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1 Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY : Report No PA Public Disclosure Authorized Public Disclosure Authorized STAFF APPRAISAL REPORT PARAGUAY SEVENTH LIVESTOCK DEVELOPMENT PROJECT Public Disclosure Authorized December 9, 1983 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Local Currency Unit = Guarani (G) Official Exchange Rate US$1 = G 126 Bank Disbursement Rate US$1 = G 160 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS BNF - National Development Bank CAH - Small Farmer Rehabilitation Credit Agency CB - Central Bank CNCA - French National Savings Bank for Agricultural Credit CREDICOOP - National Credit Cooperative, Ltd. DIAF - Dept. of Agriculture and Forestry Research FECOPROD - Federation of Producers Cooperatives FG - Livestock Fund FONPLATA - Financial Fund for the Plata Basin Development IBR - Rural Welfare Institute IDF - Industrial Development and Finance MAG - Ministry of Agriculture and Livestock OPEC Fund - Development Fund of the Organization of Petroleum Exporting Countries SEAG - Agricultural Extension Service GOVERNMENT OF PARAGUAY FISCAL YEAR January 1 to December 31

3 FOR OFFICAL USE ONLY PARAGUAY LIVESTOCK DEVELOPMENT PROJECT Staff Appraisal Report Table of Contents Page No. I. LOAN AND PROJECT SUMMARY... 1 II. AGRICULTURAL SECTOR.. 3 A. General Characteristics... 3 Background. 3 The Livestock Subsector. 3 Marketing and Prices... 3 Research and Extension... 5 Agricultural Credit. 5 Bank Group Involvement. 7 III. THE PROJECT. 8 Background... 8 Objectives and Description. 9 The Lending Program. 9 Institutional Development The Project Executing Agency Project Execution Lending Terms and Conditions Project Costs and Financing Procurement Disbursements Accounting and Auditing Monitoring, Evaluation and Reporting Financial and Economic Justification Project Justification Project Risks. 18 This report is based on the findings of an appraisal mission which visited Paraguay during April The mission comprised Messrs. J. Glenn (Mission Leader), J. Tellez (Ag. Economist), and A. Guzman (Financial Analyst). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 - ii - Page No. IV. DETAILED PROJECT FEATURES Detailed Project Costs and Financing Disbursements Financial Performance Indicators Livestock Production Indicators Environmental Impact V. AGREEMENTS REACHED AND RECOMNDATION..22 ANNEXES 1. FG's Operation, Organization and Financial Performance.24 A. Operations.. 24 B. Organization and Management.. 24 C. Lending Policies and Procedures D. Accounting and Auditing E. Loan Portfolio Control and Management..26 F. FG's Financial Performance.. 26 Historical Financial Performance.26 Projected Financial Performance.27 Chart 1 - Organization Chart.29 Table 1 - Financial Performance Indicators.30 Table 2 - Historical Financial Performance - Income Statement 31 Table 3 - Historical Financial Performance - Flow of Funds.32 Table 4 - Historical Financial Performance - Balance Sheet.33 Table 5 - Projected Financial Performance - Income Statement 34 Table 6 - Projected Financial Performance - Flow of Funds.35 Table 7 - Projected Financial Performance - Balance Sheet Farm Models and Financial and Economic Justification..37 A. Farm Models Large-size Beef Ranch.37 Mediumrsize Beef Ranch.37 Small-size Dairy Farm.38 Credit for Fattening.38 B. Production.. 39 C. Markets D. Prices and Taxes.. 42 E. Financial and Economic Justification.. 42

5 iii - Page No. Table 1 - Model I - Beef Ranch - Technical Coefficients Table 2 - Model I - Investments Table 3 - Model I - Cash Flow Table 4 - Model I - Financial Results and Sensitivity Table 5 - Model II - Beef Ranch - Technical Coefficients Table 6 - Model II - Investments Table 7 - Model II - Cash Flow Table 8 - Model II - Financial Results and Sensitivity.. 52 Table 9 - Model III - Dairy Farm (80 ha) Table 10 - Model III - Investments Table 11 - Model III - Cash Flow Table 12 - Model III - Financial Results and Sensitivity.56 Table 13 - Stock and Destinations of Beef Cattle.57 Table 14 - Beef Prices Previous Bank Agricultural Projects and Performance Selected Documents and Data Available in the Project File.62

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7 PARAGUAY SEVENTH LIVESTOCK DEVELOPMENT PROJECT I. LOAN AND PROJECT SUMMARY Borrower: Beneficiaries: The Republic of Paraguay. Livestock Fund (FG). Loan Amount: US$25.0 million. 1! Loan Terms: Relending: Project Description: 17 years, including four years of grace, at the standard variable interest rate. The local currency equivalent of the Loan's proceed would be et-lent to FG at an interest rate of 0.5% above the Bank rate for repayment in 17 years, including four years of grace. The Government of Paraguay would bear the foreign exchange risk. The project aims to increase livestock output, for which the country has a comparative advantage, thereby increasing the incomes of agricultural producers and the export earnings of the country; and strengthen the administrative and technology transfer capabilities of FG. It would provide subloans to about 350 large-scale ranchers with holdings in excess of 2,500 ha; about 700 medium-scale ranchers with 250 to 2,500 ha of land; about 225 specialized small-scale livestock producers, especially dairy farmers, with holdings up to 250 ha; and some 445 cattle fatteners. Funds would be provided for purchase of feeder steers and on-farm investments in: (a) pasture establishment, improvement and subdivision; (b) provision of watering points; (c) infrastructure in livestock handling facilities; (d) purchase of breeding cattle; (e) destumping of arable land; and (f) purchase of machinery and equipment. The project is expected to have an important impact on increasing production and productivity of the livestock industry and augmenting the export earnings of the country. It is expected that aggregate production of beef would be increased by 121,000 tons and that of milk by 10.4 million liters. (It is estimated that three fourths of the incremental meat products would be exported.) The technical and administrative capacity of FG would also be strengthened. Previous Bank experience in the sector with FG, as well as the market prospects for live cattle in Brazil and the recent increase in export of processed beef to countries in Latin America and Europe, would indicate that risks are minimal; however, given the importance of international markets for establishing farm-gate prices, a significant drop in prices in these markets could reduce demand for term credit. 1/ A "B" loan for US$15.0 million is being considered.

8 -2- Estimated Costs: Local Foreign Total (US$ million equivalent) Investment Program a/ Technical and Administrative Services Total b/ Local Foreign Total (US$ million equivalent) Project Financing Plan Bank Loan b/ FONPLATA "B" Loan Livestock Fund FG Borrowers Estimated Disbursements c/ Total Bank FY: (US$ million) Bank Loan Annual Cumulative a/ This includes about US$10.1 million in taxes and duties. b/ Includes front-end fee of $0.06 million. c! Based on effectiveness in June Economic Rate of Return: 27% to 39% (range of farm models' ERRs). Map: IBRD No

9 II. THE AGRICULTURAL SECTOR Background 2.01 Agriculture is the most important economic activity in Paraguay, accounting for about 30% of GDP, over 95% of the country's total exports, and nearly half of the employment. Seventy percent of the total population of 3 million lived in rural areas in The sector supplies most of the products needed for domestic consumption except for wheat, dairy products and fruits, which are imported mainly from neighboring countries. The Eastern region, with good soils and well distributed rainfall, is the principal crop production area and accounts for over 97% of the population and GDP and comprises pasture, crop and forested areas. The Chaco area, to the west of the Paraguay river, generates only 1.5% of the agricultural production, mostly from extensive livestock ranches Much of Paraguay's land area is most suitable for livestock production. In some areas such as the lower Chaco and the south-central part of the country, low soil fertility and/or low, poorly distributed rainfall, only allow extensive livestock raising. In other areas, where soil fertility is high, extensive livestock production is now practiced due to the low rainfall. In the extreme southeast, there are areas with crop potential for production but the investment costs to drain frequently flooded lands would be prohibitively expensive under present conditions. Parts of eastern Paraguay remain in livestock production for lack of adequate transport infrastructure. The Livestock Subsector 2.03 Cattle is the most important class of livestock in Paraguay. Smaller species such as poultry, swine and sheep have relatively little importance although the country is generally self-sufficient in eggs, poultry and pork. It is estimated that the average annual growth rate of the livestock subsector has been between 3 and 4% during the s. Reliable data on total beef production however, are not available because of non-registered slaughter for consumption in the interior and the non-registered sale of live cattle to Brazil for fattening or slaughter. Local trade estimates indicate that up to 300,000 head may have been marketed to Brazil in peak years, such as those from 1978 to The potential of the subsector by far exceeds present production levels. The incorporation of better, already tested and known management and technological practices could rapidly increase production in the medium-term with economically feasible investments. However, any significant increase will require a change in attitude of the traditional producers; relatively stable export demand for cattle or processed beef at attractive viable prices; and the availability of financing, research data and technical assistance. Marketing and Prices 2.05 In general, the marketing of agricultural products in Paraguay has been free from Government regulations, and the prices for most products are

10 - 4 - determined by domestic supply and demand and external market conditions, especially in Argentina and Brazil. The only exceptions are the guaranteed price for wheat, payable at the mills, and reference, but not guaranteed, prices for sugar and cotton Domestic beef cattle prices have improved since the mid-1970s because of increased internal demand, installation of live cattle auction markets, improved quality and high demand from Brazil. Since the late 1970s, exports of processed meat have been declining, in part because of the overvaluation of the exchange rate. Registered exports of meat almost ceased at the exchange rate of G 126 = US$1, since exporters could not compete with the prices paid in the internal market or prices that could be obtained for unregistered live cattle sales to Brazil. Beginning in July 1982, Government approved a preferential exchange rate for processed beef exports, which in March 1983 was about G 190, increasing further to G 205 in May At these exchange rates, the exporting industry is becoming competitive and exports of processed beef are increasing Total milk production is insufficient even for Paraguay's low per capita consumption and is marketed mainly in the raw form through individual consumer distribution. The lack of an organized processing industry and competition from imported processed and dry milk have an important negative impact on prices to producers. Commercial milk production has been based on a temperate climate model using dairy breeds, mainly Holstein cattle, which requires costly feeding and management inputs. Recent investments in a milk processing plant by a Mennonite cooperative will provide pasteurized milk to Asuncion and there are plans to modernize one of the milk plants in Asuncion. The Ministry of Agriculture has requested funds from the Second Preinvestment Studies Project (Loan 1780-PA) to conduct a complete study of the milk industry, including production, processing and marketing. This study, in addition to cooperative investments and further technical assistance, should Lead to a rationalization of the industry Prices for pork products are low because of the lack of a significant processing industry and the low quality of animals produced. The production and marketing of poultry is controlled by a small number of producers and it is well organized The Government places high priority on the development of the livestock subsector in view of the comparative advantage vis-a-vis crop production in most parts of the country and the potential for increasing foreign exchange earnings Agriculture is subject to a tax on farm property of 1%. The value is established periodically with a supplement for large properties. A transfer tax cf G 1,000 (US$6.25) is levied on each head of cattle sold; also, slaughterhouses and meat processing industries are subject to a tax of G 1,025 per head. Agricultural inputs and products are free from sales taxes but import duties are significant and range from 59% on the c.i.f. price of generating equipment to 24% for most machinery and averages about 9% for the investment items contemplated in the project.

11 -5- Research and Extension 2.11 The Ministry of Agriculture and Livestock (MAG) is responsible for policy formulation and for administering support services. Its most important activities are research, extension and marketing and collection of agricultural statistics. There are two centers and six substations for agricultural research and three livestock research substations with a total staff of 73 professionals. While there have been some successes in crop research, there has not been much progress in the livestock sector because of limited funds and lack of trained scientists as well as inappropriate research directions. In part, lack of funding is the consequence of the long-term nature of livestock research, as compared to crop research which gives almost immediate returns. With the possible exception of pasture research, this deficiency will only be critical in the long term. The Bank is presently conducting a sector study which will consider the need for possible assistance ir. the area of research. The information gained by Argentina and Brazil in livestock research could prove to be ver-' seful to Paraguay. Improved technology has been imported, mainly from Brazil, but is incorporated haphazardly on a trial and error basis. This applies particularly to livestock. The extension service, with some 300 technicians, also suffers from lack of adequately trained staff and insufficient funding. The National Development Bank (BNF), with 93 agricultural technicians, also provides some extension services. Neither of these agencies has significant programs for livestock production. Private middlemen and suppliers are also sources of technology transfer, especially in the principal export crops and for disease prevention and control in livestock. The National University of Asuncion provides most of the advanced level agricultural education and some research. The Livestock Fund, strengthened by credit support from the Bank, maintains a task force of technicians for credit and technical assistance. They provide limited technical assistance, besides helping ranchers prepare investment plans and loan applications, supplemented by contracted private technicians. It is the only significant source of assistance to the livestock sector. Agricultural Credit 2.12 Institutional agricultural credit in Paraguay is provided by the general banking system and certain specialized entities. The banking system consists of the Central Bank, the Government-owned National Development Bank (BNF), 22 private commercial banks and the specialized public credit erntities comprise the Livestock Fund (FG) and the Small Farmer Rehabilitation Credit Agency (CAH). Farmer associations and cooperatives which are affiliated either with the National Credit Cooperative, Ltd. (CREDICOOP) or the Federation of Producers Cooperatives (FECOPROD) also act as credit intermediaries. Non-institutional sources are important in providing seasonal production credit and consumption credit to smallholder producers of cash crops BNF is by far the most important source of institutional credit to crop and mixed crop/livestock farmers in Paraguay. In 1981 it accounted for 51% of the US$200 million total agricultural institutional lending in Paraguay serving about 15% of the farmers and financing 30% of the area under cash crops. Over 80% of :its borrowers were small-scale farmers. In spite of the importance of BNF, FG is basically the only source of term lending in the livestock sector. FG was established with Bank assistance in 1969 and became an independent branch of the Central Bank in 1974 and it has developed into an

12 - 6 - expanding source of investment credit for livestock. Of the six credits/loans from the IDA/Bank primarily for financing investment programs for livestock production, the last three have been implemented by FG as an autonomous institution. FG has provided credit assistance to a total of about 8,500 producers, of which 2,000 received subloans under the most recent loan (1979-PA) The beneficiaries of FG lending are, in general, commercially oriented livestock producers. Traditionally they have been classified into small, medium and large categories based on physical farm size, which is not always an appropriate indicator of the production potential of the farm. Under the most recent project (Loan 1979-PA), the typical "large-scale ranch" had an average of 4,000 ha with 1,900 head of cattle and a net income before project of about US$12,000. The average size of investment loans approved was US$62,400. The "medium-scale ranch" had 1100 ha, 330 head of cattle and about US$3,000 net income. The average subloan size was US$28,400. The "small producer" had 54 ha and 14 cattle but almost all of his cash income was from sale of cotton and soybeans. The average loan size was US$10,600. Hence, the large producers benefitting from the project were not among the bigger cattle ranchers which typically have more than 10,000 ha and more than 5,000 cattle. In Paraguay these very large producers do not work with FG because of restrictions on subloan size, and have other sources of financing. In recent years, these large landholders have been primarily foreign investors Policy-making and loan approval functions in FG are vested in a coordinating committee which operates as a Board of Directors; it consists of a senior staff member from CB as President, a senior staff member from BNF, and FG's Technical Director. There are two in-line Directorates --Administrative and Technical-- and one in-line Evaluations Division. The Directorates are assisted by specialized Divisions and Sections with headquarters in Asuncion. There are three branch offices in the interior operating as extensions of the Teclhnical Directorate (in Concepcion, San Ignacio, and Ciudad Presidente Stroessner) FG has operated since its inception with funds provided from World Bank credits/loans. In the initial years, CB provided counterpart funds, but in the last four projects these have been generated within FG by roll-over funds from earlier Bank/IDA projects. In the sixth project (1979-PA), the OPEC Fund provided US$10.0 million of cofinancing. Total Bank/IDA support since 1963 has been US$72.45 million, with total project costs of US$136.4 million. Between 1973 and the end of 1982, FG, with its own funds, has provided subloans, additional to Bank projects, for a total of US$28.0 million. These subloans have been for periods of one to five years, primarily for supplementary investments and purchase of breeding stock. Because of the rapid disbursement of 1979-PA and the resulting demand for counterpart funds, FG now has very limited funds available for non-bank financed lending FG has maintained a strong financial position throughout its history. Average revenues from lending operations have been almost twice the average borrowing costs of FG and operating expenses have been maintained at under 2% of the average loan portfolio. Average cost of borrowing has ranged between 4 and 5%, while average revenue from loans has ranged from 8% to 9%. FG has been characterized by a strong management and emphasis on careful selection of beneficiaries, preparation of detailed investment plans, close

13 - 7 - supervision of investments, a history of applying positive interest rates, and prompt collection of subloans. FG's gross disbursed and outstanding loan portfolio as of December 1982 was equivalent to US$98.0 million. This portfolio accounted for over 95% of total assets, and it was funded by external loans (70%) and equity (30%). FG has kept the amount of principal debts in arrears below 5% except in 1982, when it reached 5.8%. As of December 31, 1982, the number of loans granted was 6,855, with an aggregated principal amount close to US$155 million equivalent The past association of IDA/Bank has been of great importance in the institutional building of FG. The earlier IDA credits allowed the institution to strengthen its financial position rapidly through the large spread between costs of borrowing and lending and, while this margin has decreased with Bank loans, it has still been sufficient to permit continued improvements in the financial position of FG. The allowance for this spread reflects a Government decision to provide for the capitalization of FG, instead of relying on budgetary allocations for this purpose. Bank Group Involvement 2.19 The proposed project would be the thirteenth Bank Group-supported agricultural project in Paraguay. The first was a general-purpose project in 1951, followed by five livestock projects, four rural development projects, a livestock and agricultural development project, and an agricultural credit project, which has recently been approved to provide investment subloans to small- and medium-sized crop producers throughout the country. In general, the experience with these projects has been satisfactory, and, despite implementation delays, they have contributed to increased agricultural production and hence general living standards of the rural population The Bank has supported the livestock subsector lending since The first three operations (Credits 47 and 86, Credit/Loan 156-PA and 620-PA), were implemented by BNF in conjunction with FG which was a coordinating committee established in the CB. In 1974, with the implementation of the Fourth Livestock Project (1037-PA), FG was given full legal and administrative autonomy and has since successfully implemented the livestock components of Loans 1674 and 1979-PA. The Project Performance Audit Report (PPAR) of Credit 156-PA and Loan 620-PA by the Operations Evaluation Department (OED) indicated that beef production and productivity fell short of the appraisal projections as a result of less efficient ranch management, more limited technical assistance than had been expected and, to a lesser degree, insufficient progress in expanding improved pastures. The financial rate of return to sub-borrowers was calculated to be 18% while the economic rate of return was 11% compared to appraisal estimates of 24%-30% and 29% respectively.2/ The most recent PPAR on a livestock project (Loan 1037-PA) indicated that the project had brought about increases in productivity, but most of the increase in production (56.5 m tons live weight of beef and 31.5 million liters of milk) 2/ "Project Performance Audit Report: Paraguay - Third Livestock Project (Credit/Loan 156-PA and 620-PA)". OED Report Sec M of March 28, 1978.

14 resulted from increases in production area. The project economic rate of return was estimated at 23% compared to the appraisal estimate of 24%.3/ 2.21 The Livestock and Agricultural Development Project (Loan 1674-PA) included credit and technical assistance components for FG. An extension unit was established to provide improved technical assistance, primarily to smaller producers, and an expatriate co-director was employed for three years under a cost sharing UNDP technical assistance project for which the Bank was the executing agency. In this project, most medium- and all large-scale ranchers, who were not themselves technicians, were required to contract an FG-approved private technician to assist in ranch planning and management improvement. The credit portion is fully disbursed and the technical assistance project will be completed in December The Livestock Development Project (Loan 1979-PA) which became effective in December of 1981 is 90% disbursed. Under this project, FG provided free technical assistance to small- and lower level medium-scale producers. This project included an important component (45% of project funds) for small producers based on the assumption that mixed farms (livestock/crops) but predominantly based on livestock would be established. In actual practice, these producers were primarily interested in investments for crop production. Swine production, which had been expected to be the primary livestock component for the mixed farms did not prosper because of lack of demand for the product. Moreover, FG was not equipped to provide specialized technical assistance to this type of producer and it considered that such lending was in direct competition with the area of responsibility of BNF. The subloan recovery rate for these producers has been lower than for livestock investments, because of climatic factors and reduced prices to producers because of international market conditions. Although physical production achievements have been lower than appraisal estimates, they have generally continued to improve in the last few years since most of the earlier investments were in the provision of water points and fencing of native pastures and these do not result in immediate increases in productivity The Bank's past association with FG has helped substantially in terms of institution building and has assisted in the establishment and maintenance of a beef pricing and marketing system essentially free of distortions and restrictions. However, despite significant progress over the years, more remains to be done. III. THE PROJECT Background 3.01 The proposed project was prepared by FG and the Preparation Report was received by the Bank in January A Bank mission appraised the project in April / 'Project Performance Audit Report: Paraguay. Fourth Livestock Project (Loan 1037-PA)". OED Report Sec M of May 26, 1981.

15 -9- Objectives and Description 3.02 The project proposes to assist in: (a) the expansion of term lending and technical assistance to the livestock subsector through FG; (b) strengthening the institution to meet the requirements of a rapidly expanding number of clients and portfolio; (c) introducing FG to the international banking system through cofinancing; (d) increasing the income of producers; and (e) improving the balance of payments situation of the country through increased exports of beef and reduced imports of milk. The Lending Program 3.03 Over a four-year investment period, the project would finance up to 1,700 subloans. The projected inflation in Paraguay between 1984 and 1987 could reduce this number to about 1,400. The beneficiaries would be small-scale (up to 250 ha) mainly dairy producers, and medium- (from 250 to 2,500 ha) and large-scale (above 2,500 ha) beef producers. Mediumr and long-term subloans to these beneficiaries would finance on-farm investments consisting of land destumping, purchase of equipment, seeding of improved pastures, construction of livestock handling facilities, provision of water points and purchase of improved breeding stock. A supplemental short-term credit line financed by cofinancier and local funds would be available for the purchase of feeder steers to more efficiently utilize improved pastures developed with subloans from FG under this or previous projects. The cash flows, farm budgets and rates of return for the three investment models are included in Annex 2. The estimated average size of investment and subloans; physical ranch size and distribution among the types of beneficiaries are as follows: Large Medium Small Scale Scale Scale Cattle Ranches Ranches Ranches Fattening Average Investment (US$) 122,500 59,400 75,600 _ Average Subloans (US$) 86,000 44,700 67,700 28,000 Average Farm Size 4, Number of Beneficiaries The proportion of subloans assigned to large- and medium-scale producers reflects the emphasis placed by Government on the critical need to increase exports and foreign exchange earnings, and the fact that these are the types of farmers who mainly contribute to the production of beef which is one of the four major exports of the country. Besides, the number of small producers principally engaged in livestock production is relatively small. Many of these are mixed farmers whose activity is, predominantly, crop production, and whose credit needs can be adequately attended by the BNF from the resources available to it from its external credit lines which are mainly designed to serve such beneficiaries.

16 Institutional Development 3 05 The project would provide for the preparation and implementation of a reorganization program for the administrative, accounting and technical functions of FG. While these are generally sound, such changes would allow the FG to expand its present capacity of about 900 subloans per year to a level, in the medium-term, approaching 2,000 annual clients. It would also provide for a more effective technical assistance role. This plan would more equitably distribute the activities and responsibilities of second-tier management, separate the administrative and service responsibilities of the administrative director, replace the technical director on the coordinating committee, computerize the processing and storage of data, strengthen the internal auditing system and provide for changes in the accounting system, including the adoption of the accrual system. In mid 1983, FG contracted two local consulting firms to assist in the institutional and accounting system reorganization and to provide a systems analysis for the eventual purchase of a computer and the development of necessary software programs. The consultant firm for reorganization has presented the first draft of its report which is being discussed with FG. A draft of this program, along with job descriptions, would be provided to the Bank for comments and the adoption of the reorganization program, satisfactory to the Bank, would be a condition of loan effectiveness. The main proposals for the reorganization were discussed during negotiations and appropriate assurances were obtained A four-year work program for the Technical Division was discussed during negotiations. It is a condition of effectiveness that this program be accepted by the Bank and put into effect. The program would provide for among others: (a) A technical assistance program for all sub-borrowers, for a minimum of two years from the date of subloan approval, such assistance will be provided to small ranchers by FG staff and to others by rancher financed private technicians; (b) A specific training program for FG technicians in the areas of subloan preparation, farm record systems, project evaluation, forage production and general livestock husbandry; (c) At least one general meeting per year of all FG technicians to discuss FG lending and technical assistance policies (the first to be organized not later than June 30, 1984) and an annual technical seminar for FG and private technicians, with their proposed programs, (the first to be held prior to October 31, 1984); (d) A schedule of field visits by the technical director for supervision of project implementation; (e) Specific methods to be utilized for supervision and evaluation of private technicians contracted as a condition of subloans; and (f) A timetable for the implementation of the internal investment and technical audit of a sample of subprojects financed under the 1979-PA and the proposed loans. Assurances on these points were obtained during negotiations. The Project Executing Agency 3.07 Fondo Ganadero would be responsible for executing the project. This institution was organized in 1969 as a part of CB and in 1974 was upgraded to an autonomous entity in the CB to provide developmental assistance to the

17 livestock subsector (para 2.20). A full description of the operations and organizational and financial structure is presented in Annex 1 and the Project Performance Audit Reports for two previous projects are summarized in Annex 3. In spite of the favorable performance of FG to date, additional changes in organization and operational procedures are required if it is to be able to meet the demands of an increasing portfolio and provide for much needed improvements in its technical services. Provisions for these improvements are given in paras 3.05 and On the basis of the lending conditions foreseen under the proposed project (paras ), FG's financial position is expected to continue to be sound. The interest spread between new loans and new borrowings and the fact that sub-loan grace and maturity periods, are shorter than those for FG's new borrowings, are expected to generate sufficient funds to amortize the new debt and to reduce FG's dependence on outside borrowing. Returns of 9% to 15% on the average loan portfolio are attainable during the forecast period ( ). Paras 4.01 and 4.05, as well as Annex 1 provide details on these projections. Project Execution 3.09 The Government of Paraguay would be the borrower. The proceeds of the loan would be made available to FG in local currency under arrangements to be covered by a subsidiary loan agreement, similar to that of previous projects, between the Government and FG. Execution of the subsidiary agreement, satisfactory to the Bank, would be a condition of loan effectiveness. Assurances on this point were obtained at negotiations. Lending Terms and Conditions 3.10 Government would accept the foreign exchange risk and would on-lend loan funds to FG at 0.5% above the cost of external financing. This relatively small commission is justified on the basis of the desire to improve FG's capitalization and the fact that FG will bear the risk of any increases in variable interest rates on external financing. Project subloans would bear interest and commission charges at an initial effective interest rate of no less than 18% per annum for small- and medium-scale producers (the same as BNF's interest rate for agricultural lending) and no less than *20% for large-scale producers. In addition, a one-time front-end fee of 4% for small-scale producers and 6% for medium- and large-scale producers would be charged. The effective rates on this basis are positive in real terms and cover FG's financial and operating costs. In line with FG's policy of providing loans at positive interest rates, FG, CB and the Bank would review the rates charged at least once a year and more frequently if necessary. If it is found that these do not cover FG's net operating costs and maintain the real value of its capital, they would be modified to meet these criteria in respect of new subloans. Real interest rates would be determined by comparing rates charged with reference to FG's financial and administrative costs and the variation of the Consumer Price Index (CPI) for the previous calendar year. Inflation was 22% in 1980, 14% in 1981 and 7% in 1982; and is projected to be 17% in 1983, 14% in 1984 and an average of 9% between If necessary modifications are not implemented within 60 days of a decision to do so, FG would not make further commitments of loan proceeds until an agreement is reached on a new rate among FG, CB and the Bank. Assurances were obtained at

18 negotiations on these points. CB's approval of these subloan terms and conditions would be a condition of effectiveness of the Bank loan Subloans would finance up to 90% of investment costs for small- and 75% for medium-size specialized livestock producers, and up to 70% for large-scale ranchers. A summary of the on-lending terms is shown in Annex 1, para 14. Subloans made to project beneficiaries would follow the sound stanrard procedures presently used by FG. Investment subloans would be processed and approved on the basis of detailed farm plans that demonstrate the technical and financial viability of the proposed investment. A producer applying for a repeater subloan would have a study made by FG of the impact of his previous subloans and would receive further credit only if an adequate increase in production or productivity, as a result of the previous investment, could be demonstrated. The amount of a subloan allocated for the purchase of breeding stock would not exceed 70% of the total cost of the investment plan, unless FG demonstrated to the Bank that a higher level could be justified for specific subloans. In order to assure adequate producer input into, and commitment to the investment plan to be financed with a subloan, the following procedures would be followed: (a) subloan requests would not be acted upon by the coordinating committee without the signature of the borrower indicating that he is in agreement with the investment plan; and (b) at the time of sublcan -registration, the borrower would receive a full set of subloan documents which would include as a minimum (i) a copy of the investment and amortization plan, (ii) the physical and financial projections for the subproject, and (iii) a projection of pasture availability, carrying capacity and utilization. Assurances were obtained at negotiations on these points Assurances were also obtained at negotiations that the total outstanding debt for subloans from FG to any individual beneficiary receiving a subloan under the project would not exceed the equivalent of US$150,000, while sublcans to a cattle fattener would not exceed US$60,000 at the official exchange rate at the time of the subloan or short-term loan approval. Project Costs and Financing 3413 The cost estimates and the financing proposed are based on the following assumptions: (a) Bank and other external financing would reimburse the Government in US dollars against reimbursement requests in Guaranies. The exchange rate used for the purpose would initially be G 160 = US$1. This is also the rate at which FE would be provided for the import of project inputs. However, the foreign exchange component has been reduced to correct for a possible overestimate of real foreign exchange costs since the sub-borrower procures inputs from commercial importers, by direct imports with foreign exchange purchased from CB and direct purchases in Brazil and Argentina in local currencies obtained from the sale of cattle. The estimated average exchange rate for these purchased imports is about G 210 = US$1, therefore, the foreign exchange cost was reduced by 26%, reflecting the difference in the Bank disbursement rate (G 160 = US$1) and the import rate (G 210 = US$1) and the local costs were increased correspondingly.

19 The Bank disbursement rate may be altered as agreed between the Bank and borrower from time to time: 4 / (b) the only externally financed component of the project would be the on-lending program with a total cost of US$89.0 million of which US$55.0 million would be so funded; (c) the contribution of the beneficiaries is estimated at US$25.0 million (21%) and represents, in the aggregate, the minimum contribution required from producers obtaining subloans; and (d) project costs were estimated on the basis of April 1983 prices updated to October The direct foreign exchange costs of the project are relatively high due to the lack of industrial production in the country and the nature of the investments to be made. Relatively small amounts of local materials and labor are required for physical improvements to be financed, while machinery and equipment items are all imported. The indirect foreign exchange costs are also high due to the considerable petroleum and spare parts contents The following table shows the project and corresponding foreign exchange costs: 4/ The G 160 foreign exchange availability for imports is generally economy wide with the exceptions of petroleum and wheat imports (G 143 = US$1) and payment of external debt (G 126 = US$1). With normal private bank and CB commissions and interest on deposited local funds, the effective exchange rate is about G Since beef exports receive a weighted exchange rate of around G 205, there is an implied subsidy from exporters to importers which would disappear if exchange rates were unified.

20 Onr-farm Investments a/ Long Term Project Cost Summary Foreign Exchange Local Foreign Total Local Foreign Total _ % (G Million) (US$ '000) Base Cost large-scale Ranchers 3,580 3,304 6,884 22,374 20,652 43, Mediur-scale Ranchers 3,480 3,211 6,691 21,748 20,071 41, Small-scale Farmers 1,152 1,536 2,688 7,200 9,600 16, Subtotal Long Term 8,212 8,051 16,263 51,322 50, , Short Term Steer Fattening 1, ,000 10,443 2,057 12, Subtotal 9,883 8,380 18,263 61,765 52, , Fondo Ganadero Technical and Aministrative Services ,035 1,190 5, Total Baseline Costs 10,529 8,570 19,099 65,800 53, , Price Contingencies b/ , , Total Project Costs 10,748 8,635 19,383 67,174 53, , % Front End Fee c/ a! Details of investment items are shown in Annex 2, Tables 2, 6 and 10. b/ For technical and administrative services costs only. c/ The front-end fee is US$62,344 equivalent to approximately G 10.0 million. Nbvember 21, 1983

21 External financing would provide 100% of the foreign exchange costs and 1% of local costs, FG's projected cash flow is sufficient to cover the remaining local financing costs and operating expenses. These projections are in para 4.01 and Annex 1, Table The project would thus be financed by the beneficiaries, FG, Bank and cofinancier funds. The Bank proposes to provide US$25.0 million, and FONPLATA has agreed, in principle, to lend US$15.0 million. A "B" loan for an additional US$15.0 million is being explored with CNCA. Meeting the conditions for the effectiveness of FONPLATA funding would be a condition of effectiveness of the Bank loan. FG with its own funds would cover operating and technical assistance costs. A portion of these costs would be met from a special fund established from the interest earnings of FG on OPEC Fund cofinacing provided in conjunction with the most recent Bank loan (1979-PA); these funds can only be used for technical assistance financing. On this basis, the project's financing plan would be as follows: Total Investments FG Lending Program G US$ a/ G US$ a/ Million Million % Million Million % Beneficiaries 4, FG 5,456 b/ , IBRD 3, , FONPLATA 2, , "B" Loan 2, , Total 18, , a/ Conversion to US Dollars at the Bank disbursement rate of G 160 = US$1. b/ FG would also provide G 1,121 million (US$7.0 million) for administrative and technical services to the present and on-going projects. Procurement 3.17 Project beneficiaries would purchase, during a four-year period, on-farm development inputs from established local agents and other ranchers in Paraguay, Argentina, and Brazil. The Paraguayan sales agents for physical inputs represent a broad spectrum of international and local suppliers. The use of international competitive bidding would not be practical as purchases would vary widely in location and time; however, local suppliers represent Bank member countries and provide the required inputs and goods, vehicles and equipment as well as services. Items to be procured under the project are not subject to any quantitative import restrictions. Disbursements 3.18 The proceeds of the Bank/cofinancier loans are expected to be disbursed over a period of four years. The Bank would disburse 33% of the amount of long term investment subloans. FONPLATA and a "B" loan as

22 cofinancier, would reimburse, pari passu with the Bank, 19% and 5% respectively of these investment subloans. In addition, the "B" loan would reimburse 90% of short term cattle fattening subloans. A detailed disbursement schedule is presented in para All disbursements would be against certified statements of expenditures. The control arrangements within FG have worked satisfactorily in earlier projects and are adequate for continuation of this procedure. The documentation for expenditures would not be submitted to the Bank, but would be retained by FG for review by the Bank at any time. Accounting and Auditing 3.19 Separate project accounts, records and documentation would be maintained by FG and an accrual basis of accounting would be established to begin on January 1, Financial statements of FG, including a statement on sources and uses of funds, would be audited annually by independent auditors, satisfactory to the Bank, who would adopt the published Bank norms for auditing of project accounts. This activity has been carried out in past projects by the Office of the Superintendent of Banks and has been generally acceptable but some improvements are needed in procedures (Annex 1, para 8). The actual audit would include financial information supporting statements of expenditures used to claim reimbursements from the Bank. Certified copies of the audited accounts and the report of the auditors would be sent to the Bank no later than six months after the close of Government's fiscal year (December 31). Assurances on these points were obtained at negotiations. Monitoring, Evaluation and Reporting 3.20 FG would maintain complete project monitoring and an ongoing and ex-post evaluation for at least 10% of sub-borrowers in each category. The procedures utilized in the last two projects are generally good but the quality of field survey data must be improved. FG would provide a progress report to the Bank every six months, including key indicator figures and details on implementation of the reorganization and technical assistance activities. A draft completion report would be prepared by FG's evaluation division and submitted to the Bank no later than six months after the closing date of the Bank loan. Assurances were obtained at negotiations on these points. Financial and Economic Justification 3.21 The financial and economic justification of the project has been assessed through the analysis of three farm models, representing different farm sizes, locations, technologies and investment plans (Annex 2). Both the financial and economic analyses have been prepared in constant mid-1983 prices, taking into account the international price forecasts published by the Bank's Commodity Studies and Projections Division. Illustrative farm budgets, financial and economic rates of return, and cash flows, in constant mid-1983 prices, are in Annex 2 and are summarized in the following table:

23 Net Income a/ With Project Without During After Financial Economic Model b, Project Debt Serv.C/ Debt Serv.d/ Per ha ROR ROR -Uss --- US$ % %--- I II III a/ Net income is total revenue less operating costs, excluding the value of family labor. b/ Large- and medium-size beef ranch, and small-size dairy farm respectively. c/ Year 5. d/! At full development, years 12 to 19, depending on the model The resulting financial rates of return on investment for comprehensive farm development programs are 25% and 27% for large- and medium scale beef ranches respectively and 33% for dairy producers, and indicate that it would be profitable for producers to undertake the proposed investment. The expected rates of return are similar to those under earlier FG projects. The results of sensitivity tests as detailed in Annex 2 are summarized below: Model 1 Model 2 Model 3 % _- _ Best Estimate Investment Costs Up 20% S switch Value Operating Costs Up 20% Switch Value Revenues Down 20% Delayed One year Switch Value The proposed investments would remain financially attractive within the limits of unfavorable developments regarding output, prices, investments, operating costs, and delays in obtaining the benefits as estimated. Project Justification 3.23 The project would strengthen the self-financing capability of FG and increase the availability of investment and production credit to farmers, thereby enabling them to increase beef and milk output, while facilitating the specialization, among farms, of the national livestock industry. At full development, it is expected that aggregate production of beef by the project (liveweight basis) would be increased by 121,000 tons (equivalent to US$74.7 million in constant 1983 terms) and that of milk by 10.4 million liters (US$3.5 million). These rough estimates of aggregate production increases are based on the projected number and mix of project sub-loans and the illustrative farm

24 models and may, therefore, be affected by any unexpected developments related to prices, costs and adoption of improved technology. It is expected that three-fourths of the incremental production would be exported as live cattle or processed beef. The annual net farm income after debt service and at full development is expected to increase from US$16,100 to US$64,100 for large-size beef ranches, from US$4,700 to US$29,700 for medium-size beef ranches, and from US$5,000 to US$42,400 for small-size dairy farms. During the years of debt service, these income increases are about one-third to one-half of the levels reached at full development The project would also contribute to further institution building through the insistence on continued adoption of sound financial policies by FG; a reorganization to allow FG to adapt to its increased activities, responsibilities and portfolio size (para 3.05); improved levels of technical assistance (para 3.06); and initiation of a shift to computerization of accounting and portfolio control (para 3.05). In addition, the Bank's presence is helping FG secure US$30.0 million in cofinancing funds and will allow a continuation of Bank technical assistance which has been a key factor in the establishment of a sound financial institution in the FG. Project Risks 3.25 One of the risks associated with the project relates to beef exports. Recent exports depended predominantly on the Brazil live cattle market. If this market should become inaccessible because of import or export controls or because of a relatively unfavorable change in the value of the Cruzeiro vis-a-vis the Guarani, live cattle exports would decrease and substantial pressure would be placed on the Paraguayan exporting meat packers to increase exports of processed beef. Since Paraguay consumes only about 50% of total beef produced, the viability of the livestock industry is dependent upon the availability of an export market. With the low costs of production of beef in Paraguay, this product should be able to compete with other exporting countries and the Government is expected to maintain its present policy of stimulation of beef exports There is also a certain element of risk associated with the small-scale dairy producer. The production package requires a level of known management and technical skills that have not been fully applied. The farmer's willingness to change to a forage-based production system, his ability to adopt the mechanical milk handling package and to expand forage production adequately would be tested. A heavy use of concentrate feeds in lieu of forage would reduce, but not eliminate, the financial attractiveness of the undertaking. Detailed Project Costs and Financing IV. DETAILED PROJECT FEATURES 4.01 All project costs and financing are calculated in US dollars at an exchange rate of G 160 = US$1. The IBRD loan of US$25.0 million, FONPLATA cofinancing of US$15.0 million and a "B' loan of US$15.0 million would provide FG with G 8,800 million representing 45% of total project costs, 48% of investment costs, 62% of on-lending and 100% of foreign exchange costs. FG

25 would provide G 5,116 million (38%) for on-lending and G 1,121 million for operating costs. An analysis of FG's cash flow projections indicates that it would have adequate resources to provide all counterpart funds for the expanded project costs assuming that the excellent subloan recovery rate is maintained. Detailed data on FG's historical and projected financial position are given in Annex 1, Table 1 and are summarized in the following table: In Millions of Guaranies A. Current Resources 3,204 3,039 4,067 5,652 6,855 New Borrowing - 2,768 2,608 1,920 1,504 Total Resources 3,204 5,807 6,675 7,572 8,359 B. Current Applications 2,904 1,070 1,672 4,333 4,940 New Lending (project) - 4,469 4,508 3,013 2,256 Total Applications 2,904 5,539 6,180 7,346 7,196 Surplus (deficit) ,163 Cash at Beginning ,422 1,648 Cash at End ,421 1,648 2, The contribution of the beneficiaries to the investment program would be 30%, 25% and 10% for large-, mediumr and small-scale producers, respectively. The total project costs and subloan financing are shown in the following tables: Project Costs (In US$'000) Livestock Total Producers Fund Bank FONPLATA "B" Loan Project Cost Amount _ Amount % Amount % Amount % Amount % Amount % Model 1 12, , , , , , Model 2 10, , , , , , Model 3 1, , , , , Fattening - - 1, , , Tech.Serv , _ , Total 25,019 (21) 41,193 (34) 24,938 (21)15,000 (12) 15,000 (12) 121,150 (100)

26 Subloan Sources of Financing (US$'000) Total Livestock Fund Bank FONPLATA "B" Loan On-Lending Amount % Amount % Amount % Amount % Amount % Model 1 13, , , , , Model 2 13, , , , , Model 3 6, , , , Fattening Credit 1, , , Total 34,188 (38) 24,938 (28) 15,000 (17) 15,000 (17) 89,126 (100) Disbursements 4.03 Bank disbursements under the two most recent FG projects have been more rapid than appraisal estimates. The ratio of actual disbursements to profile estimates was 1.38 for the livestock component of loan 1674-PA and presently is 1.48 for loan 1979-PA. The ratio for all Bank projects in Paraguay for the years 1979 to 1982 has been 0.93, 1.18, 0.90, and 1.21 respectively Based on this experience and the unmet subloan demand in the livestock subsector, the Bank/cofinancier disbursements, assuming loan effectiveness in early FY1985, are projected as follows: Fiscal Year Semester , Amounts in US$ Million-- Bank a/ During Semester Cumulative FONPLATA a/ During Semester Cumulative "B" Loan b/ During Semester Cumulative a/ July - June. b/ January - December.

27 Financial Performance Indicators 4.05 The financial performance of FG has been outstanding in comparison with similar credit institutions in the region. Starting with very limited resources in 1974, FG, utilizing roll-over funds from project lending, has strengthened its financial position over the years. The indicators shown in the following table and detailed in Annex 1, cover FG's historical and projected financial performance: Actual a/ Projections Annual growth of loan portfolio (%) bl Subloan principal in arrears at end of fiscal year (%) Annual growth of borrowings (%) b/ Net income over average portfolio (x) Average revenues from loans(%) Average cost of borrowings(%) a! Actual data not fully comparable with projected data due to different basis of accounting of financial revenues and expenses (cash vs. accrual). b/ Projections are based on the assumption that FG will not receive further external lending. Surplus FG funds will be utilized to finance subloans. Livestock Production Indicators 4.06 The estimated technical coefficients of beef and milk production under the project are expected to change as shown below. These coefficients are based on FG's past records, estimation by field technicians and observations of Bank supervision and appraisal missions.

28 Beef Ranches Without Project With Project at Full Development Weaning rate (%) Meat production (liveweight kg/ha) Carrying capacity (animal unit/ha) Meat output/year (tons liveweight) 58, ,000 Dairies Production/cow (liters) 2,190 2,920 Production/ha (liters) 876 2,738 Calving interval (days) Milk output/year (thousand liters) 4,900 15,332 Environmental Impact 4.07 The project is not expected to have any adverse environmental effects. Land converted to pasture from either forest or abandoned crop areas would have adequate soil cover to prevent or reduce erosion effects. Very little deforestation would be financed by the project based on data from the previous project where only 1% of the hectares under crop or pasture production received funding for deforestation. V. AGREEMENTS REACHED AND RECOMMENDATION 5.01 Assurances were obtained at negotiations that: (a) FG would comply with the provisions regarding interest rates charged on its loans and the annual review of the rates (para 3.10); (b) FG would apply the subloan terms and conditions outlined in paragraph 3.11; (c) The total subloans outstanding to any individual beneficiary would not exceed the equivalent of US$150,000, and an individual cattle fattening subloan would not exceed the equivalent of US$60,000, at the official exchange rate at the time of subloan approval (para 3.12); (d) An accrual basis of accounting would be established by January 1, 1985 (para 3.19); (e) FG would be audited annually by independent auditors, satisfactory to the Bank, who would adopt Bank norms for auditing of project accounts and certified copies and reports of the auditors would be sent to the Bank no later than six months after the end of each Government fiscal year (para 3.19); and (f) Project monitoring and reporting would be carried out by FG and the Bank would be provided with semi-annual progress reports and a draft completion report, the latter no later than six months after the completion date of the loan (para 3.20).

29 Conditions of- effectiveness would be that: (a) FG had prepared a reorganization program acceptable to the Bank (para 3.05); (b) a four-year work program, acceptable to the Bank, had been developed for the technical division (para 3.06); (c) the Government and FG had executed a subsidiary loan agreement, satisfactory to the Bank (para 3.09); (d) CB had approved the terms and conditions of subloans (para 3.10); and (e) all the conditions for the effectiveness of FONPLATA funding have been met (para 3.16) With the above assurances and conditions, the proposed project would constitute a suitable basis for a Bank loan of US$25.0 million for a term of 17 years, including four years of grace. November 21,1983

30 ANNEX 1 Page 1 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT Fondo Ganadero Operation, Organization and Financial Performance A. Operations 1. FG has operated since its initiation with funds provided from IDA/IBRD credits/loans (Credits 47-PA, 86-PA, and 156-PA; and Bank Loans 620-PA, 1037-PA, 1674-PA, and 1979-PA). In the initial years, CB provided counterpart funds, but in the last four projects, these have been generated by roll-over funds from earlier Bank/IDA projects. In the sixth project (1979-PA), the OPEC Fund provided US$10.0 million of cofinancing. Total Bank/IDA support since 1963 has been US$72.45 million, with total project costs of US$136.4 million. Between 1972 and the end of 1982, FG, with its own funds, plus an 18-month loan, for cattle fattening subloans, from CB in 1981, has provided subloans, additional to Bank projects for a total of US$28.0 million. These subloans have been for periods of one to five years, primarily for supplementary investments and purchase of breeding stock. Because of the rapid disbursement of 1979-PA and the resulting demand for counterpart funds, FG now has very limited funds available to cope with credit demand. B. Organization and Management 2. FG was established in 1969 (Decree 7383, Presidency of the Republic, dated December 9, 1969, and Law 189 dated June 10, 1970) as a legal entity under the jurisdiction of the CB. In 1974, it gained full legal and administrative autonomy within CB. Under its current organizational structure (Chart 1), the Coordinating Committee has responsibility for policy-decisions and loan approvals. This Committe consists of a senior staff member from CB as President, a senior staff member from BNF, and FG's Technical Director. Management of daily operations is delegated to the President of the Coordinating Committee. There are two in-line Directorates reporting to the President: Administrative, and Technical. One in-line Division (Evaluation) also assists the President with statistical data and is responsible for project monitoring and evaluation as well as preparation of progress and final reports. The Administrative Directorate deals with the accounting, treasury, budget, personnel and general service aspects of management. The Technical Directorate deals with project analysis, technical assistance and project supervision. Three regional offices (Concepcion, San Ignacio, and Ciudad Presidente Stroessner) support technical activities in the interior. FG operates with 85 staff members; among them there are 25 veterinarians, eight agronomists, five economists, four lawyers, and 13 others in different disciplines (accounting, finance and management) plus support staff. 3. The current organization lacks adequate balance for management decisions. Decision making is highly centralized with the President assuming most of the authority. There is little delegation of authority or responsibility to the directors. There is an exception in the case of loan approvals where even though final subloan decisions are made by the

31 ANNEX 1 Page Coordinating Committee, these are highly influenced by the Technical Directorate, whose head is also a member of the Coordinating Committee. This dual function of the Technical Director allows for project evaluation and loan approval to be unchallenged on technical or economic grounds. Provisions for reorganization of FG are included under the proposed project and this organizational anomaly would be corrected, probably by making the Technical Director an advisor to, but not a member of, the committee. The reorganization would also include a reduction of the duties of the administrative director, probably through the formation of a new services directorate. C. Lending Policies and Procedures 4. FG has no statement of comprehensive lending policies and the ones in use have developed from contractual obligations contained in borrowing agreements, and were applied accordingly on each line of credit. Among those policies are the following: (a) loans are to be granted only for sound investment projects adequately appraised by FG; (b) loan size, terms and conditions are to be compatible with income level of borrowers and somewhat below commercial banking terms; (c) loans are to be secured by a land mortgage and/or a chattel mortgage; (d) additional, non-bank supported loans, are made from proceeds of roll-over funds, usually to borrowers who had successfully implemented prior projects and adequately serviced their debt. 5. Lending procedures are well established and used effectively. Loan applications are received and processed at FG's offices in the interior and at headquarters, but final approval is made only at headquarters by the coordinating committee. Disbursements are made in several installments and physical inspections are conducted before each disbursement, to ensure that loan funds are used for the purpose intended. Investment plans are developed for all loans at appraisal, including cash flow projections and rate of return calculations. Although technical and financial evaluation, monitoring and supervision of subprojects are carried out on a case by case basis, there is room for improvement in more specific studies and investment plans for sub-borrowers, before-project performance evaluation and technical assistance activities. D. Accounting and Auditing 6. Records and basic accounts are well maintained on all borrowers for each line of credit. FG's chart of accounts, and any revisions to it, have to be approved by the Superintendency of Banks under the CB. Most of the bookkeeping is done manually. Trial balances are prepared manually and submitted to CB on a daily basis. An Income Statement, Balance Sheet and Source and Application of Funds Statement are prepared at the end of each fiscal year and submitted to the Superintendency of Banks. Current accounting procedures have some deficiencies. A cash basis of accounting is used to record revenues and expenditures; therefore, income statements do not reflect real earnings during each fiscal year, as would an accrual basis of accounting. Corrective actions are contemplated under the proposed project. 7. Internal control practices are deficient. Only recetly has an internal audit unit been organized to develop and implement internal control procedures to safeguard FG's assets, mainly, its loan portfolio. Provisions

32 ANNEX 1 Page for the strengthening of the internal audit unit are included in the proposed project. 8. External audit of FG's accounts is performed annually by the Superintendent of Banks. Although well conducted, the scope of this audit needs to be extended to adapt to Bank requirements. Among the improvements needed are: (a) a review and opinion of the internal controls of FG and suggestions for their improvement; (b) analysis of the portfolio and of arrears, the latter by age and loan purpose; (c) a review of and an opinion on the accounting procedures used; and (d) an opinion on the adequacy of procedures relating to Statements of Expenditures. Provisions to this end are also contemplated in the proposed project. E. Loan Portfolio Control and Management 9. Loan portfolio control and management suffers from lack of computerization. Extraordinary efforts from the staff are required to prepare the billing of interest and principal amounts due and to follow up on amounts in arrears with manual systems. FG needs modern and effective computer equipment to cope with the increase of its lending operations and to improve the efficiency in managing its portfolio. Technical assistance, supported by FG funds, is envisaged under the proposed project to help overcome the deficiencies described above. Historical Performance (Tables 2 to 4) F. FG's Financial Performance 10. FG has maintained a sound financial position throughout its history. Average revenues from lending operations were almost twice the average borrowing costs of FG and operating expenses were maintained at under 2% of the average loan portfolio. FG's net income increased 1.5 times from 1978 to 1982, that is, from US$1.3 million equivalent in 1978 to US$3.1 million equivalent in If financial revenues and expenses had been recorded under an accrual basis of accounting, net income could have been around 25% larger. This good record of FG profits was possible because of the low cost of its borrowings as compared with revenues from its loans. Average cost of borrowings ranged between 4 and 5% of average borrowing portfolio, while average revenue from loans ranged from 8 to 9% of average loan portfolio. Other contributing factors were: (a) grace and maturity periods on FG loans shorter than grace and maturity periods of borrowings; (b) reinvestment (roll-over) of loan repayments in additional loans; (c) maintenance of value in two lines of credit through principal indexing; (d) declining exchange adjustment on two borrowings from the Bank (1037-PA, and 1674-PA); (e) low operating costs (under 2% of average loan portfolio) and (f) high subloan recovery rate (90-95%). 11. FG's gross disbursed and outstanding loan portfolio as of December 31, 1982 was equivalent to US$98.0 million. This portfolio accounted for over 95% of total assets, and it was funded by external loans (70%) and equity (30%). FG has maintained a highly satisfactory collection record, with principal amounts in arrears under 5%, except in 1982 when they reached 5.8%. As of December 31, 1982, the number of loans granted was 6,855, some of which

33 ANNEX 1 Page were to cooperatives with multiple beneficiaries, with an aggregated principal amount close to US$154.3 million equivalent. As of the same date, about US$58.0 million equivalent was repaid. 12. FG's main source of funds consisted of borrowings from IDA and the Bank. Borrowings accounted for 86% of FG's loan portfolio at the end of 1978, but only 70% at the end of The reduction was due to increased participation of FG in financing additional loans with internally generated funds. Borrowings outstanding as of December 31, 1982 amounted to US$69.5 million equivalent, of which US$60.2 million were owed to IDA/Bank. Projected Performance (Tables 5 to 7) 13. The proposed project would enable FG to cope with existing demand for credit, and would inject substantial long-term funds, which would be invested in medium term loans. These funds would, in turn, generate roll-over funds which would gradually allow FG to come closer to a self-financed credit institution. Financial projections prepared under assumptions described in paragraph 14 show that average returns (on average portfolio outstanding) of about 10% to 15% are possible during the forecast period. 14. The following are the assumptions used in calculating financial projections: (a) revenues based on accrual method of accounting, from loan portfolio outstanding were forecast using existing lending terms. Revenues on new lines of credit arising from the proposed project, and from roll-over funds, were forecast using the following lending terms: Average Average Loan Period (Years) Financial Charges % Grace Amortization Interest Commission a/ Model I: First subloan Repeater subloan Model II Model III Fattening Reinvestment funds (roll-over) OPEC b/ a/ One-time commission on loan amount (front-end fee). b/ Roll-over funds from FG/OPEC line of credit.

34 ANNEX 1 Page (b) financial expenses, based on accrual method of accounting, due to current borrowing portfolio outstanding were forecast on the basis of current contractual terms and computed on estimated average amounts outstanding. Financial expenses due to new borrowings were forecast using the following borrowing terms: Financial Charges Borrowing period (Yrs) Commitment Front-end Grace Amortization Interest a/ Fee b/ Fee c/ IBRD loan % p.a. 0.75% p.a. 0.25% "B" loan % p.a. 0.50% p.a. 0.63% FONPLATA loan % p.a. 1.00% p.a. 1.00% a/ Variable interest rate (includes 0.5% payable to CB). b/ On undisbursed amounts. c/ One-time charge on loan amount. (c) operating expenses were forecast as follows: Expense Items Growth Personnel 13% per annum General expenditures 20% "La Patria" expenditures 20% ' Provision for bad debts: 2.5% on principal amounts due. (d) loan repayments for existing lines of credit were estimated by FG on the basis of average repayment schedules prepared for each of its lines of credit. Loan repayments from new lines of credit are forecast on the basis of amortization periods described in (a) above; (e) borrowing disbursements were forecast in line with the proposed external financing reimbursement percentages of subloan disbursements; (f) subloan disbursements were forecast on the basis of expected demand for loans on each line of credit (Models I to III) Roll-over funds are expected to provide counterpart funds for reinvestment and any surpluses in additional, non-project, lending; (g) cash and bank deposit balances are forecast at levels sufficient to initially cover one and increasing to six months of subloan disbursements; (h) outstanding loan amounts on two lines of credit (1037-PA and 1674-PA) were increased annually by 5% to maintain their value in real terms; (i) accrued interest receivable on loan portfolio was forecast at levels not exceeding three months of financial revenues; (j) other assets include inventories and property for resale (given to FG in lieu of amortization of principal). Its growth was forecast at 10% per year; and (k) accrued interest payable on borrowings was forecast at levels not exceeding three months of financial expenses. Novpmhbr

35 PARAGUAY LIVESTOCK FUND Organization Chart Coordlnatigl Conmiftee < _ L ~~~~~~~~~~,e- X I 'cneral LegovIS lu Dkoctorateesden 1etc Secretury r X Leurzl AdvisorX~~~~~~~~~~~~~~~~~~serea' I - Dvi,o AcCountOg and ayment nd anades oilcrro SecSonretorvSlcion Suppiy Scin Genralurchiaes Pgionol Offices Cmuiain n i Wro,ld Bar a m

36 ANNEX 1 Table 1 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT Financial Performance Indicators Actual Projections Annual growth of gross loan portfolio I/ - % Loan portfolio a/ under arrears at end of fical year - % Net income over average gross loan portfolio a/ _ % Average cost of borrowings - % b/ Average revenue from loans - % b/ Consumer Price Index Operating expenses over average gross loan portfolio - % Net income over equity - % b/ Liquidity ratio at end of fiscal year 5:1 3:1 7:1 8:1 8:1 9:1 12:1 17:1 19:1 Annual growth of borrowings b/ - % Borrowings over gross loan portfolio at end of year - % Borrowings over borrowings Equity - % Equity over gross loan portfolio - % Equity over total assets - % a/ Disbursed and outstanding. b/ Actual data not fully comparable with projected data due to different basis of accounting of financial revenues and expenses (cash vs. accrual). November 21, 1983

37 ANNEX I Table 2 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT Historical Financial Performance Income Statement a/ TMillions of G) Financial Revenues: Interest otl FG/IDA/IBRD lines of credit b/ B Interest on FG reinvestment funds C/ Commissions d/ Other e/ -4.0 Total Financial Expenses: Interest payments on IBRD/OPEC borrowings Interest payments on other borrowings f/ Commitment charges on IBRD borrowings Other g/ Total Income from lending operations Operating Expenses: Personnel n General expenditures "La Patria" net expenses Provision for bad debts Total Income before depreciation Depreciation Income from operations Net non-operating revenues (expenses) NET INCOME a/ Summarized from audited financial statements (except 1982, on which external audit is underway). b/ IDA Credits 47-PA, 86-PA, and 156-PA, and IBRD Loans 620-PA, 1037-PA, 1674-PA, and 1979-PA. c/ Loans granted with cash available after debt service (supplementary loans). d/ Includes one-time commissions. e/ Includes revenues from OPEC funds (Loan OPEC 262-P, cofinancing with IBRD Loan 1979-PA). f/ Mainly to Central Bank of Paraguay. g/ Includes service charges paid to IDA and to Central Bank in lieu of exchange risk. h/ Includes compensation and benefits paid to staff. November 21, 1983

38 ANRX 1 PARAGUAY Table 3 LIVFSTOCK D PROJECT Historical Financial Perforwnce Flow of Fuids Statement a/ (Million of G) Furds Provided by: Nat ine Depreciation Provision for bad debts Gross internal generation Less: Funds required by operations Increase (-) decrease (+) in receivables Increase (-) decrease (+) of other assets b/ Net internal generation Loan repayaoents , ,205.4 Usable funds generated internally , , , ,625.3 Borrowings: IBRD , , ,176.1 Central Bank Other c/ Increase of other liabilities Equity increase Total usable funds 1, , , , ,203.9 Piz1s used for: Inane granted: FG/DA/IRD/OPEC/ lines of credit RG reinvestment fund Repaynent of Borrowings: IDA/IRD Central Bank Other Increase of fixed assets Decrease of other liabilities Total funds used 1, , , , ,017.7 Cash surplus (deficit) (121.8) (186-9) Cash available at beginning of year Cash available at end of year a/ Prepared by FG and the appraisal mission. b/ Includes receivable from sale of property and property for sale. c/ Includes OPEC Loan 262-P. July 11, 1983

39 33 - ANNEX I PARAGUAY LIVESTOCK DEVELOPMAMENT PROJECT Historical Financial Performance Balance Sheet a/ (Millions of G) Table _ ASSETS Cash and Bank deposits Loans due within one year: FG/IDA/IBRD/OPEC/ lines of credit , ,352.3 FG reinvestment fund Subtotal , ,950.3 Loans due after one year: FG/IDA/IBRD/OPEC/ lines of credit 3, , , , ,939.4 FG reinvestment fund , , , ,758.5 Principal overdue b/ Subtotal 4, , , , ,416.1 Less: Provision for bad debts Net loans outstandirlg 4, , , , ,286.4 Receivable from sale of property Property for sale Other assets c! Fixed Assets d/ Less: Accumulated depreciation Net fixed assets Total Assets 5, , , , ,899.2 LIABILITIES Borrowings due within one year IDA/IBRD Central Bank Other Subtotal Borrowing due after one year IDA/IBRD 4, , , , ,444.9 Central Bank Other Subtotal 4, , , , ,777.7 Total borrowings outstanding 4, , , , ,646.4 Other liabilities Equity: Capital Capital "La Patria" Surplus from inflation adjustments e/ Retained earning f/ , , ,215.8 Net income Total equity , , , ,126.5 Total liabilities 5, , , , ,899.2 a/ Summarized from auidited financial statements (except 1982, on which external audit is underway). b/ Amounts past due and under direct or legal collection procedures. _/ Includes inventory. d/ Includes net fixed assets at La Patria" experimental center. e/ Adjustment to outstanding loans (consumer price index) under FG/IBRD lines of credit (1037-PA and 1674-PA). f/ Includes losses due to exchange adjustments on borrowings (IBRD Loans 620-PA and 1037-PA). November 21, 1983

40 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT FG's PROJECTED FINANCIAL PERFORHANCE INCOME STATEMENT (MILLION OF 6/) B B FINANCIAL REVENUES INTEREST ON PREVIOUS LINES OF CREDIT a/ INTEREST ON NEW LINE OF CREDIT INTEREST ON F6iOPEC REVOLVING FUND O INTEREST ON F6 REINVESTMENT FUND OTHER bi FINANCIAL EXPENSES TOTAL INTEREST ON PREVIOUS BORROWINGS c/ INTEREST ON NEW BORROWINGS OTHER CHARGES ON NEW BORROWINGS di OTHER ci TOTAL INCOME FROM LENDING OPERATIONS > OPERATIN6 EXPENSES PERSONNEL ENERAL EXPENDITURES 'LA PATRIA' EXPENDITURES PROvISION FOR BAD DEBT TOTAL INCOME BEFORE DEPRECIATION DEPRECIATION INCOME FROM OPERATIONS NET NON OPERATING REVENUES (EXPENSES) 0 0 Q NET INCOME ai Includes coesissions. m >4 b/ Includes one-time commissions. ci Includes commissions paid to Government in lieu of exchanfe risk. di Commitment charges and front-end fee on Bank loan.

41 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT F6's PROJECTED FINANCIAL PERFORMANCE FLOW OF FUNDSTATEMENT (MILLION OF 6/) SOURCES NET INCOME SB77 DEPRECIATION PROVISION FOR BAD DEBTS GROSS INTERNAL GENERATION INCREASE 1-1 DECREASE (tl IN RECEIVABLES INCREASE i-) DECREASE (+) OF OTHER ASSETS NET INTERNAL GENERATION LOAN REPAYNENTS (OLD LOANS) LOAN REPAtMENTS (NEN LOANS) 0 O LOAN REPAYMENTS FG REINVESTMENT FUND V V USABLE FUNDSENERATED INTERNALLY BORROWINGS: PRIOR BORROWINGS V 0 O 0 0 NEW BORROWINGS INCREASE (4) DECREASE(-) OF OTHER LIABILITIES EOUITY INCREASE O TOTAL SOURCES APPLICATIONS LOANS PRIOR FG/lBRD PROGRAMS i NEW LOANS UNDER PROJECT ai NEW LOANS OPEC REVOLVING FUND b/ B5 285 Q O NEW LOANS FG REINVESTMENT FUND REPAYMENT OF PRIOR BORROWINGS REPAYMENT OF NEW BORROWINGS O 0 O INCREASE OF FIXED ASSETS ( TOTAL APPLICATIONS CASH SURPLUS (DEFICiT) CASH AT START OF PERIOD B CASH AT END OF PERIOD al Disbursements after 1985 include revolving fund for fattening. b/ Disbursements after 1987 are included in FG's reinvestment fund _

42 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT FG's PROJECTED FINANCIAL PERFORMANCE BALANCE SHEET (MILLIONS OF 6/) ASSETS CASH AND BANK DEPOSITS LOANS DUE WITHIN ONE YEAR LOANS DUE AFTER ONE YEAR INFLATION ADJUSTMENTS at GROSS LOANS OUTSTANDING Less: PROVISION FOR BAD DEBTS NET LOANS OUTSTANDING ACCRUED INTEREST RECEIVABLE OTHER ASSETS FIXED ASSETS ACCUMULATED DEPRECIATION NET FIXED ASSETS TOTAL ASSETS LIABILITIES BORROWINGS DUE WITHIN ONE YEAR BORROWINGS DUE AFTER ONE YEAR TOTAL BORROWINGS OUTSTANDING ACCRUED INTEREST PAYABLE EQUITY: CAPITAL CAPITAL 'LA PATRIA' INFLATION AND EXCHANGE ADJUST RETAINED EARNINGS NET INCOME TOTAL EQUITY I TOTALIABILITIES , ~ al Applicable to FGiIBRD lines of credit iloan 1037-PA and 1674-PA)

43 ANNEX 2 Page 1 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT Farm Models and Financial and Economic Justification A. Farm Models 1. The project constitutes a further stage in Government's Livestock Development Plan and responds to: an increasing demand for credit nationwide; the increasing acceptance of physical and technical improvements by cattle ranchers; and the necessity of a specialized institution to grant credit and technical assistance. The contemplated livestock development would take place throughout the country and thus encounter wide variations in climate, soils, infrastructure, input supply and markets. Three ranch/farm models intended to illustrate typical existing and potential development patterns have been prepared, with a view to reasonably represent the broad livestock producing areas. These models, as well as the technical coefficients given here and in Annex 4, have been developed on the basis of evidence provided by field visits during project preparation and appraisal, supervision data on the fifth (Loan 1674-PA) and sixth (Loan 1979-PA) projects, data obtained in the completion report for the fourth Bank-financed livestock project, and further estimates madle by Fondo Ganadero's Monitoring and Evaluation and the Projects Departments. The models reflect national trends in farm development investments exhibited in previous projects but are not considered as rigid guidelines for project execution. Large-size Beef Ranch (Tables 1 to 4 and Annex 4, C.2) 2. This model is representative of beef ranches under an extensive production system, primarily in the Chaco region. This area is typified by low, poorly distributed rainfall and in some areas, low quality soils. The physical production potential is lower than that of the rest of the country and 3 to 5 ha are required per AU. In previous projects, sub-borrower farm size in this region has averaged 4,800 ha, with about 1,600 head of cattle and with production activities which have included breeding, raising, and fattening of the ranch's output. Native forest typically covers less than 50% of the ranch area. Present levels of production are low, with steers sold for slaughter at about four to five years of age. Management is generally not good so that technical assistance is required and it is a condition of subloans of the 1979-PA project that private technicians approved by the Livestock Fund (FG) be hired to provide technical assistance at the farm level. The investment plan would comprise the seeding of adapted artificial pastures, additional infrastructure to facilitate livestock manipulation and to increase productivity on pasture areas, and the purchase of additional breeding cattle to improve genetic quality and utilize the increased carrying capacity of the ranch. Medium-size Beef Ranches (Tables 5 to 8, and Annex 4, C.2) 3. The typical medium-sized beef ranch is located in eastern Paraguay, usually has less than 1,000 ha and about 450 head of cattle, and has more than 50% of the unit covered with natural forest. The production system

44 ANNEX 2 Page includes breeding, raising and fattening, plus the fattening of purchased stock. Productivity is higher than in the Chaco, but weaning rates and age at sale are well below potential. In contrast to the Chaco producer, the owner of the medium-size ranch is generally the resident manager, but he must obtain technical assistance to qualify for the credit. The infrastructure investments (fencing, pasture improvement and the like) are designed to increase weaning rates, decrease marketing age, and increase cattle numbers to match the increased carrying capacity. Small-size Dairy Farm (Tables 9-12 and Annex 4, C.2) 4. This model is based on an 80-ha dairy unit specialized in milk production for sale in raw form to ambulant buyers or to the milk plants. The units are located near the consumption centers of central, southern and eastern Paraguay and are characterized by low technical coefficients, lack of electricity and manual milking. The existing infrastructure of buildings, low-yielding pastures and 32 milk cows would be complemented with an expansion of improved pastures and the purchase of a milking machine, cooler, and 20 heifers of improved quality. In addition, electricity would be installed and a forage chopper would be purchased. Technicians of FG would provide technical assistance. The model assumes that feeding of concentrates is kept at a minimum, utilizing instead quality forage. Family labor would be utilized fully but additional helpers would be hired. 5. Under this model, a line of credit has been allocated for investments on small livestock or mixed livestock/crop enterprises. FG has recently experienced strong demand for credit for the purchase of small processing equipment or additional investments in facilities by producers who otherwise have the infrastructure in an ongoing operation. The types of investments proposed under this component are: crop machinery, farm coolers, egg cleaning and classifying equipment, forage harvesters, barn repairs or expansion, watering facilities, and the like. These investments would be individually evaluated by FG technicians in view of the overall operation of the producer. Credit for Fattening 6. This line of credit has been included in response to the demand for credit experienced by FG to finance the purchase of steers by producers who have received earlier investment subloans and have excess carrying capacity and who otherwise have all of the infrastructure in an ongoing operation. Producers often begin a program of pasture development and fencing and for one or two years are short of cash resources to finance the purchase of animals to use the available pastures, development of which has been faster than the growth of the producers' herd. These investments are high yielding with repayment of the loan being possible in 12 to 18 months. The amount budgeted for this component is estimated on the basis of an average loan of about G 4.5 million.

45 _ 39 _ ANNEX 2 Page 3 B. Production 7. The land use patterns and yields for each model are shown in Tables 1, 5 and 9 of this annex and are detailed further in the herd projection tables shown in Annex 4, C Annual production of the farms participating in the project would be approximately as follows: Without Project With Project Incremental ( t) Model I - Beef a/ Model II - Beef Model III - Milk ('000 liters) Beef a! Liveweight basis. Assuming the project's credit line would finance 1,700 subloans as described in para 3.13, the incremental production of beef amounting to 74,000 t at full development, would represent 20% of the 1982/83 national production of 362,155 t; the incremental production of milk of 10.4 million 1 would represent 7% of the national production of 159 million 1. C. Markets 9. Paraguay cattle slaughter between 1976 and 1983 has varied from 557,000 to 950,000 head, oscillating around 600,000 head per year of which one-third was exported and two-thirds consumed domestically. The bulk of Paraguay's processed exports (about 70%) have traditionally been canned meats (corned beef mainly); the remainder was in the form of frozen beef and meat extracts. Processing was done during a short period of time (three to four months) in outdated, large-scale, internationally owned packing houses. Age at slaughter was high (five to seven years) and quality was not a limiting factor since exports were processed. Europe, mainly U.K., was the traditional export area. 10. World oversupply of beef occurred in the mid-1970s (especially ), when beef production cycles peaked simultaneously in all the major producing regions. Likewise, the liquidation phase of the cattle cycle in the mid-1970s occurred simultaneously in North America, South America and Oceania. Expansion of European Economic Community (EEC) beef production in 1975 coincided with heavy slaughterings in other parts of the world, bringing about surpluses, increased stocks, restrictive trade policies and a sharp drop in international prices. Sanitary regulations (e.g., foot-and-mouth disease) have kept South American fresh, chilled and frozen (uncooked) beef from entering the North American and Japanese markets, while bone-in-beef from South America is not permitted in the EEC. Like other developing

46 ANNEX 2 Page 4 countries, Paraguay has recently responded by seeking markets in other Latin American countries, southern Europe and the Middle East. 11. Paraguay's canned beef exports almost ceased in Frozen beef and processed products exports to Europe were reduced to about 4,000 tons annually and only began to increase in late Concurrent with the departure of the international processors from Paraguay in the mid-1970s, domestic demand increased significantly, mostly due to the effects of increased economic activity related to the construction of the hydroelectr:ic project of Itaipu. At the same time, unregistered exports of live cattle expanded significantly to an estimated peak of some 250,000 to 300,000 head in 1979/80. Tnese sales were primarily to Brazil, which developed barter contracts between 1979 and 1982 to exchange meat for petroleum, but the demand for beef exceeded Brazil's production. The cattle exported from Paraguay were initially males between 15 and 30 months of age which were fattened in Brazil. More recently, due to availability of improved pastures in Paraguay, most exports are of animals finished for slaughter. The production and destination of beef cattle between 1976 and 1983 are given in Table 13. Also, unregistered exports could take advantage of a free exchange rate, which, beginning in 1981, started to deviate seriously from the official rate of G 126 = US$1. In July 1982, the Government started to apply a higher exchange rate for some imports, effort which culminated in the Fall of 1983 with an application of a rate of G 160 = US$1 for almost all of the country's imports, public or private. The only exceptions to this country-wide rate are the public debt and some limited central government imports (G 126 = US$1). The import rate of G 160 at which the Central Bank releases foreign currency for most imports becomes an effective rate of about G because commercial banks charge taxes and duties amounting to G 10,5 per US dollar sold, and importers wish to deposit the local currency for periods of up to 120 days in commercial banks in order to be able to expedite the request for the purchase of foreign currency with the Central Bank. 12. In a parallel process, and as the economy is moving towards higher exchange rates, Government has allowed exporters of meat to utilize, since early 1983, a weighted exchange rate composed of several percentages of the export value at differing rates, resulting in a weighted average of betweeen G 190 and G 205. This move has clearly helped to open up meat exports which had been stagnated until the end of 1982; similar moves have been applied to exports of soybeans and cotton. The implied subsidy which these sectors may currently enjoy has permitted the Government to increase export revenues. 13. During the period of processed meat export reduction, most export slaughterhouses were closed, but with the reopening of the market, four or five processors of a relatively small size, with more or less adequate plants, are potentially able to participate. All of these, except two new ones, are now improving their facilities to respond to renewed activity. The industry has potential, as Paraguayan beef now sells at about 60% of the current international price of US$2,480/ton for frozen boneless beef and can still cover costs of production and processing. In 1981 constant terms, domestic farmgate prices of liveweight cattle have increased from G 80/kg in the early 1970s to about G 100/kg in the early 1980s (equivalent to US$1.57 of deboned beef). The international price projections indicate that the current prices for deboned beef of US$ /kg will be maintained until

47 ANNEX Page 5 the early 1900s. The price series are shown in Table 14. Beef is being exported to Chile, Peru, Israel and Germany at present and contracts with other countries are being negotiated. The industry is seeking to improve the quality reputation of Paraguayan beef and is selecting young cattle for export. Export expansion for fresh and frozen beef will be slow until exports show consistency of homogeneous quality. Expansion will also depend on maintaining or improving the exchange rate policies of the Government. Fortunately, live animal exports could increase, depending on the demand from Brazil and the parity of the Cruzeiro with the Guarani and the U.S. dollar. 14. Consumption of beef in Paraguay is relatively high, estimated at about 30 to 35 kg/person annually, and it is expected to increase as the Yacereta hydroelectric project is scheduled to begin at an early date. Incremental production arising from the proposed FG project (121,000 tons liveweight, or 55,000 tons carcass weight) should have an adequate market, either internally or outside the country. 15. Milk production has experienced a steady increase from 1971 (about 85 million liters) to the present, with domestic production in 1982 at 150 million liters, complemented by imports of 59 million liters in liquid or equivalents of powdered milk, resulting in a per capita consumption of 66 liters annually. Milk production is concentrated around the three major consumption centers of Asuncion, Ciudad Presidente Stroessner, and Encarnacion, on about 2,200 farms and in the Mennonite cooperatives in the Chaco. Characteristically, these farms are small (10 to 40 cows), milking is done once a day (due to lack of on-farm cooling), and farmers are dependent on purchased feed because good quality forage is scarce. Exceptions are the Mennonite colonies in the Chaco and eastern Paraguay, where an integrated production and processing system exists, aimed at producing processed milk to supply Asuncion. These producers have developed a high-forage, low-concentrate, low-cost production system. In addition, pasteurized, low fat milk is produced by two plants in Asuncion, mostly for the institutional market. Consumers prefer fresh and creamy raw milk delivered daily by ambulant buyers, who offer monthly credit and deliver at G 80/1 (or US$0.50/l). Imported sterile (UHT) milk from Argentina and Brazil (registered or unregistered) is freely available at about G 140/1 (US$0.88), as well as powdered milk at slightly lower prices (Annex 4, B.3, Tables 38 and 39, show the pricing and comparisons with internationally produced milk). According to a recent milk study, Paraguayan milk is reasonably priced but growth of the market is hampered by uneven quality at the farm level of milk for fresh consumption, absence of quality pasteurized milk, and competition from imports of UHT and powdered milk.l/ The study indicates that failure to control milk quality at the farm level and increase technical production coefficients are the major bottlenecks to the industry at the moment. As the road network is being expanded throughout the country, provision of mechanized milking and on-farm cooling are the factors that could most quickly overcome the quality constraint. The production and conservation of high quality forage would increase production while reducing costs; further, herd management needs improvement to decrease the inter-lactation periods and to increase calving percentage and milk production. The proposed project would address some of these constraints by providing technical assistance and credit for the installation of electricity and milking equipment and the expansion of pastures with harvesting equipment. The additional production arising from the project would be marketed domestically and would reduce imported products. 1/ Preliminary Report on a National Milk Plan, SCETAGRI/Republic of France, December 1982.

48 ANNEX 2 Page 6 D. Prices and Taxes 16. The marketing of agricultural products in Paraguay is free from Government regulations, and the prices of outputs and inputs are determined by domestic supply and demand and market conditions abroad, especially in Argentina and Brazil. Since March 1983, the price received by registered exports of meat is determined by the applicable exchange rate allowed to the exporter (para 11), currently about G 190-G 205 = US$1, as compared with the rate of G 160 = US$1, applicable to imported inputs in the agricultural sector. The three presently active exporting packers feel that, with the allowed rate, exports are feasible as far as pricing is concerned. Quality of stock and continuity in the availability of supplies throughout the year are the factors that they need to control for exporting (Annex 4, C.1 shows the historical exported and local prices of beef, together with comparisons with World Bank projections). Milk prices are freely determined. 17. There is no income tax applied to agricultural producers. The only tax affecting farm property is a real estate tax of 1% annually on the property value set by Government every year. Property units larger than 5,000 ha in the Eastern region or larger than 10,000 ha in the Western region (Chaco) pay a supplement which increases with the area in excess of those ceilings from G 0.6 to G 5 per thousand Guaranies of valuation. On output, there is a transfer tax of G 1,000 (US$6.25) per head of cattle sold, without distinction of age or sex. Import duties average about 9% for the investment packages (Annex 4, C.1, shows the applicable duties to project investments). Imports of breeding stock and semen do not require duty, following Government's policy to improve the quality of the national herd. Exports of domestically produced improved breeding stock are not allowed. Social security taxes of 16.5% on salaries paid to employees also apply to the farm labor sector. E. Financial and Economic Justification 18. Estimation of the financial and economic benefits accruing to the project is based on three farm models representing different farm sizes, locations, technologies and investment plans (paras 2 to 4 and Tables 1 to 12). The technical assumptions are detailed further in Annex 4, C.1. Both the financial and economic analyses have been prepared in constant mid-1983 farmgate prices, adjusted for expected changes in real prices according to international price forecasts published by the Bank's Commodities and Export Projections Division (detailed in Annex 4, C.1.). 19. Producer benefits in constant 1983 prices and the financial rates of return to the sub-borrowers are summarized below:

49 ANNEX 2 Page 7 Model 1 Model 2 Model 3 Large- Medium- Small-size size size Dairy Beef Ranch Beef Ranch Farm (US$ '000) Average Farm Size (ha) 4, Average Investment Cost Without Project Net Income/ha (US$) a/ Net Income/head (US$) b/ Net Farm Income With Project Net Income/ha (US$) Net Income/head (US$) Net Farm Income - During Debt Service c/ After Loan Repayment d/ Financial ROR (%) Economic ROR (%) a/ Net income is total revenue less operating costs, excluding the value of family labor and debt service. b/ Per total number of head of cattle in the herd; per cow in the dairy farm. c/ At midpoint during the repayment period of the subloan (year 5). d/ At full development. 20. The sensitivity tests summarized below, and detailed in Tables 4, 8 and 12, indicate that (a) the proposed investments are more sensitive to output and product price fluctuations than other factors, and (b) the smallsize dairy farm model is more sensitive than the relatively stable beef models. Model 1 Model 2 Model 3 Best Estimate Investment Costs Up 20% Switch Value a/ Operating Costs Up 20% Switch Value Revenues Down 20% Switch Value Delayed One Year a/ Percentage change required in the variable to reduce the rate of return of the model to the opportunity cost of capital, assumed to be 12%.

50 -44 - ANNEX 2 Page 8 The proposed investments would remain financially attractive within the limits of unfavorable developments regarding output, prices, investments and operating costs, and delays in obtaining the benefits as estimated. 21. For the economic rates of return, the following assumptions were made: (a) meat exports continue to receive an exchange rate of G 205; (b) import duties and transfer taxes payable to Government (which should provide the Government with about US$10.1 million for the investment program and US$2.8 annually for on-farm expenditures, assuming existing tax regulations are maintained and enforced); (c) adjustments to the price of meat to reflect real changes according to the projections made by the Bank's Commodity Studies and Projections Division; (d) costs of administration, including extension service costs, which were imputed and charged to the models; and (e) costs and benefits which were estimated only for the three components with comprehensive on-farm investment plans; the complementary investments referred to in para 5 above are expected to have similar economic viability. The value of family labor was included at the same value as hired labor and charged at their market costs because unemployment and underemployment are not prevalent in locations for which the models are representative. 22. The economic rates of return and the aggregate net present values, over a 20-year period discounted at 12% (assumed to be the opportunity cost of capital (OCC) on individual project components are estimated as follows: large-size beef ranch, 27% and US$132,000; medium-size beef ranch, 29% and US$84,000; and small-size dairy producer, 39% and US$154,000. The sensitivity tests are summarized below. Model 1 Model 2 Model 3 % Best Estimate Investment Costs Up 20% Switch Value Operating Costs Up 20% Switch Value Revenues Down 20% Switch Value The economic rates of return are satisfactory and slightly higher than the financial equivalents. Operating costs would need to double or revenues decrease by about 40% for the economic viability to be reduced to the OCC. November 21, 1983

51 PARAGUAY ANNEX 2 Table 1 LIVESTOCK DEVELOPMENT PROJECT Farm Model 1 - Beef Ranch (4,800 ha) Technical Coefficients A. Land Use Without Project With Project a/ Ha % Ha % Natural Pasture 4, , Artificial Pasture Forest B. Physical Productivity 4, , No. of Adult Head 1,638 2,090 Carrying Capacity (A.U./ha) Production of Meat (l.w.) - Per ha (kg/ha) Per head (kg/head) C. Technical Coefficients Weaning Rate (%) Adult Mortality (%) Calf Mortality (%) Offtake Rate (%) Slaughter Steer (Age at Sale) 4 3 a/ At full development. July 26, 1983

52 PARAGUAY LIVESTOCK DEVELOR4ENT PROJECT ANNEX 2 Table 2 Fanrm Model 1 - Investments a/ (G '000) Number Percent of Unit Foreign Total Cost Concept Unit Units Cost Exchange local Foreign Total Fencing m 10, ,729.6 Pasture Development b/ ha , , ,028.4 Pasture Weed Control ha ,307.9 Livestock Ponds m 3 3, Water Tanks m 3 1, Water Troughs Unit Artificial Insemination Equipment Unit Corral Unit Housing m Heifers Unit , , ,063.9 Bulls Unit ,089.6 Total , , ,645.6 a/ Detailed in Annex 4, C.1. _/ With "Buffel" (Cench'rus ciliaris) or Digitaria decumbens. July 26, 1983

53 - 47- PARAY ANNEX 2 Table 3 LIVESTOCK DEVELOPMENT PROJECT FARMODEL I - BEEF RANCH (4,800 HA) CASH FLOU - CONSTANT B INFLOW SALES a! LOAN b/ OWNER CONTRIBUTION TOTAL OUTFLOW INVESTMENTS c/ OPERATING EXPENDITURES d/ LOAN REPAYMENT PRINCIPAL ef INTEREST f/ TOTAL NET INFLOW g! November 21, :20 a/ Includes value of the herd at sear 20. b/ 70Z of investaent. c/ Fencing,artificial insemination, watering eauipment and Pasture improvement. The weighted foreign exchange coaponent = 63X. Replacements are shown in expenditures. df Salaries, aniaal health and artificial insemination, Pasture cultivation, technical assistance. repairs, transport, taxes and duties. Excludes family labor. el The loan is repaid in eight years, including two sears grace. Assumes loz inflation. f/ At 201 annually. 9/ Negative inflow of year 3 is financed by Positive inflows of Previous years.

54 PARAGUAY ANNEX 2 Table 4 LIVESTOCK DEVELOPMENT PROJECT Farm Model 1 - Beef Ranch (4,800 ha) Financial Results and Sensitivity With Project Without During a/ After b/ A. Financial Results Project Debt Service Debt Service Gross Revenue (G/ha) 2,075 3,401 4,2'1 Operating Expenditures (G/ha) 1,536 2,582 2,155 Net Income (G/ha) ,1:36 Net Income (G/head) 1,577 2,077 4,905 Net Farm Income (G'000) 2,583 3,933 10,251 Appraisal Switching Percent B. Switching Values at 12% (G'000) Value Value Change Meat Sales 53,127 34, Operating Expenditures 16,538 35, Investments 17,540 36, Total Costs 34,078 53, NPV (G'000) = 19,049 IRR = 25% C. Sensitivity Analysis IRR (%) Meat Sales -10%: 21-20%: 19 Meat Sales Delayed One Year: 19 Two Years: 16 Operating Expenditures +10%: %: 22 Investments +10%: %: 21 a/ Year 5. b/ Years 12-19, full development. July 26, 1983

55 PARAGUAY ANNEX 2 Table 5 LIVESTOCK DEVELOPMENT PROJECT Farm Model 2 - Beef Ranch (900 ha) Technical Coefficients A. Land Use Without Project With Project a/ Ha _ Ha X Natural Pasture Artificial Pasture Hillside Forest B. Physical Productivity No. of Adult Head Carrying Capacity (AU/ha) Production of Meat (l.w.) - Per ha (kg/ha) Per head (kg/head) C. Technical Coefficients Weaning Rate (%) Adult Mortality (%) Calf Mortality (%) Offtake Rate (%) Slaughter Steer (Age at Sale) a/ At full development. July 26, 1983

56 PARAGUAY LIVESTOCK DEVEIJJRENT PROJECT ANNEX 2 Table 6 Fann Model 2 - Beef Ranch (900 ha) Investments a/ (G '000) Number Percent of Unit Foreign Total Cost Concept Unit Uhits Cost Exchange Local Foreign Total Fencing m 5, ,011.2 Pasture Development b/ ha ,626.6 Pasture Weed Control ha Livestock Ponds m 3 2, Corral unit Spray Race unit Heifers unit , ,567.0 Bulls unit Total , , ,539.5 a/ Detailed in Annex 4, C.1. b/ With "Colonial" (Panicurm mxidmm), Brachiaria decumbens or hmiidicola, deforested by chain saw and hand labor. July 26, 1983

57 -51- ANNEX 2 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT FARMODEL 2 - BEEF RANCH (900 HA) CASH FLOW - CONSTANT Table INFLOW SALES a/ LOAN b/ OWNER CONTRIBUTION TOTAL OUTFLOW INVESTMENTS c/ OPERATING EXPENDITURES d/ LOAN REPAYMENT PRINCIPAL e/ INTEREST ft/ TOTAL NET INFLOW November 21, :21 al Includes value of the herd at sear 20. In the without Project and first Year situations. fifty steers are Purchased, fattened and sold; one hundred steers thereafter. b/ 75% of the investment. c/ Fencing, Pasture improvement, facilities for artificial insemination and watering. The weighted foreign exchange component is 622; replacements are shown in expenditures, d/ Salaries, hired labor, anisal healthy Purchase of breeding bulls, technical assistance, repairs, transport, taxes and duties. Excludes family labor. Includes annual Purchase of the fattening steers. e/ The loan is repaid in ten years, including three Years grace, Assumes 10% inflation. fj At 182 annually.

58 PARAGUAY ANNEX 2 Table 8 LIVESTOCK DEVELOPMENT PROJECT Farm Model 2 - Beef Ranch (900 ha) Financial Results and Sensitivity With Project Without During a! After b/ A. Financial Results Project Debt Service Debt Service Gross Revenue (G/ha) 4,721 10,104 12,134 Operating Expenditures (G/ha) 3,884 7,847 6,851 Net Income (G/ha) 837 2,257 5,283 Net Income (G/head) 1,887 3,377 5,032 Net Farm Income (G'00O) 753 2,178 4,755 Appraisal Switching Percent B. Switching Values at 12% (G'00O) Value Value Change Meat Sales 34,646 22, Operating Expenses 14,016 26, Investments 8,517 20, Total Costs 22,533 34, NPV (G'000) = 12,113 IRR = 27% C. Sensitivity Analysis IRR (%) Meat Sales -10% % Delayed one year Delayed two years Operating Expenditures +10% % Investments +10% % a/ Year 5. b/ Years 12-19, full development. July 26, 1983

59 PARAGUAY ANNEX 2 Table 9 LIVESTOCK DEVELOPMENT PROJECT Farm Model 3 - Dairy Farm (80 ha) Technical Coefficients A. Land Use Without Project With Project a/ Ha %Ha - Natural Pasture Green Chop Improved Pasture B. Physical Productivity Milk Output: (liters/ha/year) 876 2,738 (liters/cow/year) 2,190 2,920 Sales of Heifers (No.) - 18 C. Technical Coefficients Calving Interval (days) Lactation (days) Birth Rate (%) Adult Mortality (%) 3 2 Calf Mortality (%) Milking Cows/Dairy Herd (%) a/ At full development, year 5. July 26, 1983

60 PARAGUAY ANNEX 2 Table 10 LIVESTOCK DEVELORMENT PROJECT Farm Model 3 - Dairy Farm (80 ha) Investments a/ (G '000) Nmber Percent of Unit Foreign Total Cost Concept Unit Units Cost Exchange local Foreign Total Fencing m 2, Milking Barn m ,027.0 Milking Mzchine Unit 1 1, , ,659.8 Milk Cooler Unit Watering System Unit 1 2, ,778,0 2,378.0 Electrical System Unit 1 1, ,175.5 Forage Chopper Unit Pasture Developnent b/ ha Green Chop c/ ha Heifers Unit , ,729.0 Breeding Bull Unit Total , , ,041.6 a/ Detailed in Annex 4, C.1. b/ With 'Psangola" (Digitaria decumbens) or "Estrella"(Cynadon Sp.). c/ With grass 'Elefante" (Pennisetum purpureum) or sugarcane. July 26, 1983

61 PARAGUAY ANNEX 2 - Table 11 LIVESTOCK DEVELOPMENT PROJECT FAR MODEL 3 - DAIRY FARM (80 HA) CASH FLOW - CONSTANT G INFLOW MILK SALES MEAT SALES al LOAN b/ OWNER CONTRIBUTION c/ TOTAL OUTFLOW INVESTMENTS d/ OPERATINtG EXPENDITURES ex LOAN REPAYMENT PRINCIPAL f/ INTEREST g/ TOTAL NET INFLOW Noveeber 21, :22 a/ Includes the value of the herd at year 20. bl 901 of the investment. c/ 10% of the investment; kilking shed is built in gear 2. d/ Fencing, Pasture isprovementi milking aachine and cooler, installation of electricity, watering system. shed and Purchase of 20 heifers. The weighted foreign exchange component is 751. e/ Salaries, animal health, supplesentarv concentrates, artificial insemination, Pasture reseeding. replacement of oachinery every five years, office expenses, transport, taxes and duties. Excludes family labor. f/ The loan is repaid in ten years, including three sears of grace. Assumes 10% inflation, a/ At 18% annually.

62 PARAGUAY ANNEX 2 Table 12 LIVESTOCK DEVELOPMENT PROJECT Farm Model 3 - Dairy Farm (80 ha) Financial Results and Sensitivity With Project Without During a/ After A. Financial Results Project Debt Service Debt Service Gross Revenue (G/ha) 51, , ,625 Operating Expenditures (G/ha) 41, ,088 91,875 Net Income (G/ha) 9,950 28,475 84,750 Net Farm Income (G'000) 796 3,963 6,780 Appraisal Switching Percent B. Switching Values at 12% (G'000) Value Value Change Milk Sales 49,356 28, Meat Sales 9,096-12, Total Benefits 58,452 37, Operating Expenditures 26,635 47, Investments 10,717 31, Total Costs 37,352 58, NPV (G'OO0) = 21,100 IRR = 33% C. Sensitivity Analysis IRR (%) Milk Sales -10% % Delayed one year Delayed two years Meat Sales -10% % Delayed one year Delayed two years Operating Expenditures +10% %.27 Investments +10% % a/ Year 5. b/ Years 12-19, full development. October 27, 1983

63 PARAGUAY LIVESIOCX DEVELIOPM PRDJECT ANNEX 2 Table 13 Stocks and Destinations of Paraguayan Beef Cattle TIhusands of Heads Official stocks a/ 5,568 5,800 5,809 5,203 n.a. 6,341 n.a. n.a. Estimated stocks b/ 5,568 5,816 6,076 6,347 6,631 6,928 7,609 7,949 Estimated production Registered exports: (no. of bead equivalent) c/ Processed maats d/ 74,270 82, ,215 2, Frozen meats e/ 8,480 14,799 13,074 20,661 5,037-6,082 - Estimated donestic consumption Exports of live animals and/or stock increases n.a. Sources: a/ 1978 Agricultural Survey by Sanple, Ministry of Agriculture and Livestock (1979). b/ Mission estimates at an annual increase of 4.47% since ri/ Statistical Bulletin No. 297, Central Bank, February d/ Corned beef-0.7=carcass equivalent-.54-=liveweight at 320 kg/head. e/ Frozen beef-.544liveweight equivalent at 350 kg/head. October 27, 1983

64 PARGY LIVES1 DEVEL EPMJSR= ARMEX 2 Table 14 Beef Prices: Actual and Projected AimLal averages, liveweight faragate doaestic market a) Current G/kg b) Contant 1982 G/kg c) Coatant 1981 G/kg l Amxial averages livewight, fariete, daestic nmrket a) airrent G/kg b) Constant 1981 G/kg Amual average, iniers. steer. mediua wight, current G/kg (Exhange used. G/Peso Arg.). 0.C World Bark projections a) Current US$/kgI b) Constant 1981 US$/kg )Wholesale Price Index Paraguay, Note At a livew-ight price of G 100/kg, with a dressirg percentage of 54% and 74Z of meat/carcass weiht (Anrex 8, Table 30), a kg of deboned seat - G 233. equuivalent to US$1 46 at an eemha rate of 160 or US$1.17 at an ecane of G 200. International prices are about US$ /kg of debed rmst. local price of G 100/kg liveeeight is a reasonable estliate for the financial and economic analyses. Sources l(a) DCA - Ministry of Agriculture, steer over 350 kg liveweight, Boletin Informativo No. 97, pege 11. l(b): Calculated by deflatirng l(a) with inidices of item 5. For 1973 (46x405.6) For 1974 (52x405.6) : Central Bank of Paraguay, Departaranto de Estudios Econoicos, Division de Produccion, Precios y 1ercado Interno. Table prepared for the appraisal vmission, April 19, : Informstivo sobre Mercadeo, DtXEA, Ministry of Agriculture, Departmnt of Informaticn and Technical Assistance to Marketing, No. 392, Mrch 11, 1983, mid-point prices of nrdmn and mirdim-, March of each year. 4 World Bank Projectias, Decerker 1982 pages 18 and 20. US price. steer with lo fat. 5: Preparation Report, Anrex I, Table prices are for the moith of July. From Central Bark data. October 27, 1983

65 PARAGUAY ANNEX 3 Page 1 LIVESTOCK DEVELOPMENT PROJECT Previous Bank Agricultural Projects and Performance 1. The proposed project would be the 13th Bank/IDA supported agricultural project in Paraguay. These loan/credits have been as follows: Loan/Credit Year US$v000 Number Approved Amount General Purpose Loan 55-0-PA ,000 Agriculture-Farm Machinery Imports Credit 47-PA ,600 Livestock Development Credit 86-PA ,500 Livestock Development Credit 156-PA ,300 Livestock Development Loan 620-PA ,300 Livestock Development Credit 509-PA ,000 Rural Development Loan 1037-PA ,000 Livestock Development Loan 1418-PA ,000 Rural Development Loan 1674-PA ,000 Rural Development, Wholesale Market, Agricultural Census and Livestock Development Loan 1979-PA ,000 Livestock Development Loan 2087-PA ,000 Regional Development Loan 2141-PA ,400 Rural Development Loan 2304-PA ,000 Agricultural Credit 2. In the rural development projects, implementation has been slow. Major problems have been encountered in timely building of roads and this has delayed the progress of the remaining components. To date only one project has been completed and the Project Performance Audit Report (PPAR) issued. This was for credit 509-PA (PPAR SECM ) and concludes that, while the project achieved most of its physical, economical and social objectives and resulted in increased yields of cotton, maiz and soybeans, the implementation delays led to a cost overrun of 25%. 3. In the livestock subsector, two PPAR's have been issued. The one for Credit/Loan 156-PA and 620-PA (SECM78-248) was issued in 1978 and included results from investments made under credits 47-PA and 56-PA. Since no project evaluation was carried out by the implementing agency, a consultant was employed to survey beneficiares. Difficulties were encountered in obtaining reliable data since few ranchers maintained records adequate for an accurate measurement of the productivity levels.. The report estimated the FRR to be 18% and the ERR 11% compared to appraisal estimates of 24-30% and 29% respectively. As compared to appraisal estimates, assessed by the PPAR to have been too pessimistic, the beneficiaries had a 50% reduction in mortality and a 3% increase in weaning rate but the increase in stocking rate was only 24% of that projected.

66 ANNEX 3 Page 2 4. The second PPAR (SECM ) issued in 1981 for the 1037-PA project estimated the ERR at 23% as compared to the appraisal estimate of 24%. Although data collection by FG had improved, serious deficiencies remained in quality and reliability of the statistics. Estimated physical target results were based on appraisal estimates and a 1979 FG survey of beneficiaries to obtain without and with project data. These estimates are as follows: Region Chaco East Without Proj. With Without Proj. With Appr. Project Appr. Prcject Estim. Survey Survey Estim. Survey Survey Weaning Rate % Adult Mortality % Extraction Rate % Carrying Capacity AU/ha Improved Pasture ha ' The estimated annual incremental production of beef was 56,500 mt liveweight and for milk 31.5 million liters. A portion of this increase was due to improved productivity but most was due to an increase in the area under production. 6. The Livestock and Agricultural Development Project (Loan 1674-PA) included credit and technical assistance components for FG. An extension unit was established to provide improved technical assistance, primarily to smaller producers, and an expatriate co-director was employed for three years under a cost sharing UNDP/TA project for which the Bank was the executing agency. In this project, most medium- and all large-scale ranchers, who were not themselves technicians, were required to contract an FG-approved private technician to assist in ranch planning and management improvement. The credit portion is fully disbursed and the TA project will be completed in December Loan 1979-PA, which became effective in December of 1981 and included a US$10.0 million cofinancing from the OPEC Fund is 90% disbursed. Fondo Ganadero provides free technical assistance to small- and lower level medium-scale producers while other medium- and all large-scale ranchers must contract private technicians. This project included an important component (45% of project funds) for small producers based on the assumption that mixed farms predominantly based on livestock could be established. In actual practice, these producers were primarily interested in investments in crop production; swine production, which was the primary livestock component, did not prosper due to lack of demand for the product. FG was not equipped to provide specialized technical assistance to this type of producer and it considered that such lending was in direct competition with the area of responsibility of BNF. The subloan recovery rate for these producers has been lower than for livestock investments, due to climatic and product price constraints. FG, according to OPEC Fund requirements, will continue to on-lend roll-over proceeds to such small producers and has contracted with SEAG to provide TA to crop farmers receiving such subloans. Otherwise FG will return to its role as a specialized livestock credit institution.

67 ANNEX 3 Page 3 7. The results of the PPAR's quoted and the observations of supervision missions of production enterprise performance indicate that slow but steady progress is being made in increasing production and productivity in the livestock subsector. The lack of more significant improvements is mainly a result of the inevitably slow process of introducing improved herd and range management systems essential for the full utilization of the investments made. Beef production, especially under extensive open range conditions, has a long gestation period between the time of investment and the achievement of the incremental production. Cattle ranchers operating under these conditions, because of past experience of fluctuating beef prices, are usually conservative in relation to investment and adoption of new technology, although this attitude is improving with each new generation of participating ranchers. In the case of Paraguay, in addition to the international beef cycle, the closure of the EEC market in the mid-1970s, and frequent changes in the value of the Brazilian Cruzeiro (Brazil is the major market for Paraguayan live cattle) have resulted in a high degree of price and market instability for beef in the country. This in turn caused ranchers to go slower than expected with the introduction of more capital and management intensive production systems and, in periods of low prices, even to fall back to low input/low risk ranching. Another cause of the slow productivity growth is the still immature technology transfer system. Although FG has continued to improve its extension activities, it has tended to stress more the banking rather than the technical assistance aspects in its operation. Under the arrangement introduced in the Sixth Project, with the assistance of an expatriate consultant, FG provides technical assistance to its small-scale clients and requires the larger ones to contract private FG-supervised technical assistance. This system is not yet fully effective due to the traditional conservatism of beef producers and since neither FG nor the private sector has a cadre of sufficiently experienced technicians to accelerate the change of traditional attitudes and management practices of ranchers and farmers which is required for a full utilization of the investments made. The problem of availability of qualified technicians is general throughout Latin America, since most University graduates in agricultural specialties are from cities and do not have adequate practical experience to complement their formal training. November 21, 1983

68 ANNEX 4 PARAGUAY LIVESTOCK DEVELOPMENT PROJECT Selected Documents and Data Available in the Project File A. Selected Reports and Studies on the Sector A.1. Paraguay: Economic, Financial and Monetary Survey, Central Bank, A.2. Statistical Bulletin, Central Bank, No. 297, February A.3. Paraguay: Evolution, Perspectives and Trends of the Agricultural Sector, Draft Report, Marcelo A. Rossi, August A.4. Minimum Export Prices for 1983, Schedule No. 95, Central Bank, February 25, A.5. Preliminary Report for a National Milk Plan in Paraguay, Pierre Ponsardin, SCETAGRI/Ministry of Foreign Affairs, Republic of France, December A.6. Paraguay: SAR Agricultural Credit Project, Report 4382a-PA, May 16, B. Selected Reports and Studies Related to the Project B.1. Paraguay: SAR, Sixth Livestock Development Project, Report 3311-PA, April 7, B.2. Paraguay: Final Report of UNDP Technical Assistance Project to Fondo Gandero, Project PAR/79/002, December B.3. Paraguay: Seventh Livestock Development Project, Preparation Report, Fondo Ganadero, August B.4. Paraguay: Recommendations on the Management of Fondo Ganadero, Gustavo A. Gomez, Consultant, UNDP Technical Assistance Project, PAR/79/002, September B.5. Paraguay: Report on Staff Training, William H. Mark, Consultant, UNDP Technical Assistance Project, PAR/79/002, January C. Selected Working Papers and Tables Prepared by Mission Members C.1. Calculations and Assumptions for On-farm Development Models. C.2. Calculations for Project's Financial and Economic Analyses and Computer Programs. C.3. Production Systems. November 21, 1983

69 IBRD < ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ It ' ( _ < \.r v t x _ s * e ' 2 \ \ \ p 4 c N X I L ;, e \ a, ( IZ \ ' ii 0 ) -- K' 6 K [ ) < < / f A/ p <t g >izess$hi2h 2i\ ; 0 TaT3 t; 079 \te0z <: ~/ c >Le N\:ff. T. \i i ~~ _ i g X ' > 9ffir>r0 v \ S _T t i \ 2 f \ im'21mij 8 \ L~U-