cause of arrears. As shown in Table 5.1, changes in producerprices lagged behind changes in the general price level and this continues tobe a source of friction. Adjustments in consumer and producer prices remaincompromises between consumer and producer goals. The consultants studywas accepted by the Government in 1974 and provided a solid basis for intro-ducing price differentials to provide producer incenLives. The Government wasunwilling or unable to act and is still in default of the covenant in which itagreed, "On a date not later than nine months after the date of the saidsubmission report (consultants study) . . . the Borrower shall adopt a beef

price policy . . . establishing price differentials between different gradesand qualities of meat." (Section 3.02). However, the issue is not the overallprice level but the relative prices between different cuts and grades. Nocomparative analysis has ever been done to provide a factual basis on theequity effect of administered beef prices versus the cyclical movements offree market levels. Air freight prices ceased to be a source of complaint andare assumed to be satisfactory.

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5.09 Since construction and/or renovation of slaughterhouses werecontingent on introduction of a meat inspection and grading system(Section 3.03) following the marketing studies, no money for this purpose(Part D) was used. Instead, the US$0.4 million was reallocated in June 1978to enable the Comite de Carnes (a) to study ways to implement therecommendations of the 1974 meat industry study; and (b) to prepare feasibilitystudies for specific meatworks proposals. The Comite de Carnes remainsfunctionally inoperative. The above study, now under UNDP execution, hasnot yet started and a feasibility study for a new abattoir at Santa Cruzhas been completed, but, to date, no follow-up action has been taken.

5.10 Despite assurances that prompt clarification of land titles(Section 4.05(i)) would enable rapid subloan disbursements, the problem ofdocumentation of land titles to satisfy BAB requirements for mortgageguarantee was still the major reason for rejection of credit applicationas late as 1978, some seven years after effectiveness. The change of BAB'srequirement from land mortgage to chattel mortgage in 1978 overcame thisdifficulty, rather than compliance with the covenant.

5.11 Foot-and-mouth disease was responsible for significant cattlelosses and poor performance. Such viral disease proved a serious impedimentto beef development in extensive grazing areas, such as the Beni whereanimal control is minimal. An agreement was signed (Section 4.05(ii)) underwhich the Borrower undertook to establish and maintain an effective vaccina-tion program. In 1974, an Aftosa (foot-and-mouth disease) program wasestablished under a project of the Inter-American Development Bank and conti-nues to expand the "clean" areas free from the disease or under treatment.

5.12 Because of the presence of foot-and-mount disease, the unsani-tary state of the meatworks and the lack of meat cut standardization andgrading systems, Bolivian exporters eventually lost the small trade, begin-ning with Peru and northern Chile. At the time of appraisal, it was con-sidered that quantitative restrictions were the factor limiting exports and,under Section 4.06 of the Development Credit Agreement, the Borrower undertookto remove such restrictions and not reimpose them except for "temporary"and "emergency" conditions. The Government replaced the export ban witha licensing and taxing system but, because of the unsatisfactory marketingconditions, such controls became irrelevant. Unofficial export of livecattle from border areas to neighboring countries is common because of easeof access, relative transport costs, exchange rates and market distortions.

5.13 In general, the production support activities of the project havent had a great direct impact on beef development. Except for the BIDfoot-and-mouth disease control program, these components provided only asound basis on which to restructure beef marketing. Because of lack ofcommitment or ability, the failure to follow through has left beef industryconditions little better than at the start of the project.

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BOLIVIA

FIRST AGRICULTURAL CREDIT PROJECT (CREDIT 561-B0)


PART B

3.53 -

PART B

FIRST AGRICULTURAL CREDIT PROJECT (CREDIT 561-BO)

VI. PROJECT BACKGROUND

Sector Developments

6.01 During the mid-1960s and early 1970s, at the time the Third Livestock

Credit was being processed, rapid developments in commercial agriculture were

taking place in line with similar developments worldwide. During the periods of

1963-65 and 1970-72, the annual average area under cotton rose from 3,000 ha

to 23,000 ha and sugar area increased from 24,000 ha to 36,000 ha. The value

of cotton exports rose from zero to US$7.5 million and that for sugar from

US$0.4 million to US$1.0 million. In addition, poultry numbers increased from

4.6 million head to over 6 million and whole milk production expanded from

25 million liters to 35 million liters. The most rapid increases in poultry

and milk production were in the Santa Cruz and Cochabamba areas following the

growth in commercial feed availability, principally oilseeds and wheat

by-products.

The Project

6.02 The Banco Agzicola de Bolivia carried out several studies of these

developments and proposed to IDA that it approach the Cooperative Program

to put together an agricultural credit project focused on these activities,

more as a companion project to the Livestock Credit than as a follow-on.

In 1973, a Livestock IV Project was scheduled for FY76 and a separate Agricul-

tural Credit Project for FY74. In January 1974, IDA decided that, for

project management simplicity, it would proceed with only one project.

Accordingly, beef and sheep components were added to the proposed Agricultural

Credit and poultry production was dropped due to declining profitability as

feed prices rapidly increased. Because of the need to develop sound husbandry

practices in the newly cleared areas north of Santa Cruz, a small component

for research was added.. At appraisal, in 1974, the project provided US$11.00

million in credit for on-farm developments for beef, sheep, sugarcane, annual

crops, and grapes. A f:urther US$0.14 million was included for support to

agricultural research and US$0.86 million for project administration.

VII. PROJECT FORMULATION

Identification and Preparation

7.01 The Cooperative Program (FAO/IBRD/CP) identified and prepared the

project between June and October 1972 with assistance from the Project Unit of

the ongoing Livestock Credit Projects. At this time, considerable concern

was being felt in IDA over these projects because of "(a) . . . deterioration

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in the management of BAB due to recent changes in senior positions; and (b)the question of interest rate policy." 1/ Because a decree had reducedinterest rates on subloans under these credits to 10%, whereas the agreed ratewas 12%, IDA was initially reluctant to proceed past this stage. At the timeof the interest rate reduction, the rate of inflation had reached the pointwhere indexing of subloans should have been begun in accordance with theconditions agreed for the Third Livestock Credit. Section 4.03 of the CreditAgreement required indexing if the domestic inflation rate were to exceed8% per year. On October 27, 1972, the Bolivian peso was devalued by 67%(from $b ll.88/US$1 to $b 20.OO/US$l), making BAB's repayment of US dollarobligations, relent in pesos, more difficult. In addition to increasingarrears, the Government transferred uncollectable farm loan portfolios toBAB from other institutions.

7.02 However, some progress was being made and a preappraisal missionwent to Bolivia in February 1973. The March 1973 supervision missionreported that ranchers were progressively reducing arrears because BAB wasnow branding cattle purchased with the subloans, giving itself prior claimto subsequent sale proceeds. An agreement on indexing was reached betweenIDA, the Government and ranchers, providing for a 9% interest rate, withperiodic adjustments of outstanding principal, based on the movement of thelower of two indices (consumer price index and beef or mutton price index),minus 3%. On loans obtained prior to November 1, 1972, borrowers could chooseto retain the existing 12% rate without adjustments of principal (March 16,1973). This system was calculated to give a real rate of interest of 6% andwas to be applied to the new project.

Appraisal, Negotiations and Approval

7.03 Nevertheless, IDA informed the Minister of Finance in May 1973that it would not appraise the project until ". . . we have been notified

that the Government has adopted such a plan of action (to reorganize BAB)and taken the first measures to carry it out ..... " 2/ The Governmentinitiated the required reforms in mid-1973 but, in September, was advisedof IDA's concern at the slow progress of the reorganization committee'swork and the continued deterioration of BAB's financial condition. At thistime, IDA instructed the Bank mission to Bolivia to examine the possibilityof using the Central Bank through its Agricultural Development Fund as analternative channel for the proposed agricultural credit project. Thiscourse was rejected on the grounds that a principal project objective wasthe institution building of BAB. Prior to the early 1970s, BAB had areasonably good operating record and a developmental perspective not sharedby the banks participating in the Agricultural Development Fund.

1/ Letter of November 15, 1972 from G. F. Darnell, IDA, to J..P. Huyser,FAO/CP.

2/ Letter from G.K. Weise to L. Bedregal, May 30, 1973.

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7.04 Upon completion of the reorganization committee's work, BAB's

management introduced changes recommended in a draft Presidential Decree of

December 1973. The decree contained virtually all IDA's recommendations.

In the same month, a fi:aal decree was promulgated on indexing applied

retroactively to November 1972. The level of arrears on interest payments

dropped from 40% to 5% between 1973 to 1974, but it is not clear how much of

the fall was due to rescheduling. In any case, sufficient progress was

thought to have been made that IDA proceeded with appraisal in June 1974.

7.05 However, at this time, the ranchers persuaded the Government to

press for repeal of the indexing decree because: (a) there were flooding

losses in the Beni; (b) a 60% adjustment had to be made to principal in some

cases because of the retroactive clause; (c) indexing had not yet been intro-

duced in the Santa Cruz area. Although flooding had been severe, the project

manager reported that only one-third of the ranching area was affected and

relatively few participating ranchers suffered in a serious way. The appraisal

mission was sent, but was instructed to advise Govermment that IDA management

would not be in a position to recommend to the Executive Directors further

lending to Beni ranchers until these issues were settled.

7.06 Between appraisal in June L974 and negotiations in May 1975, several

missions worked to break the impasse. By negotiations, seven issues remained

namely: (a) Government contributions to BAB equity, counterpart funds,

project administration and agricultnral research; (b) initiation of a consul-

tant study on BAB reorganization and finances; (c) implementation of an agri-

cultural research and land titling program; (d) staffing of the Project Unit;

(e) establishing a project monitoring unit; (f) agreement on indexation; and

(g) participation of commercial banks in the project and the agreement ofthe Government to make up any shortfall in counterpart funds expected from

these banks. Agreement was reached on these points and the project was

presented to the Board under Special Procedure on June 19, 1975. Effective-

ness was delayed by three months over meeting the conditions with regard

to Government contributions to BAB and appointment of a Bolivian national as

project director.

Project Description

7.07 Project objectives were to (a) expand production for export (live-

stock and sugarcane) arid domestic consumption (wool, mutton, wheat, potatoes,

oats and grapes); (b) improve the economic welfare of some 3,600 families of

rural poor; and (c) improve regional distribution of economic development.

Beef would be financed in the Beni and Santa Cruz areas, sugarcane in Santa

Cruz, annual crops in the Cochabamba region, and grapes in the Tarija valley

and sheep in the Altiplano.

7.08 Of a total of 4,600 subloans, some 3,600 were targeted to the smallfarmer poverty group. Beef ranchers were expected to be in predominantlymedium to upper income groups. Farmers growing sugarcane on farms in excess

of 50 ha and grapes on farms greater than 4 ha would not qualify for a subloan.In addition to on-farm investments, provision was made for an expanded Project

Unit and some support to research in crop rotation trials near Santa Cruz.

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The total project cost was estimated at US$12 million, of which US$11 millionwas for farm credit, US$0.86 million for project administration, and US$0.14million for research support. The shares in total costs were as follows:

Source Share of Total (%)

IDA 62Government 20Commercial banks 7Beneficiaries 11

Total 100

The Government was the borrower and the Banco Agricola de Bolivia, throughthe ALPD, the executing agency, with both BAB and commercial banks as parti-cipating institutions. It was hoped that 10 commercial banks, as wellas one cooperative society, DESEC (Centro para el Desarrollo Social yEconomico), would be involved.

7.09 The organization and management was essentially the same as forthe ongoing livestock project, with some expansion of supervision andtechnical assistance capability to accommodate the wider range of activitiesand regions. The financial rates of return expected varied from 13%(potatoes) to 27% (sheep and grapes). No overall economic rate of returnwas given, but economic rates of return for the various components wereexpected to be similar to those at financial prices.

7.10 The major financial innovation was the settling of the interestrate dispute. The system agreed upon was to leave to the sub-borrowers theoption of choosing between (a) an interest rate of 4% on outstandingbalances adjusted by the cost of living index for La Paz; or (b) an interestrate of 14% on the outstanding balances adjusted for variations of the rateof exchange between the Bolivian peso and the US dollar. Subloans to sub-sistence (sheep and potatos) farmers would bear a 12% nominal interestrate. Grace periods were to be four years (cattle, sheep and grapes), threeyears (sugarcane) and two years (potatoes). Subloan periods were to be 12years for sheep and cattle, six years for sugarcane, eight years for grapes,and four years for potatoes.

VIII. PROJECT IMPLEMENTATION

8.01 Disputes over interest rates slowed the initial progress of theAgricultural Credit Project as happened under its predecessor, theThird Livestock Credit Project. After 18 months, only US$1.70 million hadbeen disbursed compared with an appraisal estimate of US$5.50 million.Although the Government allocated part of its agreed equity contributions,BAB's position continued to deteriorate. Despite earlier promise, arrearsonce more became critical. The consultants completed their studies of BAB andproduced detailed operational manuals which were a solid basis for restructur-ing the bank and BAB, once more, was reported to be in process of implementing

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a reorganization plan. During this period, no applications were received forsheep subloans because sufficient funds were left over from the livestockproject to cover demand; no requests were received for sugarcane developmentbecause the world sugar industry was in a cyclical downswing in profitabilityand subloans were available to growers through a Central Bank line with BAB;and no demand was forthcoming from annual crop farmers because of lack ofknowledge of the availability of funds. The April 7, 1977 Supervision Reportdrew attention to the point that Government policy discouraged sugarcaneplantations of less than 100 ha whereas the Credit Agreement (Schedule 3)restricted subloans to farms under 50 ha. Although the number of subloans tobeef and grape producers were substantially on target, the average investmentsize was some three times that envisaged, partly because of inflation, butmostly because of underestimation of investment needs per unit of an activity.Beef property sizes were substantially in excess of those envisaged. Only oneprivate bank had made any subloans even though 10 signed subsidiary loanagreements. The cooperative participant, DESEC, had decided not to participate.The rate of granting land titles even slowed down, in spite of undertakings tothe contrary.

8.02 However, in 1978, following BAB's agreement to accept chattelmortgages as security Eor smallholders' loans, subloan commitments for sheepand annual crops rose sharply to 186. Demand for beef subloans increasedand, early in 1979, new commitments for grape development ceased because allfunds had been allocated for that purpose. In April 1978, the unused alloca-tion for sugarcane development was reallocated to beef and sheep development(Table 8.1). At the same time, the financing proportion for the farm equip-ment for agricultural experimentation was changed from 100% of foreign expen-ditures to 50% of total cost to facilitate the administrative process of bankdisbursements for these items since they would be purchased locally. Also,the proportion of the local ALPD Director's salary was increased from the 24%of the total agreed to in an amendment in December 1975 to 37.5%. The firstamendment was made because no expatriate staff were hired by the Project Unit,making the proposed IDA contribution to foreign exchange costs redundant. Inorder to keep quality staff, IDA agreed to contribute the difference between aBAB salary and an international level salary for the Project Director. Thesecond amendment was to maintain a real salary value as BAB salaries eroded inreal terms. No changes were made in the actual dollar amounts allocated toproject administration and agricultural experimentation.

Table 8.1 - Allocation of Loan Proceeds

Original Allocation of Reallocation of FinalAllocation Contingencies Sugarcane Funds Allocation %-------------------------- US$ '000------------------------

Beef 3,170 1,138 0,443 4,750 67Grapes 0,580 0,396 - 0,976 14Annual crops 0,470 - - 0,426 6Sheep 0:570 0,217 0,117 0,948 13Sugarcane 0:560 - - -Contingencies 1.,750 - -

Total 7,100 1,750 0,560 7,100 100

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8.03 By the end of 1979, some 67% of IDA funds had been disbursed and

virtually all project funds had been committed. New subloan disbursements

by the Project Unit slowed down from June 1979 until completion for several

reasons: first, because of the shortfall in the Government's contributions

of counterpart funds, the Project Unit was forced to wait for subloan recuper-

ations to use instead; second, project management failed to process the

necessary claims for disbursement in a timely manner; and third, uncertainty

surrounded the devaluation in November 1979. The closing date was extended

six months three different times from June 30, 1979 to December 31, 1980.

8.04 Following the second devaluation, the interest rate issue was raised

again. Growers petitioned the Government against application of the principaladjustment clause. In addition, hail damage in Tarija had reduced grape

yields in 1978 and 1979 from the long-run average of around 15,000 kg/ha to

5,000 and 9,000 kg/ha in the two years, respectively. Temporary moratoria ondebt repayment were applied in the Beni and Tarija Departments. These were

rescinded in 1980 and the indexing mechanism applied. The credit was closed on

December 31, 1980 and disbursements were made until March 31, 1981. Thebalance of US$64,000 remaining for project administration was cancelled.

IX. PROJECT ACHIEVEMENTS

Farm Credit

9.01 By the completion date in December 1980, some 1,139 subloans hadbeen made, for a total of US$9,726,000. Of these, 43% went to beef invest-

ments, 20% to sheep, 15% to vineyards and 22% to annual crops. Another

US$200,000 went to support agricultural experimentation and US$600,000 toproject administration. Most of the on-farm credit advanced (67%) was used

for beef development, with the balance going to investments in vineyards, 14%;sheep grazing, 13%; and annual cropping, 6% (Table 9.1).

9.02 The beef areas of the northern lowlands absorbed 49% of the farm

credit advanced for 23% of the total subloans made. Although about thesame number of subloans were made in the Altiplano for sheep (20%), the

smaller size of investments required less than one-third (13%) of the amount

spent on beef. However, the greatest concentration of subloans was in theCochabamba valleys for annual cropping, but reached only 6% of the creditamount because of the smallness of individual subloans.

Table 9.1 - Distribution of Subloans by Region and Type

Regional Agency Total Beef Sheep Grapes Annual CropsNo. Loans % US$ m % No. Loans US$ m No. Loans US$ m No. Loans US$ m No. Loans US$ m

Triniad 220 20 4.386 45 220 4.368 - - - - -

Riberalta 8 1 0.153 2 8 0.153 - - - - -

Cubija 25 2 0.150 2 25 0.150 - - - - -

Santa Cruz 221 20 1.751 18 221 1.751 - - - - -

La Paz 82 7 0.488 5 5 0.016 77 0.471 - - -

Oruro 151 13 0.827 8 - - 151 0.827 - - - -

Cochabamba 274 23 0.737 7 6 0.068 - - 13 0.085 255 0.583

Tarija 158 14 1.252 13 -- - 158 1.252 - -

Subtotal 1,139 100 9.744 100 485 6.507 228 1.298 171 1.337 255 0.583

Z of Total 100 - 100 - 43 67 20 13 15 14 22 6

Source: Completion Report of Project Unit.

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On-farm Investments - Beef

9.03 The pattern of investments made was consistent with what was to beexpected for development of extensive grazing systems. Investments in orderof importance were fencing and yards (38%), breeding cattle (36%), pasturesand watering points (14%), and miscellaneous (12%) (housing, airstrips,machinery and equipment).

9.04 The weighted average property size proved to be considerablygreater than that assumed at appraisal, leading to a reduction in the numberof subloans that could be made with a given credit total. Even after adjust-ment for considerable local inflation, the realized investment per family wasalmost three times that anticipated. However, it is interesting to note thatinvestment per hectare was almost half that expected. In other words, Bolivianbeef properties proved to be quite large, with high credit requirementsoverall, but low on a per hectare basis. This is consistent with the assetstructure of lowland ranches where the land has scarcely any value.

Table 9.2 - Beef - Actual Compared with Estimated Achievements

Appraisal Actual PercentItem Estimate Actual of Estimate

Number of subloans 930 482 52Average property size (ha) 500 2,500 500Investment per family (US$) 5,250 15,000 286Investment per hectare (US$) 10.5 6 57

9.05 The distribution of subloans by beneficiary farm size shows aconcentration of number in the small-size farm class and a concentrationof funds in the medium-size farm class. About 56% of subloans went to thoseclassified as small, 31% to medium, and 13% to large, respectively. Ofthe credit total, 42% went to medium, with 36% to small and 22% to largeproperties. However, these figures need to be interpreted with care since thesize by which farms are classified refers to enterprise size and not farmsize. For example, a sugarcane grower with 500 ha of cane is a large farmerby income definitions. If he has 50 head of cattle and applies for a beefdevelopment loan, his herd size classifies him as "pequeno". A similarsituation commonly occurs where absentee owners not dependent on their beefholdings for their principal income source maintain understocked properties.Annex, Table 3 classifies subloans according to size in detail.

9.06 Repeat loans with IDA accounted for 26% of all subloans, with 74%being IDA clients for the first time. Diversion of funds was significant.Some 109 beneficiaries (24% of the total) used farm credit received forother purposes, representing 7% of the total amount (US$430,100). Thegreatest diversion occurred among the large property class with most beingin the Beni. Diversion of funds was of three types, namely: (i) non-compliance with the agreed farm investment plan but use of the funds for otherproductive on-farm investments; (ii) compliance with agreed investment plans

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but at a lower cost for inferior materials, with surplus funds being retainedfor unspecified purposes;; and (iii) non-compliance with the agreed farm planand use of the funds outside the agricultural sector. The Completion Reportof the ALPD identified this non-compliance with agreed investments as aprincipal cause of disappointing financial results on the properties concernedand as a major contribu:or to the overall arrears level. No action was takenby the ALPD because of insufficient support from BAB. No action was taken byIDA because the problem was not identified until after the project was closed.A further type of diversion was the failure of beneficiaries to contributethe agreed share of the investment cost from their own resources. Only 47%of the beenficiaries' agreed contribution was actually made.

On-farm Investments - Shaeep

9.07 As for the beef component, property sizes proved larger, creditneeds per subproject greater and, hence, number of beneficiaries considerablyless than anticipated.

Table 9.3 - Sheep - Actual Compared with Estimated Achievements


Number of subloans 1,600 228 14Number of beneficiaries N.A. 531 -Average farm size (ha) 100 430 430Investment per subproject (US$) 560 2,445 436Investment per ha (US$) 5.6 5.6 100

As shown in Table 9.3, the weighted average farm size proved to be over fourtimes the appraisal estimate; the average investment, over four times thatanticipated, even with adjustment for inflation; and the total number ofsubloans, less than one-fifth of that expected. Because 88 of the subloanswere to groups, the number of beneficiaries was over twice the number ofsubloans. However, since no applications were received from productioncooperatives, no subloans were made to such group. It had been thought thatcooperatives with an average of 20 family members would seek help. In fact,although farmer groups averaged four beneficiaries per group, many beneficiarypairs were spouses, reducing the number of beneficiary families.

9.08 Most subloans (76%) and credit supplied (57%) went to individualsor groups with less than 100 breeders. Of the balance, only one subloanfor 1% of the funds was advanced to large farmers having more than 500 breedersheep.

9.09 The major investments were in purchase of breeding sheep (33%);other livestock, such as dairy cattle, work oxen, and llamas (29%); and dips,yards, and other structures (22%). Some 24,000 head of sheep,364 dairy cows,580 oxen, and 2,086 llamas were financed. Minor items included 727 ha ofpasture establishment and 33 irrigation pumps (Table 9.4). The level ofdiversion of farm credit proceeds to purposes not authorized by the agreed

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farm plans was 12% of the total funds, which is almost twice that for thebeef component. The major non-compliance was for construction and reached25% of the subloans for this item.

Table 9.4 - Sheep Component Items Financed

Item Number Amount %US$

Sheep 24,000 425,000 33Cattle, llamas 3,944 377,000 29

Dips, yards, structures 800 292,000 22Pasture (ha) 727 62,000 5Veterinary equipment tools - 54,000 4

Irrigation pumps 33 43,000 3Infrastructure roads 96 23,000 2Forage, seeds, other - 22,000 2

Total , 1,298,000 100

On-farm Investments - Vineyards

9.10 Most of the 171 subloans for grapes were made in Tarija whereproduction for wine making is an important industry. Scarcely 8% of bene-

ficiaries were located around Cochabamba where generally grapes are grown onlyfor table use. Some 172 ha of new grapevines were planted with 76% of thecredit advanced and an extra 35 ha of vineyards were rehabilitated withanother 9%. The balance of 15% was almost equally divided between nets forprotecting the crop from hail damage (5%), irrigation pumps and tractors (4%);and miscellaneous items, such as land levelling and fencing (Table 9.5).

Table 9.5 - Grape Component - Items Financed

Item Number Amount %US$

Vineyard establishment (ha) 172 1,013,000 76Vineyard rehabilitation (ha) 35 122,000 9Anti-hail nets (ha) 15 72,000 5Irrigation pumps, tractors 19 54,000 4Land levelling, fences, other - 76,000 6

Total 1,337,000 100

9.11 The number of beneficiaries reached 201, which is 30 greater thanthe number of subloans because some credit went to cooperatives (Annex,Table 4). In contrast to the cattle and sheep components, the average sub-project size was considerably smaller than anticipated at appraisal. However,the 62% higher cost of investments led to shortfalls in the number of subloansand in the area planted. Only 39% of the area intended for grape plantingwas reached (Table 9.6). Deviation of funds for purposes not authorizedwas quite small at some 2%. Most of the subloans (78%) went to small growershaving up to 8 ha with irrigation, not necessarily all for grapes.

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Table 9.6 - Grape Component - Basic Indicators

Appraisal Actual PercentEstimate Actual of Estimate

Number of subloans 220 171 78Number of beneficiaries 220 201 91Area of subproject (ha) 2 0.85 42Total area (ha) 440 172 39Average subloan amount (US$) 4,090 6,652 162Investment cost/ha vineyard (US$) 4'435 5,900 133

On-farm Investments - Aanual Crops

9.12 One of the key intentions of the project was to bring in Bolivianinstitutions other than BAB to participate in farmer credit programs. Not onlywas the attempt to interest commercial banks in development lending for beefunsuccessful, but, also, the involvement of the DESEC cooperative movementfailed to materialize. At appraisal, DESEC was to be the major intermediaryfor channeling funds for improvement of annual cropping among small farmers inthe Cochabamba valleys. DESEC established and continues to operate an inte-grated system of marketing, technical assistance and planning among smallscale farmer associations. Under the project, this organization planned toassign nine staff to assist project beneficiaries on the basis of a commissionfrom the participating credit institutions. However, a misunderstanding arose(or existed from the beginning) between DESEC and the ALPD over the roles ofeach, the method of sharing the financial costs and benefits involved, and theamount of off-farm investment for cooperative groups. After a six-months'delay, the ALPD managed this credit line without DESEC's involvement.

9.13 This component deviated the most from project intentions. Nooff-farm items such as warehouses, trucks and other group marketing facilitieswere purchased and the cooperative aspect was considerably diminished.Eventually, 22% of beneficiary farmers received subloans in groups. Itis interesting to note that farmers preferred to make relatively small invest-ments in items shared by a few, such as teams of working bullocks, than inlarge cooperative facilities shared by many, such as the warehouses and trucksenvisaged As shown in Table 9.7, the considerable underestimation of perhectare costs by four-fifths resulted in the achievement of only 15% of thearea and 18% of the number of subloans proposed.

Table 9.7 - Annual Crops Component - Basic Indicators


Number of subloans 1,800 327 18Average area of subproject (ha) 2 1.6 80Total area (ha) 3,600 531 15Average subloan amount (US$) 406 1,782 440Investment cost/ha (US$) 202 1,100 545

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There are two reasons for this underestimation. One is the fall in popularityof oats and wheat and the rise in demand for potatoes in response to relativeprofit shifts. The cost of potato growing is much higher, resulting in no

demand at all for grain investments. Second is the unexpected demand for farmoxen. Some 69% of the farm credit was used for potato growing (Table 9.8) and20% for purchase of oxen, used mostly in land preparation for potatoes. Theother 11% bought spraying equipment, tractors, trucks, mules and buildings.Most of these were for use in potato growing. Of the total of subloans given,88% went to small farmers having less than 6 ha under irrigation or 12 harainfed for a total of 76% of the funds. Diversion of funds reached 16% ofthe total.

Table 9.8 - Annual Crops, Items Financed

Number of Subloans Amount %(US$)

Potato cultivation (ha) 531 403,000 69Working oxen 458 117,000 20Spraying equipment 105 15,000 3Tractors 2 20,000 4Trucks 1 10,000 1.5Mules 63 14,000 2Buildings 7 3,000 0.5

Technical Assistance

9.14 Of the Project Unit's 90 member staff, 42 were classified as techni-cians being veterinarians, agronomists or others. Because of the inadequacyof Bolivia's extension service, something less than 10% of farmers everreceive technical assistance. For most project beneficiaries, ALPD technicalstaff provided the only extension they were receiving. Because of the numberof beneficiaries, their geographical dispersion, the range of crops coveredand the need to be involved in project administration, services were thinlyspread.

Project Monitoring

9.15 The Project Unit was set up under Credit 107-BO, First LivestockProject, and continued to manage the Second and Third Livestock Projects.Because of the need for tighter subloan supervision and better analyticalpreparation for follow-on projects, the Unit was expanded and strengthened.A focal point was the inclusion of a project monitoring group for systenaticdocumentation and field evaluation of the program. One headquarters' techni-cian worked fulltime on monitoring, with parttime assistance from field staff.For 1979 and 1980 farms were sampled to measure project impact. Much of thedata in this report is a result of the monitoring group work and, on completionof their analyses in 1981, a firm basis for future credit projects will beavailable.

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Agricultural Experimentation

9.16 The sum of USS100,000 was provided to support the work of CIAT(Centro de Investigation Agricola Tropical) at Saavedra, north of Santa

Cruz. The objective was to assist in research, experimentation and extensionin pasture and livestock management, especially in the newly cleared areas.The use of these funds was approved by IDA on March 31, 1977, after receiptof CIAT's research prog-cam and evidence of a capital contribution of US$100,000by the Bolivian Government to the Center. Because of problems with local procure-ment procedures necessitating amendment of the Credit Agreement, disburse-ments were held up until the end of 1978. Most of the funds were used forfarm machinery, which, Dn inspection, was gainfully used and well maintained.However, no defined plan was ever drawn up by IDA or CIAT as to how theresults of the investment were to be evaluated. IDA's contribution canbe seen only as a part of the total support coming to CIAT from the Governmentand other agencies, such as the British mission. The results of CIAT's workhave been generally less than expected because of lack of local support, andthis is the most that can be said for this component.

Land Titling

9.17 Following the recommendations of the consultant study of land tenure,financed under the First Livestock Project and costing US$133,000, assuranceswere obtained from the Government of budgetary support for a high priorityto the land titling program. In the northern Santa Cruz area and the Altiplano,the lack of titles was a serious impediment to obtaining development credit.However, the support which the Government was able to give was insufficientand the increase in the number of titles has been only 27,000 during theproject life, from 566,000 to 593,000. This amounts to an annual increaseof 1.5%. During 1980, the titling process almost ceased.

Project Auditing

9.18 In general, the audits of the project accounts were satisfactory.However, they suffered from a lack of continuity due to the Bolivian lawrequiring a different external audit firm each year. Retention of the samefirm for more than one year at a time would have improved the overall result.

X. PROJECT IMPACT

Production Effects

10.01 The rates of return on individual farms that complied with farmplans were generally acceptable, but less than anticipated. Table 10.1 listsrates calculated from actual farm data sampled by the project monitoring unit.Grape returns of 26% to 49% exceeded the 27% anticipated due to the steep risein prices paid to producers as demand from the wine industry expanded. Smalland medium beef producers realized 9% to 17% compared with the 22% expected,whereas the larger properties seemed to give a slightly better result, butstill somewhat lower than the appraisal value of 22%. Returns on sheepactivities also at 13% to 18% were below the expected 27%. Although adversechanges in cost-price relationships may be claimed for the shottfall, the moreplausible reason is that the original estimates were a little overoptimisticsince the actual returns achieved are in the range normally encounteredelsewhere.

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Table 10.1 - Rates of Return Based on Actual Farm Data

Component Appraisal Estimate Actual Recalculation

Grapes 27 26-49

Beef 22 small size 9.4-16medium size 9-17large size 15-17

Sheep 27 13-18

Annual crops 13 N.A.

10.2 The overall rate of return for the project as a whole, which isthe weighted average of all investments properly made, plus others notcomplying with plans, is not yet available. The monitoring unit is processingthe sample survey results and a report is due in late 1981. However, it isexpected to be less than the individual returns above indicated for threereasons. First, beneficiaries in arrears may be considered as not realizingexpected profits because of a variety of reasons; second, some funds werediverted from intended use; and, third, the rate of investment was slightlyslower. For instance, grape growers in localities hit by the hail damage in1978 and 1980 would not have obtained these rates of return whereas those notso afflicted would receive high rates inflated by the shortage. Also, theappraisal expected a faster rate of investment not reached.

Year 1 2 3 4 5

Percent expected 42 46 8 3 1Percent realized 37 28 24 7 4

10.03 No significant technological changes were introduced by theproject. The support to experimentation produced little that could be ofimmediate use to the beneficiaries involved.

Income Effects

10.04 The total number of beneficiaries the project hoped to reach wasaround 4,850. Those actually participating totaled 1,560, receiving 1,139subloans, some as groups. Because many members of groups were married toeach other, the number of beneficiary families is probably little are thanone-quarter anticipated. From these may be subtracted those considerablyin arrears, who, for various reasons, do not consider the benefits receivedworth paying for. For instance, samples taken from farm supervision reportsoccasionally showed herd numbers being less after four years of projectparticipation and the property owner in arrears. On the other hand, on-farminspections showed ample evidence of the benefits received by those complyingwith the agreed investment plans. In particular, the access to credit whichsmall farmers were able to get for the first time was an important equitygain.

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10.05 The income characteristics of the beneficiary farmers in differentfarm activities are interesting and worth noting. Of the eight grape growerswhose files were sampled at random, four were lawyers, of whom two ownedhotels, two owned factories and two were fulltime farmers with no off-farmincome stated (Table 10.2). Of the nine beef property owners sampled, sixwere absentee owners with off-farm income greater than farm incomes. Incontrast, none of the sheep growers or annual crops beneficiaries sampled had

assets or income other than those related to their farms. In addition, thegrape grower receiving the largest loan among the sample was not eligible fora loan at all since he possessed 10 ha planted in grapes. The Credit Agreementstates: "No farm loan will be made to any grape grower with a farm exceeding4 ha of area," (Schedule 3, Part B, 1(ii)). It must be stressed that this 3%sample may well not prolerly reflect the characteristics of the beneficiary

population as a whole, but it tends to support a perspective built up fromother experience.

Table 10.2 - Some Characteristics of a Small Sample

Farm Type Net Farm Income Average Loan Amount Fulltime Farmers

(US$ (US$)

Grapes 0-36,000 4,000-46,000 2 out of 8Beef 3,000-15,000 12,000-36,000 3 out of 9Sheep 100-2,000 500-4,000 allAnnual crops 800-6,000 700-7,000 all

10.06 Not only are the efficiency and equity effects smaller thananticipated, but the lUck of follow-on credit will not sustain most of thegains realized. At project closure, considerable leakage from the creditprogram was occurring due to: (a) non-collection of arrears; (b) failure ofthe Government to supply its counterpart funds, as agreed; and (c) executiveorders from BAB to ALPI) directing US$610,000 equivalent from recuperations

to purposes contrary to the intent of the project. At the same time,genuine farm credit needs could not be met. Under Section 3.07 of theCredit Agreement, Article III, such recuperations are required to be paid tothe Central Bank, which, after deducting the amounts needed by the Borrowerto service the credit, is to use the balance for further lending for thesame purpose under teras agreed to with IDA. No debt service is yet duefrom the Borrower to IDA.

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XI. SPECIAL ISSUES

11.01 Both projects experienced many of the difficulties common to creditprojects, such as cost increases, land titling deficiencies and institutionalweaknesses. However, four problem areas are noted here as special issuesbecause they have existed since the beginning of IDA's involvement inBolivian agriculture in 1965 and are still germane after four projects and15 years of effort to solve them. In addition, the three ongoing ruraldevelopment projects share the same impediments and the processing of afollow-on credit project is stalled for similar reasons. These issuesconcern:

(a) the commitment of the Government and its ability to complywith covenants agreed to;

(b) BAB and its competence as a development bank;

(c) the Project Unit, ALPD, and its appropriate role; and

(d) IDA and the choice of development strategy to pursue inBolivian agriculture. Undoubtedly, the major issue hasbeen institutional.

Government Commitment - Counterpart Contributions

11.02 During negotiations of both projects, the Government agreed to aseries of covenants in which it undertook to provide counterpart funds,restructure BAB and agricultural lending, restructure the beef industryand accelerate its land titling program. Despite partial compliance, theobjectives of the covenants were not reached and the deficiencies remain.Part of the difficulty may well be that the covenants required much thatthe Government was unable to do.

11.03 The Project Performance Audit Report for the First and SecondLivestock Projects (October 11, 1974) had mentioned delays in provision oflocal funds to these projects. Although a general covenant obliging theGovernment to make counterpart funds available (Section 3.01(a)) wasconsequently included in the Credit Agreement for the Third LivestockProject, shortage of funds continued to be identified as the main problemfor the project (July 9, 1974). IDA wrote to the Government on July 19,1974 and requested it not to submit withdrawal applications untilUS$1.0 million had been transferred to BAB and the indexing question wassettled. The transfer was eventually made but BAB's ability to providelocal funds continued as a problem. In June 1975, the Credit Agreement ofthe First Agricultural Credit Project included specific provisionsrequiring capital subscription of US$4.3 million (3.01(c)) plus US$0.56for subloan counterpart contributions (3.03(ii)). At completion, theGovernment had transferred US$4.3 million in total, leaving a shortfall ofUS$0.56. In addition, the Government agreed (3.04) to make up.the short-fall in counterpart funds expected from the private banks. Since such

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participation was small and restricted to one bank, the required Government

contribution was US$822,000. No payments were made on this account. During

the period 1978-1980, the Project Unit was so short of counterpart funds it

had to wait for recuperations before making disbursements, even though this

was in contravention of Section 3.07 of the Credit Agreement (561-BQ) requiring

recuperations to be repaid to the Central Bank.

Government Commitment - Restructuring BAB and Agricultural Lending

11.04 One of the first questions concerning the preparation of the

Agricultural Credit Prcject was whether or not BAB was an appropriate lending

channel, given IDA's experience with the Livestock Projects. In 1968, a

a consultant firm. studied BAB's accounting system and proposed changes. The

supervision report of February 24, 1969 of the ongoing Livestock Project

related that the reorganization of the accounting system had started. A

report of October 2, 1973 concerning a Bolivian delegation's meeting with Mr.

Alter (RVP) stated that the reorganization would now take much longer than

anticipated. The delegation inquired if IDA would consider implementation of

the proposed Agricultural Project by the Agricultural Development Fund of the

Central Bank. This course was rejected on the grounds that a major objective

of the project was the long-term improvemnt of BAB. An earlier proposal to

split BAB into two regional banks had also been considered (261-BO Supervision

Report, January 3, 1973).

11.05 A decree reorganizing BAB was promulgated on July 26, 1974, but was

not implemented to any substantial degree. As detailed in para 4.14, IDA

agreed to finance under the Livestock Project another study for reorganization

of BAB as a condition ':or presentation of the Agricultural Credit Project.

This study was done and the recommendations were approved in 1976. By late

1978, although a "partial" reorganization had been implemented, BAB's situation

continued to worsen.

11.06 In 1979, USAED, as a condition to a proposed grant and loan to

BAB, requested another reorganization study. This study was only partially

completed. In 1980, IDA requested yet another study of BAB as a conditionof processing a follow-on Agricultural Credit Project. The study was

completed in 1980 and a commission was formed to study the report. Its

findings are yet to come.

Agricultural Lending Policy

11.07 The reason for BAB's recurrent difficulties has been the lack of

a sound agricultural credit policy on the part of the state. The interest

rates fixed by the Government for subloans are not sufficient to cover BAB's

cost of borrowing and administration. In addition, liberal rescheduling and

subloan writeoffs constantly erode BAB's capital. Moreover, most of BAB's

borrowings are in US dollars, whereas it relends in Bolivian pesos. As a

result, the devaluations of 1972 and 1979 increased the difference between

BAB's obligations in US dollar amounts and the dollar equivalent of pesos

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owed to it at the new exchange rate. Since it is a matter of public policythat BAB should absorb the losses, IDA insisted on indexation of outstandingsubloan balances for beef and grape subloans.

11.08 Borrowers were given the choice of (a) adjustment by the ratio ofthe new to the old exchange rates on the occasion of a devaluation; or(b) adjustment by the annual change in the La Paz Consumer Price Index eachyear. All chose the "dollar clause" option. Following the two devaluations,the adjustments were made after protracted disputes. However, many beneficia-ries simply responded by defaulting on repayments. Table 11.1 is a summary ofBAB's financial performance during the period 1978-1980. In 1978, interestincome covered less than one-half that year's expenses, with similar lossesin the following years. In summary, expenses are running from 17% to 22%of the loan portfolio whereas income is only some 10% to 11%.

Table 11.1 - Financial Performance of BAB

1978 1979 . 1980 (Est.)--------- ($b millions) -----------

Loan Portfolio 1,114 1,598 1,957

Income 127 160 209

Expense:

Administration 101 105 124Interest 100 85 111Loan writeoffs 53 43 72Other 1 45 27

Total 255 278 334

Operating loss 128 118 125

Ratios: income/loan portfolio 0.11 0.10 0.11expense/loan portfolio 0.22 0.17 0.17

Source: Appraisal of Santa Cruz Agricultural Development Project.

11.09 A special feature of the project was the setting up of a projectmanagement unit to provide, among other things, close supervision ofsubloans. Table 11.2 shows that, at the project closing date, some 20% ofsubloans were overdue and, of these, 19% are in the process of legal actionfor recovery. The figures range from 13% for the Agricultural Credit Projectto 30% for the Third Livestock Project. The difference is said to be due tobetter selection of clients.

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Table 11.2 - Status of Subloans December 31, 1980Classification of Portfolio by Percent

Total Normal Overdue Under One Year In Legal Process

561-BO 100 86 1 13

261-BO 100 69 1 30

107/171-BO 100 78 5 17

Total 100 80 1 19

Of the first two livestock projects, all the overdues in process for recoveryare for beef. In the Third Livestock Project, the beef overdues total 31% ofthe portfolio and sheep, 24%. A distinct improvement is shown in the Agricul-tural Credit Project with improved management performance of the Project Unit.Beef overdues fell to 13%; sheep, to 4%; and annual crops to 9%. Grapedefaults were the highest in this credit, at 19%. The only class of subloansfor the whole program with repayments that can be considered satisfactory arethose for sheep in the Agricultural Credit Project. In reality, the arrearssituation is probably worse because of rescheduling unpaid debt.

BAB and Alternate Lending Channels

11.10 From the history of attempts to reform BAB, it is clear that struc-tural reorganization without basic changes in public policy for agriculturallending has brought no more than marginal gains. Until the Government allowsBAB to: (a) set interest rates that cover the cost of borrowing; (b) takeeffective legal action to recover overdues; (c) discriminate in its choice ofclients; and (d) rationalize its numbers and use of staff, efforts to improveBAB's performance at the level of field supervision and accounting systems arebound to have limited impact on the institution's overall worth as the majorchannel for farm development credit. Over the years, it appears that the manygovernments have been unwilling or unable to make the required changes.Besides debilitating BAB, the interest rate policy has led to disinterest onthe part of commercial banks to be involved in agricultural developmentlending, thereby reducing the flow of funds to the sector. Under the Agricul-tural Credit Project, a serious attempt was made to involve these banks and 10signed Supplemental Agreements to become participating banks. However, onlyone commercial bank actually participated and granted just 19 subloans out ofa total of 1,139. This bank had no problems with arrears and, although it didnot supply detailed da:a as requested for the Completion Reports, its executivesexpressed complete satisfaction with the program and wished to be involvedin future operations. The key difference was that this bank was able tochoose its clients primarily on the basis of creditworthiness and the costof subloan administration. As a result, the average subloan size made wasUS$30,000 compared with the average figure of US$13,000 made by BAB to thiscategory for beef deveLopment.

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The Project Unit, ALPD and its Role

11.11 The Project Unit was established in 1968 to manage the firstlivestock project between IDA and BAB. It was subsequently expanded tocope with the changing scope of the follow-on projects (para 9.14). Theinitial directors were expatriates but were replaced by local staff whenit proved impossible to find a suitable international recruit for the start ofthe First Agricultural Credit Project in 1975.

11.12 The performance of the ALPD has been mixed. On the one hand, theunit has not been able to bring down the level of arrears to an acceptablefigure nor is the technical assistance it gives adequate. On the otherhand, its achievements are considerable in bringing the concept of supervisedfarm credit to such a difficult area as the Beni and extending it to smallsheep farmers in the Altiplano whose attractiveness to credit institutions isnegligible. The consensus of the 30 or more supervision reports written sincethe program began with the First Livestock Project is that the deficiencies ofthe ALPD's performance are due to a lack of training and exposure rather thanto any shortage of dedication and ability. It is noteworthy that the perfor-mance of the Project Unit seems to have been the same under local directors asunder expatriate directors. The critical factor in determining the unit'sperformance is that the task set has been too much for the resources provided.First, in the absence of a functioning national extension and research apparatus,the Project Unit could not be expected to fill the vacuum across the range ofactivities eventually financed and across wide geographical diapersion ofbeneficiaries. Second, the ALPD, as a department within BAB, has been subjectto the same general policies and problems with which that institution isbeset. Any real progress in the ALPD's performance will depend on either theprogress of the institution-building of BAB as a whole or on placing the ALPDin another institution altogether, such as the Central Bank.

11.13 In contrast to BAB's overall losses, the ALPD was able to show amodest profit of 5% on its operations with the Agricultural Credit Project.This was achieved in spite of BAB's insistence that the ALPD absorb the 50%to 100% of the cost of various personnel whose participation in the projectwas minor. At the time of appraisal of the Agricultural Credit Project, itwas intended that the ALPD should be absorbed into BAB's general operationswithin 18 months. This was not done because of the failure of BAB to reachthe minimum institutional development goals required to be able to absorbthe ALPD without a negative impact on project performance.

IDA Performance and Project Concept

11.14 After the relative success of the first two livestock projects,which were simple in concept and design, it became clear that factors otherthan simply shortage of credit were responsible for the slow development ofthe beef industry. At about this time, IDA's own ideas about incomedistribution effects of projects were rapidly finding expression in projectdesign. As a result, the follow-on projects also sought to restructure themarketing system for beef in the hope that changes would be a stimulus toproduction. At the same time, more effort was put into a reorganization ofBAB and its interest rate policies in the hope that its improved ability

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would ensure a reliable delivery of credit to farmers. In addition, theinclusion of areas other than the Beni, the extension of coverage from beefto small farmer activities such as sheep, annual crops and grapes, and thefocus on the farm size of intended beneficiaries sought to redress imbalancesin regional development and income distribution.

11.15 The concept was logical but the question remains as to whether itwas overly ambitious, given the limited capacity of the institutions concernedand the primitive state of developent of the Beni. Also, these secondaryobjectives were important enough of themselves to warrant another means ofachievement than as side conditions in credit projects. For instance,the treatment of beef profitability as a function of state producer priceintervention to be resolved by a study to set the "right" price is questionable.At no stage was it shown that producer prices were "wrong" with respectto public policy objectives. For instance, a comparison of the domesticproducer price index for the period 1973 to 1978, given in Annex, Table 5,with the world price index, shows that adoption of world parity prices wouldhave resulted in instability. The view that Bolivian producer prices wereunusually low was gained because world prices were climbing during an upswingof the cyclical trend at the period of preparation of the Third LivestockProject. This view prevailed even during the dramatic fall in world pricesthat resulted from the oversupply because world prices were not "right" forlong-run equilibrium. Second, the changes proposed in the studies involvedadded costs. No analysis was made as to who would bear these extra costsamong producers, consumers and Government, how they were to be financed, andwhat the welfare implications would be. In other words, a more comprehensivetreatment was required and it is not altogether surprising that the Governmentdid not act within the required nine months after receipt of the consultant'sstudy. The supervision reports did not consider these aspects but took asomewhat antagonistic view toward the Borrower's failure to act, an attitudethat was not justified, given the uncertainties.

11.16 The four credit projects financed six studies costing almostUS$1 million. In general, they generated a lot of data and helped quantifysituations known to ex2ist, but the effective results have been few. Nochanges were made as a result of the land titling study, recommendations ofthe study of BAB were only partly implemented and the meat industry studiesproduced no changes. From these experiences, it seems clear that IDA'sexpectations of what a study can achieve were unrealistic. However, thestudies were neither unjustified nor failures. They provided factual basison which to structure subsequent discussions. Since their recommendationscould only be partial, the real failure was the lack of subsequent dialogbetween IDA and the Borrower to modify those recommendations to fit thegeneral system. The distinct impression gained from the correspondence aadreports is that neither IDA nor the Borrower was prepared to do this, butreached "stand-offs" over consultant's recommendations that were not imple-mentable, as given. For instance, nine months after the receipt of themeat marketing study in 1974 was not an opportune time to change the Borrower'sprice policy (i.e., increase prices) to stimulate exports as required by thecovenants. The price of beef in world trade was at an all-time low and anactual producer price reduction was warranted in Bolivis for World parity.Subsequent events showed that it was not prices but the inability to reach

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international trade standards that caused the loss of export markets to Peruand Chile. 1/ Producer price increases would have been regressive incometransfers and would not have overcome the export problem.

11.17 In conclusion, the lesson learned is that studies have a valuablerole to play in development but care needs to be taken as to when studiesare to be used, what they can achieve, and how the recommendations are to beapplied. It is also questionable as to whether a production credit projectis the appropriate vehicle to which to attach a requirement for restructuringa major industry with all the implications for required changes in macro-economic policy.

Targets

11.18 The achievements of both projects in terms of reaching numericaltargets differed markedly from those expected at appraisal. This was notdue to any deficiencies in design but to the nature of credit projects thatcover many enterprises and regions. The period 1968-1980 covered by theprojects was unprecedented in international price instability and localprice inflation. Accordingly, the structure of demand, the cost of invest-ments financed, and the number of subloans adjusted to current conditions.For example, at appraisal of the Agricultural Credit, sugar prices were highbut, by the time subloans began, the sugar industry was in a major slump andno subloan applications were received. Because of these factors, the appraisaland supervision missions concentrated on the policies, procedures and financialperformance of the institutions involved rather than field-level development.Because of this, there has been a tendency to look at project problems as afunction of the institutions rather than as farm problems caused by conflictbetween what the project was trying to do and what made sense to the sub-borrower. The sole criticism of IDA's performance made in the CompletionReport of the Project Unit was that supervision missions tended to give littleweight to the technical aspects of the difficulties encountered by the program.

XII. CONCLUSIONS

12.01 Although implementation of both projects encountered numerousdifficulties, the problems arose precisely because they tackled basicdevelopment issues in Bolivia. In addition to providing funds for farminvestment, they were used as a means to change agricultural credit policiesand procedures. The Livestock Project also sought to restructure the entirebeef industry and the agricultural Project extended beneficiary coverage andfocused on poverty alleviation. Because of the failure to attain specifiedtargets, it would be easy to take an overly negative view of the results of

1/ FAO/CP Preparation Report No. 18/78 BOL.10 for a Meat Industry Projectin Bolivia, 1978.

- 57 -

the program that is not warranted. The acceptance of indexation, theagreement to accept chattel mortgages and the building of the ALPD wereimportant gains. Although certain features of the projects, as appraised,could be brought into q,aestion, the view is held that the results would havebeen much the same under any system of project design. The limiting factorin the failure to achieve the institution-building and beef industryrestructuring goals was the Government's unwillingness or inability to followthrough. The studies, in general, gave a good analytical basis for neededreforms that is still valid.

12.02 The Government's failure to act may have been due to the partialtreatment given by the recommendations. For example, the consumptionimplications of meat producer price rises were not followed through in thestudies. Given the best intentions in the world, it is difficult to see wherethe state should begin to tackle macro-economic reforms based on partialmicro-economic analysis. Although projects are appropriate vehicles forfinancing studies, the implementation of study results should not be acondition of the same project. Implementation of recommendations of studieswith wide implications are probably best left to the new Structural AdjustmentLoans.

12.03 The results of the four agricultural sector credit projects suggestthat future projects should be limited in the number of objectives eachcan pursue. The closure of the Third Livestock Credit Project was delayed bythree years because of the beef studies, which are still not completed 1/ norare likely to produce changes. Second, the infrastructure deficiencies inBolivia impose special burdens on supervision. This has become a chronicproblem in the Beni where floods, lack of roads and absentee ownership makeregular and effective supervision unusually difficult and costly. Moreemphasis would be placed on initial creditworthiness, previous credit historyand the pursuit of a more vigorous policy on collection of payments due.The experience with the one commercial bank that cooperated in the FirstAgricultural Credit Project indicates that Beni beef development would bebetter handled as commercial credit. Third, the lack of a functioning researchand extension system necessarily requires modest goals in improving farmtechnology for a supervised credit project covering diverse enterprises,regions and target groups. The alternative is either to bear the high costneeded for effective results, which would probably be best left for a specificextension project, or to reduce the coverage. In summary, the experiencessuggest that the major objective of a follow-on project should be to developBAB into a reasonably strong and financially autonomous credit institution inorder to ensure a continued flow of credit to the agricultural sector ofBolivia.

1/ Execution of the Eecond marketing study to cost US$250,000 was passed onto the UNDP to allow closure of 261-BO.

ANNEX 1Table 1

BOLIVIA

THIRD LIVESTOCK CREDIT PROJECT (CREDIT 261-B0)

Beef - Subloan Classification by Size

Classification Number of Loans % Amount %(US$)

0-2,500 41 7 51,789 12,500-5,000 254 45 966,023 155,000-10,000 99 17 889,700 1410,000-15,000 45 8 573,216 915,000-25,000 74 13 1,361,170 2125,000-50,000 41 7 1,392,300 2250,000-75,000 16 3 1,143,800 18

Total 570 100 6,377,998 100

Source: PCR of ALPD.

Table 2

Sheep- Subloan Classification by Size


0-2,500 8 .7 16,740 1

2,500-5,000 14 13 47,630 35,000-10,000 21 20 190,639 1110,000-15,000 23 21 326,667 18

15,000-25,000 20 19 474,607 2625,000-50,000 19 18 617,977 3550,000-75,000 2 2 111,395 6

Total 107 100 1,785,655 100


- 59 -

ANNEX 1Table 3

BOLIVIA


Beef - Subloan Classification by Size


0-2,500 22 5 57,157 12,500-5,000 144 31 608,505 105,000-10,000 .70 15 499,548 910,000-15,000 79 17 1,002,323 17

15,000-25,000 97 21 1,858,309 3125,000-50,000 54 11 1,896,023 32

Total 466 100 5,921,865 100


Table 4

Grapes - Beneficiaries' Grape Area Before Subloan

Total Tarija CochabambaNumber of

Area in Hectares Beneficiaries % Number % Number %

0 116 68 106 62 10 61 35 20 33 19 2 1

2 16 4 6 4 - -3 2 1 2 1 - -

4 4 2 4 2 - -

5, 6 2 1 2 1 - -

Greater than 7 6 4 5 3 1 1

Total 171 100 158 92 13 8


- 60 -

ANNEX 1Table 5

BOLIVIA


Index of Meat Prices

(1973 = 100)

1/ 2/World Price- Bolivian Price-

1968 431969 411970 471971 571972 681973 100 1001974 83 1331975 45 1331976 53 1341977 56 1401978 64 156

1/ Composite World Indicator Price Index.2/ Index computed from official producer price series.

4

1

BRD 1241SEPTEMBER 1974

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.:-- Radroads

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BOLIVIA

THIRD LIVESTOCK DEVELOPMENT PROJECTPROJECT AREAS

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RT A N B R

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Documents

World Bank Document...Supervision II )4/72 2 1 - - - Supervision III LO/72 2 1 - - - Supervision IV )2/73 1 2 - - - Supervision V 31/74 1 1 2 1 T, P Supervision VI )6/74 1 1 3 3 M,