Document of The World Bank Report No. 15554-BR STAFF APPRAISAL REPORT BRAZIL STATE OF PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT June 6, 1996 Natural Resources, Environment and Rural Poverty Division Country Department I Latin America and the Caribbean Region CURRENCY EQUIVALENTS (as of December, 1995) Currency Unit = Real (Rs) Real US$1.05 US$1.00 = Rs$0.95 FISCAL YEAR (State of Parana) January I to December 31 WEIGHTS AND MEASURES The metric system has been used throughout the report. BRAZIL STATE OF PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CCPG Centro de Coordenacao de Programas do Governo (Center for Coordination of Government Programs) CDAR Centros de Desenvolvimento Agricola e Rural (Centers of Agricultural and Rural Development) CM Conselho Municipal (Municipal Council) CODAPAR Companhia de Desenvolvimento Agropecuario do Estado de Parana (Agricultural Development Corporation of Parana) CODEPRO Comissao Deliberativa do Projeto (Project Deliberative Commission) COHAPAR Companhia de Habitacao de Parand (Housing Corporation of Parana) CRP Comissao Regional do Projeto (Regional Project Commission) DER Departamento de Estradas de Rodagem (Department of Roads) DERAL Departamento de Economia Rural (Department of Rural Economics) EMATER/PR Empresa Paranaense de Assistencia Tecnica e Extensao Rural (State Rural Extension Agency) FAO/CP Cooperative Program of the Food and Agriculture Organization GDP Gross Domestic Product GNP Gross National Product IAP Instituto Ambiental do Parana (Environmental Institute of Parana) IAPAR Instituto Agron6mico do ParanA (Agricultural Research Institute of Parana) ICB International Competitive Bidding IERR Internal Economic Rate of Return IPARDES Instituto Paranaense de Desenvolvimento Econ6mico e Social (Institute of Economic and Social Development of Parana) ABBREVIATIONS AND ACRONYMS (Continued) LMI Land Management I Project (Loan 3018-BR) MERCOSUL Mercado Comun do Cono Sul (Common Market of Southern Cone) SMG Sistema de Monitoramento Gerencial (Management Information System) NBF Not Financed by the Bank NCB National Competitive Bidding NGO Non-governmental Organization NL National Shopping NRDP Northeast Rural Development Program POA Piano Operativo Anual (Annual Operating Plan) PS Produtor de Subsistencia (Subsistence Farmer) PSM Produtor Simples de Mercadoria (Small Market-Oriented Farmer) SEAB Secretaria de Agricultura e Abastecimento (State Secretariat of Agriculture) SEMA Secretaria de Estado do Meio Ambiente (State Secretariat for the Environment) SETR Secretaria de Estado dos Transportes (State Secretariat of Transportation) SMM Salario Minimo Mensal (Minimum Monthly Salary) SOE Statement of Expenditures TOR Terms of Reference UAP Unidade de Assessoramento do Projeto (Project Advisory Unit) UATM Unidade Municipal de Assessoria Tecnica (Municipal Technical Assistance Unit) UATR Unidade Regional de Assessoria Tecnica (Regional Technical Assistance Unit) UGP Unidade de Gerenciamento do Projeto (Project Management Unit) BRAZIL STATE OF PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY ...............................................................i 1. ECONOMIC BACKGROUND AND SECTORAL CONTEXT ............................. 1 A. MACROECONOMIC BACKGROUND ...................................................................1 B. RURAL POVERTY ....................................................................... 3 C. NATURAL RESOURCES . .......................................................................4 D. AGRICULTURE IN THE ECONOMY OF PARANA .................... ..............................5 E. AGRICULTURAL VIABILITY AND COMPETITIVENESS ..........................................8 F. STATE GOVERNMENT INSTITUTIONS IN THE RURAL SECTOR ..............................9 G. STATE GOVERNMENT STRATEGY IN THE RURAL SECTOR ................................ 10 H. GOVERNMENT PROGRAMS IN THE RURAL SECTOR .............. .......................... 1l 2. SECTORAL CONSTRAINTS AND OPPORTUNITIES ...................................... 12 3. BANK EXPERIENCE IN THE SECTOR AND LESSONS LEARNED .............. 14 4. THE PROJECT.......................................................................................................15 A. ORIGIN AND RATIONALE FOR BANK INVOLVEMENT ....................................... 15 B. PROJECT STRATEGY ................................................................ 17 C. PROJECT OBJECTIVES AND DESCRIPTION ....................................................... 17 D. TARGETING ................................................................ 18 E. PROJECT COMPONENTS ......................... ....................................... 20 F. PROJECT COSTS .. 25 G. FINANCING PLAN ......................... .............................................. 26 5. PROJECT IMPLEMENTATION .............................................................. 28 A. INSTITUTIONAL ARRANGEMENTS .................................................................... 28 This report is based on the findings of the Appraisal Mission that visited Parana in March 1996. The Missions consisted of M. Carroll (Mission Leader and Task Manager), and E. Gacitua (LAlER). A. Saliba (LA lHR), A. Ninio (LEGLA) and D. Rosenblatt (LAICO), as well as E. Floto and V. Silvestri and M. Nelson (FAO/CP) and A. del Castillo (Cons.). The report also incorporates valuable contributions made during preparation by M. Wilson (MN1NE), A. Abramovich (LAIER), S. Hocombe (FAO), M. Raczynski and S. Figueroa (FAO/CP Consultants) and F. Hoyos and L. Requejo (Cons.). Peer reviewers are J. van Zyl (AGRDR) and I. Valencia (AF3AE). R Rudran was responsible for the production of this report. C. Bernard is the Division Chief, 0. Grimes is the Project Advisor and G. T. Nankani is the Department Director. TABLE OF CONTENTS (Continued) B. SUBPROJECT CYCLE ...................................... 31 C. PARTICIPATION ACTION PLAN ................. ..................... 34 D. MONITORING AND EVALUATION S YSTEM ............... ....................... 3 5 E. PROJECT PERFORMANCE INDICATORS ...................................... 3 6 F. PROJECT IMLEMENTATION MANUAL ........... ........................... 3 6 G. PRocuREmENT ............... 37 H. DISBURSEMENTS, SPECIAL ACCOUNT, AND PROJECT AccouNT .. 40 I. AccouNTs AND AUDITS ............................... .................................... 41 6. PROJECT BENEFITS, IMPACTS AND RISKS ......................... ......................... 42 A. BENEFITS .......................................................................... 4 2 B. ECONOMIC ANALYSIS ........................................................................... 43 C. ENViRONMENTAL ASPECTS ....... 46 D. RISKS ..................... 47 7. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION ..... 49 A. AGREEMENTs REACHED .......................................................................... 49 B. RECOMMENDATION .......................................................................... 50 S. ANNEXES A. Assessment of Rural Poverty in Parana ........................... ............................ 51 B. Agriculture and Natural Resources in Parana ................. ............................. 61 C. Creditworthiness Assessment .................................................................... 67 D. Poverty Alleviation Investment Component ................................................ 71 E. Technical Support Services Component ...................................................... 87 F. Detailed Project Costs ...................................... .............................. 99 G. Institutional Organization .................................................................... 109 H. Project Monitoring and Evaluation ............................................................ 115 I. Performance Indicators ..................................................................... 123 J. Supervision Plan ...................... .............................................. 131 K. Project Implementation Manual ............................................................... 133 L. Allocation of Loan Proceeds ................................................................... 135 M. Economic Analysis ............................ ........................................ 137 N. Environmental Aspects ..... ............................................................... 143 0. List of Documents in Project File . ............................................................ 153 MAP No. IBRD 27989 BRAZIL STATE OF PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: State of Parana (Brazil) Guarantor: Federative Republic of Brazil Implementing Agency: State Secretariat of Agriculture (SEAB) Beneficiaries: An estimated 255,000 small farm households. Poverty: Program of Targeted Interventions. The eligibility criteria developed ensure that project funds would be targeted primarily to the rural poor. Approximately 50% of project beneficiaries are below the poverty line. Amount: US$175 million equivalent. Retroactive financing up to a maximum of US$4 million equivalent is proposed. Terms: Repayment in 15 years, including five years of grace, at the Bank's standard variable interest rate Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after loan signing, less any waiver Financing Plan: See para. 4.48 Net Present Value: The weighted average of the internal economic rates of return for those subprojects with quantifiable economic benefits, representing about 60% of total subprojects, is estimated at 21.2% Staff Appraisal Report: No. 15554-BR Map : IBRD 27989 Project ID No. BR-PA-37828 BRAZIL STATE OF PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT 1. ECONOMIC BACKGROUND AND SECTORAL CONTEXT A. MACROECONOMIC BACKGROUND 1. 1 In Brazil, by the late 1980s, the combination of excessively high public spending and intense protectionism of the previous two decades, had led to economic disarray, severely restricted long-term credit and one of the world's highest inflation rates. In 1988, to address its economic crisis, the government began to liberaiz7e trade and eliminate public monopolies and price controls. With the Plano Real of June 1994, the currency was devalued and many subsidies were eliminated or reduced. The economy responded to these reforms with the private sector rapidly restructuring to increase its efficiency and ability to compete. Inflation was subdued, with rates plunging from 1,620% in 1993 to 25% in 1995. Investment increased from 13.7% (as a share of GNP) in 1992 to 14.4% in 1993, reaching 18.7% in the first semester of 1995. Beginning in 1993, the annual growth rate of GDP reached 5%, the highest growth rate in eight years (see Table 1.1). Table 1.1 Annual Real Growth Rates (%) ____ GDP Agriculture Industrv Commerce l___ I Parana Brazil Parana Brazil Parana Brazil Parana Brazil 1990 -6.6 117.6a 4.4 |IO.Oa 3.7 -9.7 -4.8 -8.0 -6.7 6.3 1991 2.5 120.5a |1.0 11O.9a 2.6 3.4 3.0 -0. 1 1.2 1.1 1992 1.7 122.6a -0.9 109.8a 6.0 0.1 0.9 -4.0 3.3 -3.2 1993 8.1 132.5a 15.0 115.2a_ -1.4 2.5 j 11.8 8.1 7.1 7.2 a: GDP based on an index with 1985 = 100. 1.2 The economy of the State of Parani represented almost 7% of the Brazilian GNP in 1993. Its economy, while diversified, is strongly agriculture-oriented. The agricultural sector contributed more than 40% of State's GDP in 1993, with primary production providing 14% and agro-processing the balance (see Chart A). In addition, agriculture- related industries, such as the manufacture of agricultural inputs and machinery, are significant. The chemical and metallurgical industries are also important contributors to the economy. Since bulk agricultural commodities, including forestry, represent more than half of the State's exports, economic performance is highly sensitive to international commodity market developments. - 2 - 1.3 In recent years, the economy of Parana has out-performed the national economy. Between 1986 and 1993, the State's economy grew by almost 33%, while the national economy increased 15%. Since 1990, the annual economic growth rates for Parana have steadily improved, from minus 6.6% to a positive 8.1% in 1993. Chart A - Parani: Sectoral Share of GDP 1993 Other I _o/ Chemical Agriculture 21% 43% Communication and Transport Metals and Metallurgy 14% 12% 1.4 The current administration enjoys a national reputation for sound public management, largely due to the Governor's success as mayor of the State's capital city. Having consolidated political support for privatization, the State is moving ahead with the privatization of state roads, and many future infrastructure projects are expected to incorporate significant private sector participation. To reduce the prevalence of payrolls in the State's budget and the consequent budgetary sensitivity to real wage adjustments, the government has imposed a hiring freeze and advocates decentralization of administrative responsibilities from state to local offices. 1.5 Since entering office in early 1995, the current State administration has focused on financial and fiscal reforms and incentive programs to achieve a sustained medium-term annual growth rate of 6%. With the intention of extending its achievements in environrmentally sustainable urban development into the rural sector, the government has increased rural investment programs in order to alleviate rural poverty and natural resource degradation. To reduce the economy's vulnerability to world market fluctuations, government programs promote, in addition to sustainable agricultural production, increasing agricultural commodity value-added, through crop intensification, diversification and modernization. Agricultural and agro-industrial development is being encouraged in the central and western regions. Recently, the government has initiated programs to improve the rural social infrastructure of the poor. - 3 - B. RURAL POVERTY 1.6 In Parana, poverty is concentrated in the rural areas, where more than 25% of the State's 8.6 million inhabitants live. In part due to rural poverty, farm concentration and agricultural capital intensification, the share of the rural population relative to the total has fallen steadily since 1970 when it represented 64%. Despite its relatively high per capita income level of US$2,784 in 1994, ParanA has the largest number of poor among Brazil's southern States. Nearly a quarter of the economically active population in the agricultural sector earns less than twice the monthly minimum wage (salario minimo meosal, SMM'), of whom the poorest 40% earn under one SMM2. Poverty is pronounced among agricultural laborers. An estimated 64% of such workers earn less than 2.5 SMMs. 1.7 Geographically, although poverty is widespread throughout the entire state, rural poverty is particularly concentrated in most of the central portion of the state. 1.8 Sixty-five percent of all agricultural producers are small farmers, whose net incomes are below three SMM, corresponding to the Subsistence Farmers (Produtor de Subsistencia) and a significant proportion of the Small Market-Oriented Farmers (Prodistor Simples de Mercadoria) (see Annex A) '. Many of these households depend upon off-farm employment to complement revenue from farm market sales. 1.9 The living conditions of the rural poor in ParanA are largely unsatisfactory. Almost half of the rural homes are constructed with non-durable materials and have dirt floors. Nearly a third of the houses have only one room, and only 12% have two rooms. For households of landless seasonal agricultural laborers (Boias Frias), whose dwellings have an average 1.6 rooms, overcrowding is a serious problem. Half the rural households and 70% of poor rural households do not have electricity. Compared to the other southern States, Parana presents the worst water and sanitation conditions, with 80% of rural poor households lacking an adequate supply of water and more than 92% lacking proper sanitation facilities (see Table 1.2). In Brazil, the urban household income line for extreme poverty, equivalent to the minimum salary needed to acquire the basic food basket, is set at two minimum monthly salaries (salarios mini'mos mensales, SMM). The houschold poverty line, equivalent to the salary needed to acquire the minimum food basket and other family needs, is approximately three SMMs. For rural areas, the extreme poverty line is adjusted, following CEPAL recommendations, to .75 of the urban line, due to the lower costs of living in rural areas. As of March 1996, an SMM was about equal to Rs.100. 2 National Household Survey, UNDP, 1990. 3 A farm typology was developed by IAPAR (1994) based on survey data on variables such as use of hired labor; degree of capitalization; technological level: net agricultural income and; sale of labor force. According to this typology, there are five main types of producers in Parana: (i) Subsistence Farms; (ii) Small Market Oriented Farms; (iii) Commercial Family Farms; (iv) Low Technology Rural Enterprises; and (v) High Technology Rural Enterprises. - 4 - Table 1.2 Selected Socio-Economic Indicators Brazil Southern States Parani Indicators Total Rural Total Rural Total Rual| Population (million) 146.8 35.8 22.1 5.7 8.4 2.2 Population under poverty line (million) 31.7 16.0 4.0 2.4 1.8 1.1 He& < one mininum wage (%e) 33.0 60.0 28.9 47.8 29.4 38.7 Head < one year schooling (%/) 24.0 49.0 14.1 21.9 15.3 38.1 House adequate sanitation (/) 52.4 12.8 53.4 17.0 39.6 7.3 Child labor, age 10-13 (%) 14.2 27.8 17.5 35.2 20.1 37.0 Source: IBGE, Pesquisa Nacional por Amostra de Domicilios PNAD-1990 and IBGE, Censo Demografico do Brasil, 1991. 1.10 Social and education indicators for Parana are the lowest in southern Brazil. More than 80% of heads of poor rural households have received less than one year of formal education. The illiteracy rate among the rural poor over age 15 reaches 60%, compared to 40% and 18% for the non-poor rural population and total population over age 15, respectively. 1.11 The children of rural areas in Parana are most affected by poverty. To contribute to household income, children must work, thereby limiting their opportunity to attend school. In Parana, nearly 37% of the children under the age of 13 work, as compared with 8.3% nationally. C. NATURAL RESOURCES 1.12 Parana is the second largest of the southern Brazilian States, with a total area of 199,554 kM2 (2% of Brazil), extending from 220 to 270 south of the Equator. It is bordered on the north by the State of Sao Paulo, on the west by the State of Mato Grosso do Sul, Paraguay and Argentina, and on the south by the State of Santa Catarina. To the east, Parana faces the Atlantic Ocean. Most of the State territory presents a humid subtropical climate, with annual rainfall ranging from 1,250 to 2,000 mm, which allows for tropical and subtropical agricultural crops. The State is divided into 19 administrative regions, 371 municipalities and eight agro-ecological mesoregions, regions with similar climatic and geomorphic conditions, and land use capabilities as summarized in Table 1.3. 1.13 Deterioration of natural resources, especially water and soil, is severe. In the past sixty years, the expansion of the agricultural frontier has dramatically reduced the native vegetation, shrinking coverage from 87% of the State's territory to less than 10%. Poor management of fragile soils has led to their degradation, reducing farm productivity and threatening the State's valuable resource base. Despite the positive impact of the World Bank-financed Land Management I Project (LMI, Ln. 3018-BR), more than 40% of agricultural land remains in need of improved soil management to reduce erosion and sustain productivity. In addition, while soil erosion is widespread throughout the State, the most severe soil constraints tend to coincide with those pockets with high concentrations of small farmers. A detailed description of natural resources in Parana is provided in Annex B. Table 1.3 Parana: Natural Resources and Agro-ecological Mesoregions Mew Area Msnicl Topography Soi Type No. of Share region millon ha padties Farns of Main ActivIdes (percent) Small Farnu l 008 (4.7) 13 rough/ tropical sedimentary 13,200 90 citrus, sugar forest cane 2 4.6 (27.8) 58 undulating basalV sub- 90,700 79 food crops/ traditional tropical fragile farming 3 2.4 (14 5) 34 undulating basalt/ natural 74,200 85 maize, soybeans, rnice, vegetation loss/ cotton, wheat, pasture erosion 4 0 6 (3.6) 20 undulating poor/serious 20,700 73 maize, beans, rice, pasture erosion 5 0.5 (3.0) 18 strongly basalt 24,700 70 coffee, cotton, maize, beans undulating 6 3.5 (21.3) 97 slightly basalt/ fertile 97,400 44 soybeans; pasture; dairy undulating 7 1.5 (9.4) 54 slightly basalt/fertile/fragi 82,300 70 maize, beans, hogs, poultry undulating lc and areas of l _______ _____________ ________ _____________ severe erosion 8 2.6 (15.7) 75 slightly highly erosion 63,100 40 canle, coffee, rna.ze, - - -! 1 sandstone cassava, cotton D. AGRICULTURE IN THE ECONOMY OF PARANA 1.14 The agricultural sector of Parana encompasses some of the most modem and capital-intensive farmners in Brazil. Nevertheless, the majority of the State's farming community is represented by more than 400,000 small to medium traditional farm households. The State is one of the country's largest producers of wheat, maize and soybeans (Chart B), providing in 1993 about 50% of the national wheat output and more than 20% of the cotton, maize and soybeans production (Annex B). 1.15 Subsidized credit schemes during the 1970s and early 1980s, which enabled producers to acquire farm machinery and inputs, led to the establishment of extensive soybean, grain and livestock operations in Parana. During that period, trade restrictions and government-guaranteed price programs protected local producers from international competition and price instability. Beginning in the late 1980s, with the gradual reduction of protectionism and farm subsidies, the economic context within which farmers in Parana operate changed dramatically. - 6 - Chart B - Parana: Area Planted to Major Crops (1994) Wheat Soybeans l .l10%s 33% _|I.|1 . | l , l eans | I | | Ellil ~9% offee 3% / :4o Cotton 5% Maize 40% 1.16 The initial effects of the recent economic reform programs on agricultural production in Parana are shown in Chart C, which presents the percentage change in annual average yields, area and production for the major crops between 1989/92 and 1993/94. Wheat, maize and soybeans account for over 80% of the State's cultivated area, while beans, cotton and coffee are also important. Between 1989 and 1994, the area under the main crops fell by 12%, being replaced primarily by livestock production. WNheat area fell by more than half, from 1.33 million ha in 1989 to 0.66 million ha in 1994. Coffee and cotton areas fell from 0.40 million to 0.22 million ha (43%) and from 0.55 to 0.29 million ha (47%), respectively. Only the maize area increased slightly, from 2.3 to 2.6 million ha (14%). Chart C - Parana: Changes in Major Crops (1989/92-1993194) ...... .. S. ';. ..... ....... . ,.,': . '....... '. '.,.......,,..'' ' :'': W''.'"''.-'.'''..... . .. ..'.... .... " . .. " Whe.t . ...v Soyabean Maize *..~~~~~~~~~~~~~~~~~~~~~~~~~., .~~~~~~~~~~~...... ke ; ~~~~~.... .. :S s........... ....... ...4.Q.:. .. ''.,. ...... -- 1°rea % | Cotton Y Ret "ALt: Coffee . . Beans si. - - -0D -50 -40 -30 -20 -10 0 10 20 30 40 50 1.17 Consistent with the national trend, the farm structure in Parana has become increasingly concentrated. During the 1970s, the number of small farms (under 20 ha) in Parana fell by more than 100,000. Between 1970 and 1985, the area cultivated by small farms fell by 35%, while area occupied by farms greater than 500 ha increased more than 30% (see Table 1.4). More than 90% of the State's farm households represent less than 40% of the agricultural land, while less than 3% of the farms occupy almost half the farn area. However, as the table shows, the decline in the area of small farms has not resulted in a similar reduction in the number of small farmers. Compared to 1970, the current number of small farmers (0.50 ha) represents a reduction of only 5%, still representing almost 90% of the total number of farmers. This phenomenon is largely explained by the fact that land tenure is not a major problem among small farmers, as over 60% hold legal titles to their land. Evidence suggests that, unless small and medium-sized farms can adjust to the evolving economic conditions, the tendency toward increasing farm size could become more pronounced. As has been determined elsewhere, the absorption of small farms by larger units could have a negative impact on Parana's agricultural productivity4. van Zyl, Johan, Binswanger, Hans, and Thirtle, Colin: The Relationship Between Farm Size and Efficiency in South African Aericulture, Policy Research Working Paper No. 1548, The World Bank, November 1995. - 8 - Table 1.4 Farm Stmcture in Parani (1970-1985) Size Range NumnberofFanus Tota Area (km) Year (Percentage) (Percentage) 0 - 20 1970 76.1 22.9 .___________________ 1985 71.2 14.8 20 - 50 1970 16.6 18.9 1985 18.0 14.9 50 - 200 1970 5.3 20.0 1985 8.2 20.5 200-500 1970 1.0 12.1 1985 1.8 14.5 > 500 1970 0.5 26.1 1985 0.8 35.3 Soure: Canao Apopecuario, 1970/85 1.18 Of the total of 455,000 farn households in Parana, approximately 300,000 cultivate under 15 ha of land and earn less than 3 SMM. An estimated 100,000 of small farm households are extremely poor, subsistence farm households, with an average farm size of 6 ha. Small farms operate with family labor, using animal traction or manual methods for light work and their own or hired machinery for land preparation5. Modern inputs are applied to commercial crops, but rarely to subsistence crops. 1.19 The typical production pattern of small farmers pursues food self-sufficiency as well as a cash surplus by growing basic food and industrial crops and raising livestock. Their main summer commercial crops are soybeans, maize and cotton. Beans are a regular, though minor, part of their cropping pattern, destined mainly for on-farm consumption. Perennial activities include coffee and pasture. During the 1 980s, encouraged by government subsidies, wheat became the principal winter crop. With the elimination of subsidies for wheat, much of the wheat area has been replaced with fodder, such as oats, to support small livestock and dairy production. Some farmers utilize grains as feed for pigs and poultry. 1.20 With regards to rural credit in Parana, according to a recent analysis, total availability of credit has declined from Rs.4 billion in 1980 to Rs. 1.2 billion in 19946. In 1994, almost 72% of total rural credit financed short-term investments, such as production and marketing costs. The data indicates that only farmers with gross farm receipts greater than 10 SMM have access to formal sources of credit while the majority of small farmers are virtually excluded from the credit system. E. AGRICULTURAL VIABILITY AND COMPETITIVENESS 1.21 The existing trends, resulting from trade liberalization, are likely to be accentuated by greater regional economic integration. While it is premature to assess the implications of these developments, they are likely to continue to induce major adjustments in the 5 Household Survey conducted by the Project Preparation Team in December 1995. 6 "Participacao do Produtor no Credito Rural", Projecto Parana 12 Meses, Parana, March 1996. - 9 - agricultural sector, particularly among small farmers. Preliminary evidence suggests that, given prevailing conditions, many producers of wheat and beef, to a lesser extent maize, soybeans and a number of small-scale horticultural crops, will have difficulty competing with Argentine imports.7 1.22 Wheat producers in Parana will face strong competition from Argentina. While average wheat yields in Parana are comparable to those of Argentina, Argentine production costs are less than half those of Parana. In addition, due to protein content differences, Argentine wheat is needed by Brazilian millers to blend with local grain. Despite Brazilian government efforts to encourage higher quality wheat and improve crop yields and quality, Argentine imports will likely dominate the Brazilian markets. Although a clear trend of substitution of wheat by soybeans is expected, only medium to large farms (over 200 ha) in areas with favorable growing conditions for wheat and good market access are expected to continue to grow wheat. 1.23 Local soybean production is also expected to face keen competition from Argentina. Although Argentine soybean yields are 20% higher and production costs are 25% lower than those in Parana, it is likely that local production will continue to increase in Southern Brazil, mainly due to reduced input costs and improved technological packages. Because of Parana's sophisticated agro-industrial base, processing will also probably increase, relying upon local and imported supplies. 1.24 Although maize yields in Parana and Argentina are comparable, relatively higher production costs suggest that maize production in Parana will have difficulty competing directly with Argentina. However, local maize production could be economically viable when integrated within Parana's many technically advanced and efficient poultry and swine operations. 1.25 Low beef cattle productivity, due to poor pasture and herd management practices, severely limits viable opportunities for extensive beef production in Parani. However, potential expansion exists for intensive livestock production systems suitable for small- scale farmers given Brazil's substantial milk deficit and the growing trend of integration of poultry and port processing with suppliers. F. STATE GOVERNMENT INSTITUTIONS IN THE RURAL SECTOR 1.26 The Secretariat of Agriculture (Secretaria de Agricultura e Abastecimento, SEAB) is responsible for promotion of agricultural development through the implementation of policies, sectoral development plans and rural programs. The technical assistance agency (Empresa Parananese de Asistencia Tecnica e Extensao Rural, EMATER/PR), affiliated with SEAB, delivers technical assistance on natural resources management, production and marketing. EMATER is staffed by about 1000 technicians, 7 Abranovich, A., "MERCOSUR: Role, Performance and Prospects of Agriculture and the Food Industry", unpublished manuscript, March 1996. -10- 14% of whom work at the State and Regional levels and 86% at the municipal level. The agency services the rural sector through an operationally decentralized network of 20 Regional administrative and 370 municipal offices. The regional supervisor works with a team of technical experts in crop and livestock production, natural resources management, rural organization, post-harvest handling and rural development. The Agricultural Research Institute (Instituto Agronomico do Parana, IAPAR), conducts research on agricultural and agro-industrial technologies and provides training to rural extension workers. The State Agricultural Development Corporation (Companhia de Desenvolvimento Agropecuariodo Parand, CODAPAR) operates lime distribution facilities and acts as a financial agent for several of SEAB's development programs. 1.27 The State Housing Secretary (Secretaria Especial de Politica Habitacional) plans and implements housing programs through the semi-autonomous Housing Construction Corporation (Companhia de Habitacao do Parana, COHAPAR), which has offices in the State's regional centers and major municipalities. The Secretary of Transportation (Secretaria de Estado do Transporte, SETR) plans, monitors and implements activities related to road, rail, and water transportation. The Department of Roads (Departamento de Estradas de Rodagem, DER), under SETR, is responsible for road construction, rehabilitation and maintenance. G. STATE GOVERNMENT STRATEGY IN THE RURAL SECTOR 1.28 The government's overall strategy aims to achieve: (i) sustainable development, through water, sanitation, energy and agricultural policies which allow economic growth while protecting the environment; (ii) human resource development, by meeting society's basic health, educational, housing, judicial, security and recreational and cultural needs; (iii) an infrastructure capable of supporting a dynamic economy through investments in transportation, modem telecommunications and basic rural infrastructure; and (iv) rationalization of the current structure of the public revenue and expenditure to allow the government to deliver basic public services efficiently, with higher participation of public sector. 1.29 Within the broad context of the State's general development objectives, the strategy for rural areas is to address the causes of rural poverty by improving social conditions, increasing household incomes and generating employment. At the same time, the government's objective is to promote sustainable and efficient resource use and to modernize the sector through greater economic integration and diversification. In this way, the government expects to increase the multiplier effect of sectoral growth, and to provide rural workers with year-round opportunities for employment thus addressing the serious social problems caused by the seasonality of primary services of agricultural labor. 1.30 Building upon its success in urban poverty reduction, the government is committed to increasing social expenditures and providing incentives for sustainable income- generating activities aimed at poor communities in rural areas. The government is establishing strategic development poles throughout the rural sector. These, in - 11 - conjunction with better social services and greater economic integration, are intended to create the conditions needed to allow communities to remain and prosper in the rural sector. Pursuant to government's policy of promoting decentralization and encouraging local participation, the State strategy is being implemented through partnerships between State agencies and municipal govemments and the private sector, including non- government organizations (NGOs). H. GOVERNMENT PROGRAMS IN THE RURAL SECTOR 1.31 The State-promoted main programs which support the strategic objectives for in the rural areas are: (i) land management and microcatchment development, feeder road rehabilitation and extension programs implemented by EMATER/DER and local governments (Prefeituras); and (ii) the Vilas Rurais Program. 1.32 EMATER's technical assistance has effectively introduced sustainable natural resource practices in various regions of the State. EMATER's capacity has been demonstrated through the institution's participation in the implementation of the Bank- financed LMI project (Ln. 3018-BR). The government seeks to consolidate and enhance technical assistance in soil and water management, as well as expand the scope of such assistance to promote interventions regarding on and off-farm rural initiatives. 1.33 The Vilas Rurais program began in 1995 as an initiative aimed at improving living conditions of the poorest segment of the rural population. The program provides land plots and technical and financial assistance for social and productive investments to poor rural families in newly established rural villages. These villages, consisting of up to 50 families, are designed to provide access to markets, utilities and basic social services. The villages are located in the rural areas, but are easily accessible to an urban center. Participating municipalities receive State finance for up to 75% of the value of the land acquired for the village. The heads of the participating households are experienced agricultural workers, with seasonal employment, living under sub-standard housing conditions. Beneficiaries receive land plots and cost-recoverable finance for construction costs. Beneficiaries repay for the cost of housing in installments over 25 years. The household plot (typically 5,000 m2 ) permits each family to cultivate crops, which would complement the household's principal off-farm earnings and increase their purchasing power by reducing the food bill and generating a modest cash surplus from commercial sales. 1.34 During 1996, the State Government has allocated more than US$13 million for participating municipalities to finance land purchases for the establishment of approximately 20,000 plots, representing about 400 Vilas Rurais. In the program's first year, 228 municipalities have expressed interest in participating in the program; while another 131 municipalities are expected to participate in 1997. To date, 15 municipalities have begun construction or have established Vilas, and another 57 are in the process of preparing their proposals. By June 1996, it is projected that approximately 13 Vilas with 500 families will be fully developed. - 12- 2. SECTORAL CONSTRAINTS AND OPPORTUNITIES 2.1 Several factors constrain sectoral development, impeding poverty alleviation and the achievement of acceptable standards of living in Parana's rural sector. The most critical are: (a) Inadequate rural social services and facilities depress rural living standards. The houses of most rural poor are constructed of inferior materials and lack both running water and basic sanitation. These conditions compare unfavorably with those found in the urban areas and are a principal reason for many families to leave the rural areas for the urban centers seeking improved living conditions. (b) The steady deterioration of the natural resources has considerable negative environmental effects on both rural and urban populations and contributes to depress the basis from which small farmers derive their livelihoods. Continuous cultivation on land with steep slopes, without correction for acidity or nutrient replacement, has caused serious soil degradation. Erosion of the poorly-structured soils has reduced moisture storage in the soil profile, increased drought susceptibility and lowered yields. As a result, the viability of agriculture as a sustainable means of supporting rural households is threatened. (c) The third serious constraint is the technical and financial resources for small farmers to adjust to the new economic conditions. The sector's competitive performance depends upon its ability to rapidly modernize and diversify production, opening opportunities for vertical integration with agro-industries. Such adjustments require technical and financial resources. However, many small farmers do not have access to the technical expertise to identify viable market opportunities and funds to modernize, diversify and/or integrate their family farming systems. (d) Finally, limited rural employment opportunities depress rural economic growth. Lack of rural work possibilities is one of the major reasons youth, both men and women, migrate to the urban centers. Greater economic diversification, including agro-industrial expansion and rural services as well as work skill training, would contribute to growth, increase labor productivity and alleviate rural poverty. 2.2 Because of the government's commitment to alleviating rural poverty, greater attention and resources will be directed to improving the living conditions of the rural poor. Programs such as the newly established Vilas Rurais Program, need to be supported and strengthened to help bring rural conditions to satisfactory levels. In - 13 - addition, programs extending the coverage of basic social services, especially water, electricity, health and education in the rural areas need to be strengthened. 2.3 Government support is essential to promote adequate soil and water management to reduce the deterioration of the environment, in both rural and urban areas. Therefore, programs such as the LMI project (Ln. 3018-BR), which is introducing appropriate techniques for the rational use of these resources, need to be consolidated and expanded to cover a greater area of the State. 2.4 While the more competitive market conditions demand substantial short-term adjustments, they also offer an efficient farm sector ample opportunities for growth. Small and large farmers alike will need to become more efficient and identify market niches in which they can effectively compete. To continue farming, many producers, burdened with debts and falling land values, will need to rapidly identify and adopt viable agricultural alternatives which can bolster their net returns. 2.5 The continued displacement of small and medium sized family farms by larger farms is expected to contribute to the gradual downward spiral of the rural economy and the burden to the State of its social assistance programs. To abate this trend, these farm households need to pursue on- and off-farm productive activities. Viable activities would build upon the State's substantial comparative advantages, which include not only good agro-ecological conditions and a skilled agricultural labor force, but also a modem agro- industrial base, and good transportation and communication infrastructure. Altematives for small and medium-sized farm households include contract swine and poultry production, intensive dairy production, diversification into high-valued crops such as fruits and vegetables, and greater on-farm value-added, through better handling and processing methods and market integration. - 14 - 3. BANK EXPERIENCE IN THE SECTOR AND LESSONS LEARNED 3.1 The Bank's favorable experience in the rural sector in Parana is based on the highly successful Land Management I Project (Loan 3018-BR, LMI), which is expected to close by October 1996. This project effectively supported the Government's efforts to reduce soil degradation and erosion, improve soil fertility, and moisture storage capacity, and increase crop yields. Concentrated in Mesoregions 5, 6, 7 and 8, the LMI project introduced innovative technical approaches for economically viable investments in soil conservation and management on 6.5 million ha in 2,350 microcatchments. Moreover, the program initiated a process which expanded soil conservation practices, such as terracing, liming, minimum tillage and reforestation, indirectly benefiting approximately 200,000 farms. As a result, production of major crops and incomes farm household has improved significantly. More importantly, not only did participating farmers assimilate and integrate the project's soil management techniques, but, through their demonstration effect, many other farmers in the region followed their example. 3.2 Since early 1989, the Bank has been involved in four successful natural resources management and watershed development projects in southern Brazil, of which the project in Parana was the first.' These natural resource projects, organized around water catchments and implemented with the participation of local farmers, municipalities and the private sector, serve as excellent models for the natural resources component of the proposed project. The experience validated the water catchment as an effective planning unit for natural resources management activities. The projects' participatory approach generated the needed bottom-up support for the project. Good coordination of project interventions, linked to timely adoption by the farmers of recommended conservation practices, was critical to the success of the investment packages financed in the microcatchments. 3.3 Regarding poverty alleviation, for more than twenty years the Bank has supported rural development and poverty alleviation in northeastern Brazil, starting with the POLONORDESTE Program (1975-84), which was followed by the Northeast Rural Development Program (NRDP, 1985-93). Beginning in 1993, the NRDP was reformulated to introduce a stronger poverty focus and greater local participation. The design of the most recent rural poverty projects in the Northeast (Bahia, Ceara and Sergipe), which were initiated in 1995, take these elements into consideration. This continuum of project experience has provided valuable lessons on: (i) client demand- driven subproject investments; (ii) subproject implementation by the beneficiary communities; (iii) decentralized project management; (iv) clear beneficiary eligibility criteria; and (v) sound project management techniques. 1 Land Management I Project: ParanA (Loan 3018-BR), Land Management II Project: Santa Catarina (Loan 3160-BR), Land Management III Project: Sao Paulo and Land Management IV: Mato Grosso do Sul. - 15 - 4. THE PROJECT A. ORIGIN AND RATIONALE FOR BANK INVOLVEMENT 4.1 The proposed project fully supports the Brazilian Govemment's broad strategy for poverty alleviation and decentralization of project administration to the States, as well as the anti-poverty orientation of the Bank's Country Assistance Strategy (CAS), discussed by the Board of Executive Directors on June 29, 1995. The principal elements of the CAS are: (i) direct rural poverty reduction; (ii) consolidation of environmental and natural resources management; and (iii) promotion and financing of infrastructure investment. The project would combine the successful experience of the LMI project with the lessons learned in the Bank poverty alleviation projects, primarily in northern Brazil. 4.2 During the initial stages of the current administration, the State Government requested Bank support to implement a comprehensive initiative aimed at addressing the principal causes of rural poverty throughout the State - inadequate social services and infrastructure; deteriorated natural resources; and the poor competitive position of the small farmer, the dominant agricultural unit. While the initiative was originally conceptualized upon the successful experience of the Bank-financed LMI project, its objectives, scope and coverage are substantially broader, incorporating a strong focus on poverty alleviation. 4.3 Consistent with the Bank's current strategy for direct lending to Brazilian states, the Bank's decision to support the project was made on the basis of the verification of the State's creditworthiness. A summary of the Bank's assessment of the creditworthiness of Parana is provided in Annex C. The rationale for the Bank's technical and financial assistance to the project is primarily based on the extensive experience acquired in rural poverty alleviation and natural resources management. The most relevant lessons learned by the Bank which contributed to project design were as follows: (a) Decentralization: A direct financial assistance mechanism to alleviate rural poverty is most effective when delivered through decentralized institutions. The Bank's experience has underscored the need to provide these entities with sufficient technical support to ensure that they can respond effectively to the needs of the project. (b) Beneficiary Participation: Experience has demonstrated that beneficiary participation throughout the subproject cycle ensures that investments respond to a genuine demand, generate cost-savings and increase accountability at the local level. - 16 - (c) Targeting Criteria: World-wide Bank experience indicates that simple, explicit and verifiable targeting criteria are essential to the effective allocation of investment funds and reduction of political interference. (d) "Weaker" Communities: A successful project must be accessible to its target beneficiaries. Previous demand-driven projects in Brazil have underscored the need to provide sufficient assistance to the "weaker" communities to strengthen their planning, management and financial capabilities. An evaluation of poverty alleviation projects in Brazil revealed that many municipal councils were unfamiliar with the concepts of development planning, appraisal of altematives, development objectives, cost-benefit analysis and opportunity cost. (e) Subproject Standardization: Standardization of subproject documents, technical designs and unit costs simplifies subproject preparation and evaluation, facilitates procurement, provides a technical and financial reference for municipal councils and reduces the over-design of subprojects. Experience in the Northeast Rural Development Projects has demonstrated that such standardizing encourages participation by poorer communities and reduces bottlenecks in the subproject cycle. (f) Sustainability and Cost-Sharing: Recent project evaluations indicate that cost-sharing arrangements, along with sound subproject selection criteria, tend to increase the likelihood of subproject sustainability. As a result, most recent Bank projects require beneficiary contributions of at least 10% and up to 40% of the investment value, most of which is provided in the form of labor. (g) Subproject Supervision: Bank experience with demand-driven, decentralized projects highlights the necessity for intensive subproject supervision which incorporates significant local-level participation and site visits. Adequate supervision, through technical and financial monitoring of subproject samples, allows for rapid detection and correction of: (i) delays in fund allocation; (ii) gaps in communication among the various project administrative levels; and (iii) implementation bottlenecks, especially in procurement. (h) Project Performance Monitoring: Good project design, implementation and evaluation requires the development of indicators of project performance and impact which are consistent, specific and easily collected. In addition, Bank evaluations suggest that the preparation of a well- designed representative baseline study, as well as discussing the indicators with the Borrower at an early stage of project preparation helps to define and secure consensus on project objectives. - 17 - 4.4 The project is fully consistent with the criteria for the Bank's Program of Targeted Interventions. To target project investments at the municipal and beneficiary levels, the project would establish a mechanism for direct financing of beneficiary subprojects which takes into account municipal poverty levels, concentration of small farms, types of agricultural producers and agro-ecological characteristics of the area. B. PROJECT STRATEGY 4.5 The project's strategy would be to contribute to the alleviation of rural poverty, the protection of natural resources and the stimulation of the rural economy. It would provide technical and financial assistance to eligible communities or groups of rural poor beneficiaries in order to provide the standard of living, introduce proven natural resources management practices, and support small-scale initiatives for modernization and/or diversification of traditional production systems. 4.6 The project would provide groups of poor rural households with well-targeted support for beneficiary-demanded economic and social investments, using microcatchments (microbacia) as the primary operational unit. In addition, within the microcatchment, the project would help small farmers introduce improved natural resources management practices as well as encourage innovations to increase sectoral competitiveness and household income. The project strategy would also seek to strengthen the linkages between on-farm and off-farm activities to generate employment opportunities and raise the income levels of the rural poor. C. PROJECT OBJECTIVES AND DESCRIPTION 4.7 The objectives of the proposed project are to increase the incomes and improve the living conditions of approximately 255,000 rural poor and small farmer households by supporting the implementation of community-demanded investment subprojects. The project also aims to protect the State's natural resources by promoting sustainable practices for improved land management and soil and water quality conservation in an area of approximately 8.1 million ha. 4.8 The project design is based primarily on Parana's valuable experience in developing community-based development programs in rural areas in particular through the implementation of the Land Management Project, as well as the incorporation of lessons learned in poverty alleviation throughout projects in Latin America. The main project features include: (i) decentralized decision-making mechanisms that rely mainly on existing institutions, including local governments and beneficiary organizations, rather than promote the creation of new project-specific entities; (ii) high beneficiary participation, including demand-driven identification of subprojects and the development of participatory methods to ensure that project implementation benefits from adequate and continuous feedback from beneficiaries; (iii) accurate beneficiary selection criteria, based on extensive analysis and validation of socio-economic data for targeting purposes; (iv) adequate project promotion, to ensure widespread awareness of project features - 18 - within potential beneficiary communities; (v) simplified subproject processing cycle, including standardization of typical subproject designs, intensive training of field staff providing technical assistance to beneficiaries; and (vi) sustainability-oriented implementation of subprojects, through community integration and accountability, beneficiary commitment to 0 & M of subprojects, establishment of financial limits per individual beneficiary, and adequate levels of technical assistance and specialized monitoring during subproject implementation. D. TARGETING 4.9 Drawing from existing experience in poverty alleviation investment projects, the project incorporates well-defined targeting mechanisms based on a series of socio- economic indicators specific to the rural population of Parani. To identify potential beneficiaries, correlates of poverty in rural areas would be used. By means of simple, explicit and verifiable eligibility criteria, the different project activities would be targeted to: (i) specific communities within microcatchments defined by their agro-ecological as well as socio-economic conditions; and (ii) groups of households defined by their socio- economic and productive characteristics. 4.10 Priority Mesoregions. As targeting mechanisms used would allow the project to focus on beneficiaries regardless of geographical areas, all qualifying poor communities and microcatchments would be eligible for project assistance. However, given the high concentration of potential beneficiaries in certain areas of the State, the project would initially prioritize implementation efforts in a limited number of mesoregions (see Annex B). Initial project activities would be primarily oriented to mesoregions 2, 3 and 6 (map), where 60% of Parana's 300,000 poor small farmers are concentrated and soil deterioration is substantial. This strategic approach would allow a more concentrated effort towards decentralized institutional strengthening, staff training, project promotion and implementation of monitoring systems. 4.11 The identification of the priority mesoregions was based on: (i) the proportion of subsistence small farm households; (ii) the importance of soil deterioration problems; and (iii) the degree of coverage provided by the previous LMI project. It is expected that approximately 68% of project beneficiaries would be located in these mesoregions. 4.12 Approximately 70% of the rural population of the priority mesoregions are small farm households. Farm land, covering more than 11 million ha, is primarily dedicated to traditional crops including wheat, maize and soybeans. Most of the soils in these mesoregions have low natural fertility and are susceptible to erosion, while the majority of small farmers do not apply adequate natural resources management practices. 4.13 Microcatchment Eligibility Criteria. For the implementation of Natural Resources Management Subprojects, priority would be given to those microcatchments where the LM[ project initiated soil and water conservation activities, so that the package of recommended practices can be completed and consolidated. Identification of "new" - 19 - microcatchments would be based on demand. Requests for support in new microcatchments would be prioritized according to: (i) concentration of small farmers; (ii) beneficiary interest, organization and participation, including commitment to maintain infrastructure; (iii) erosion potential or intensity of soil degradation; (iv) downstream water use or urban water demand; and (v) location, with preference given to microcatchments in a priority mesoregion which received less support from the LMI project. All three categories of beneficiaries would be eligible for natural resources management subproject financing. 4.14 Beneficiary Household Eligibility Criteria: Project activities would be targeted to those households classified as Subsistence Farm Households (PS) and Small Market- Oriented Farm Households (PSM). The main features of these categories are described in Annex A. The parameters used to develop the eligibility criteria of potential groups of beneficiaries would be as follows: 4.15 Subsistence Farm Households (PS) would be identified by the following correlated poverty indicators: (i) farmers with less than 15 ha of land; (ii) earnings below one SMM; (iii) minimum use of hired labor and reliance on animal or/and manual traction; (iv) low levels of on-farm investment; and, (v) household members are employed farm laborers more than 15% of days worked in a year. 4.16 Small-Market-Oriented Farmers (PSM) are divided into three subcategories: PSM1, PSM2 and PSM3. The average PSMI would. (i) cultivate under 15 ha; (ii) earn less than 3 SMM; (iii) rely predominantly on family labor, with hired labor accounting for up to 20%; (iv) use animal as well as some mechanical traction; (v) make minor on-farm investments; and (vi) work off-farm as contracted laborers for less than 15% of days worked in a year. 4.17 The PSM2 and PSM3 have similar characteristics to the PSMI, except that household area is less than 50 ha and earnings represent a maximum of 5 SMM. Groups of such farmers would be eligible for a limited range of project support activities and be required to: (i) apply recommended natural resources management practices; and/or (ii) have received assistance from the LMI project. 4.18 Table 4.1 illustrates the different categories of project beneficiary groups, the targeting eligibility criteria to be applied and the types of project investments that would be available to each category. - 20 - Table 4.1 Targeting(Eligibility Criteria for Project Beneficiaries Beneficiary Eligible Project Activities Targeting/Eligibility Criteria Household Subsistence Farmer Poverty Alleviation and Social Investments under 15 ha of land earn less than 1 SMM (PS) minimum capital investment Natural Resources Management animal or manual traction over 15% off-farm employment Training predominantly family labor Small Market- Poverty Alleviation and Social Investments er 15 ha o lan Oriented Farmer ~~~~~~~~eamn less tha 3 SMM Oriented Farmer low capital investment (PSMI) Natural Resource Management animal/mechanised traction under 15% off-farm work Agricultural Diversification Training Small Market- Natural Resource Management under 50 ha of land Smalled Market- Naua eoreMngmn eam less than 5 SMM Oriented Farmer low capital investment (PSM2&3) Agnicultural Diversification animallmechanised traction under 15% off-farm work Training must apply appropriate natural resources _management practices E. PROJECT COMPONENTS 4.19 The proposed project would have two components: (i) Poverty Alleviation Investments; and (ii) Technical Support Services. Poverty Alleviation Investment Component (US$299.1 million, 89% of project costs) 4.20 The Poverty Alleviation Investment Component (Annex D), would provide financing to eligible communities or groups of poor farmers for the implementation of demand-driven social and productive subprojects with demonstrable social, technical, economic and environmental viability. 4.21 The component would finance subprojects within. Two investment categories would be financed: (i) Social and Income-generating Investment; and (ii) Natural Resource Management and Agricultural Modernization Investments. In each case, variable levels of project-financed incentives and cost-sharing arrangements would be established based on investment types and category of beneficiaries. 4.22 Social and Income Generating Investments (US$185. 5 million, 55% ofproject costs) - The objective of these investments would be to improve the quality of life of the rural poor by financing: (i) social infrastructure subprojects; and (ii) on-and off-farm small- scale income generation subprojects. - 21 - 4.23 Social Infrastructure (US$128. 7 million, 38% of project costs). The project would finance subprojects, aimed at improving the quality of life, proposed by groups of poor subsistence and small farmer households. Possible subprojects would include water supply and sanitation, electrification, household infrastructure, and community buildings and basic social services. Priorities would be established within the community and proposals would be prepared with assistance of EMATER, municipal social workers or private institutions. The request presented would describe the subproject objectives, technical specifications, and costs as well as a detailed maintenance plan. 4.24 As part of an integral strategy for community development a significant portion of the demand for social infrastructure subprojects is expected to originate from communities participating in the government's Vilas Rurais program (para. 1.33). Once the communities have been assigned their land plots under the Vilas Rurais program, they would formulate and present their requests for financial and technical assistance by the project. By virtue of their participation in the Vilas Rurais program, beneficiaries would have satisfied the program's eligibility criteria, which require that the head of the beneficiary household be: (i) an experienced agricultural laborer, who works seasonally and has a large family, which lives in inadequate housing; (ii) a resident of the municipality for at least four years; and (iii) without ownership of urban or rural real estate. 4.25 In the case of proposals for housing subprojects, once community requests are approved, the beneficiaries, in collaboration with staff from the state housing agency (COHAPAR), would participate directly in the purchase of building materials. To reduce costs, purchases would be aggregated wherever possible. In addition, to stimulate the local economy, preference would be given to local materials and service providers. Construction would meet the civil and environmental requirements applied by COHAPAR in community development construction projects. As part of the agreed cost-sharing arrangement, beneficiaries would contribute to the total costs through the supply of their labor. 4.26 Since families would become owners of the housing, cost recovery mechanisms, similar to those applied by COHAPAR in urban programs, would be established. After a six-month grace period, beneficiaries would pay the equivalent of about 15% of one SMM a month under a "lease to own" arrangement during the first 30 months. Having demonstrated their financial responsibility during the initial period, beneficiaries would begin to pay monthly mortgage payments, representing 25% of one SMM, over a 25-year period. Failure to fulfill the responsibilities during the first 30 months would result in the repossession of the land and infrastructure. 4.27 Income-Generating Subprojects (US$56.8 million, 17% of totalproject costs) - The project would finance viable on- and off-farm income-generating activities to increase rural household income and stimulate the local economy. These investments would emphasize crop diversification, agro-processing and -industries, and market expansion of local commodities. Subproject proposals, presented by the community or groups of beneficiaries, would be approved on the basis of economic, technical and environmental considerations, and the impact of subprojects on local income and employment. - 22 - 4.28 On-farm subprojects would include: (i) investments and selected inputs and materials for crop improvements, emphasizing subsistence crops and vegetable gardens; and (ii) environmentally sound small-scale livestock production ventures, including dairy, poultry, hog and fish farming. 4.29 Off-farm subprojects would include small-scale investments for, inter alia: (i) milling facilities; (ii) cottage agro-industry and processing equipment; (iii) dairy and food processing; (iv) equipment for the provision of agricultural services; (v) basic marketing infrastructure and facilities; and (vi) post-harvest storage facilities. Preference would be given to subprojects using local farm products and absorbing under-utilized labor. Natural Resources Management and Agricultural Modernization Investments (US$113.6 million, 34% ofproject costs) 4.30 These investments would finance the introduction of natural resource conservation practices and feeder road rehabilitation activities, included within a microcatchment soil conservation plan, as well as assistance to small farmers to modernize and/or diversify their traditional fanning systems. 4.31 Natural Resources Management (US$48.2 million, 14% ofproject costs) - These subprojects would finance an integrated package of practices jointly implemented by all small farmers within a microcatchment. Subprojects would: (i) consolidate project activities already initiated in about 1,100 microcatchments by the LMI project; and (ii) introduce improved soil conservation technologies and cultivation practices in an estimated 1,200 "new" microcatchments, with small farmers representing a relatively high proportion of the population and land area. Principal activities would include: (i) collective land management practices, such as vegetative contours and terracing; (ii) conservation and/or establishment of permanent vegetation on fragile areas; (iii) provision of soil improvement inputs; (iv) water pollution control measures; and (v) purchase of conservationist farm equipment for farm groups to undertake reduced tillage and other land management practices.- 4.32 Rural Feeder Road Rehabilitation (US$3 7.0 million, 11% of project costs) - The project would rehabilitate approximately 8,000 km of rural feeder roads, exclusively within participating microcatchments, to reduce water run-off and soil erosion. It is expected that 70% of the investments in the priority meso-regions would improve drainage of existing roads, and the balance of the investments would be applied to repair badly damaged roads. The proposed road designs would be environmentally assessed by the State Secretariat for the Environment (SEMA). The designs for the works would be prepared by private firms based on the technical and environmental standards contained in the Project Implementation Manual. More complex works would require topographical surveys. 4.33 Private firms, contracted by the State Road Department (DER), are expected to execute 80% of the road rehabilitation program, while the balance would be undertaken directly by DER but not financed by the Bank. Selected contractors would agree to - 23 - comply with adequate environmental standards, acceptable to the Bank. The beneficiaries would agree to carry out infrastructure maintenance. 4.34 AgriculturalModernization (US$28.4million, 9% ofprojectcosts) - The subprojects would assist groups of small farmers and producer associations to regain their competitiveness by providing financial support for subprojects involving crop diversification, post-harvest facilities and small agro-industrial ventures. These subprojects would also include direct benefits to natural resources management, as implementation would allow beneficiaries to reduce soil erosion and water quality deterioration on their farms. 4.35 The implementation of these subprojects would be subject to the conclusion of a study on financing and cost recovery mechanisms to be conducted during the first year of implementation (para. 5.21). Given that potential beneficiaries would be participating in natural resources management subprojects in their respective microcatchments, and that adequate implementation of soil and water management practices would be a requisite for agricultural diversification, the completion of the study would not delay the scheduled timing for initiation of these activities. The financial assistance would be targeted to groups of producers who, despite having achieved adequate levels of crop production, lack the necessary capital to diversify and modernize their traditional production systems. 4.36 To assist these farmers, the project would provide: (i) financing of feasibility studies, required for all subproject proposals; (ii) technical assistance; and (iii) seed capital to finance a portion of the investments required. Tentatively, the financial contribution of the project would amount to about 35% of the costs of a particular activity within the beneficiary's total modernization plan, and would not exceed US$4,000 per beneficiary. Therefore, the seed capital for a typical investment on a farm of 5 ha, would represent less than 5% of the total financial requirements for diversification of the existing traditional production systems. Beneficiaries would finance a significant portion of subproject costs with either their own resources or borrowed funds. Together with a network of reference units, to be established by the project as part of the adaptive research program (see paras. 4.42 - 4.43), these subprojects would have a strong demonstration effect on other farmers interested in modernizing/diversifying their production patterns. Annex D provides additional information on the Natural Resource Management and Agricultural Diversification Subcomponent. Technical Support Services Component (US$36 million, 11% of project costs) 4.37 The strategy and design of the proposed project are based on the criteria of allocating the majority of project funds to support investments to be made directly by the beneficiaries. Within this premise, the Technical Support Services component (Annex E), is aimed at providing services essential for sustainable use of project funds by beneficiary communities. To fulfill this objective, the Technical Support Services component would include activities in the following areas: technical assistance, training, institutional strengthening, research, studies and project administ.ration. - 24 - 4.38 Institutional Strengthening and TechnicalAssistance (US$15.6 million, 4% of project costs) - The project would strengthen selected institutions participating in project implementation (EMATER and DERAL), to improve delivery of services. In the case of EMATER, this support would include the provision of vehicles and equipment for field offices in participating municipalities, as well as the contracting of a limited number of social promoters to work in the priority mesoregions. In addition, the project would expand and improve the effectiveness and coverage of the existing Agricultural Price Information System, under the direction of the Department of Rural Economics (DERAL) within SEAB. 4.39 Technical assistance would include: (i) support by EMATER and municipal extensionists to beneficiary groups and municipal and regional councils; (ii) private technical assistance to complement EMATER's extension services; (iii) preparation of specialized studies related to subproject proposals, as requested by the beneficiaries or project implementing entities; (iv) feasibility studies for subprojects whose value exceeds US$30,000 and all modernization subprojects; and (v) ongoing support to beneficiaries in subproject implementation. By applying participatory methodologies, these services would help communities or groups of farmers analyze their constraints, prioritize their needs, recognize their resources and identify subproject initiatives. 4.40 Training (US$8.5 million, 3% of project costs) - The project would incorporate a comprehensive training program aimed at both beneficiaries and the field staff of participating institutions and municipalities. In the case of beneficiaries, the project would contract specialized firms to organize informal training and extension events in subjects related to farm production, vocational skills, home economics and community organization. Given the particular needs of project beneficiaries, a substantial portion of training events would be conducted within the community or in nearby facilities. Training would be directed to all members of beneficiary families, especially to the young people. 4.41 The project would also finance the equipment and operation of a network of existing training facilities, the Agricultural and Rural Development Centers (CDAR) to be used for the delivery of most of the training activities requiring specialized facilities. 4.42 Adaptive Research: (US$5. 0 million, 2% ofproject costs) - The project would include an adaptive research program, aimed at improving the existing technological packages suitable for small-scale agricultural production systems, emphasizing methods to reduce production costs, increase productivity, and increase farm household income. Special lines of research would be conducted on improved soil management and erosion control techniques. The Parana Agricultural Research Institute (Instituto Agronomico do Parana, IAPAR) would be contracted to conduct an estimated 60% of the research, while competitive bidding would be used for the delivery of the remaining 40%. Research priorities would also incorporate the demands of beneficiaries. Project management would prioritize beneficiary demands and contract specific lines of research. 4.43 The project would establish a network of reference units, selected among farms satisfying the project's eligibility criteria, to: (i) validate and demonstrate new - 25 - technologies and farm enterprises; and (ii) disseminate information concerning viable small-scale agricultural modernization options and soil management techniques. The final scope for the adaptive research programs to be implemented by the project would be agreed upon during negotiations. 4.44 Studies (USS3.2 million, 1% of project costs) - The project would finance a series of studies that would contribute to the sustainability and effectiveness of project activities and to improve the project's operational and technical strategies. The proposed studies include: (i) A Comprehensive Diagnosis of Rural Poverty in Parana, including the Baseline Study for monitoring of the project's impact on rural poverty; (ii) An Evaluation of the Environmental Impact of the Project in Selected Microcatchments; (iii) A Comparative Analysis of the Effectiveness of Mass Communication and Technical Transfer Methodologies for Small Farmers; (iv) An Analysis of Fruit Markets and Demand in Central-Southern Brazil; (v) An Evaluation of Options for Privatizing Technical Assistance to Small Farmers; and (vi) Feasibility and Mechanisms for Establishing a Cost Recovery System for Income-Generating Subprojects (required prior to initiating implementation of agricultural diversification subprojects). Budgetary provisions have been made to include additional studies to be defined during implementation, based on the demand of beneficiaries and entities involved in the project. The project management unit would draft the TOR and select the firms to carry out these studies. A summary of the studies to be financed by the project is provided in Annex E. 4.45 Project Administration (US$3.6 million, 1% of project costs) - To assist the executing agency (SEAB) in project implementation and coordination, a Project Management Unit (UGP) would be established. The UGP would be composed of a core team of qualified professionals. managerial and administrative support to the project, including procurement, contracting of consultants, and consolidation of training programs as well as inter-institutional coordination and subproject monitoring. In addition, UGP tasks would be complemented by: (i) CODAPAR, who would be responsible for subproject administration and monitoring, and (ii) a small Advisory Unit (UAP) to be established in the Center for Coordination of Government Programs (CCPG) of the Secretariat of Planning. The main task of the UAP would be to prepare TORs, and contract and supervise the implementation of all evaluations to be conducted by the project, including the Mid-Term Review. F. PROJECT COSTS 4.46 Total project costs, including contingencies, taxes and duties, are estimated at US$353.5 million equivalent, of which US$41.8 million (12%) represent foreign exchange costs. Price contingencies were estimated at US$15.6 million equivalent (or 4.5% of baseline costs), while physical contingencies have been estimated at US$2.8 million equivalent (5% of baseline costs) for road rehabilitation, technical assistance and equipment. 4.47 Given the demand-driven nature of the project, cost breakdowns by subproject categories represent estimates of expected demand based on the findings of community - 26 - participatory assessments made during project preparation. Of the base costs of US$335.1 million, about US$185.5 million, or about 53% of total project costs, would finance social and infrastructure subprojects; US$85.2 million, or 24% of project costs, are expected to be demanded for natural resources management activities; and US$28 million, or 8% of project costs, would be allocated to subprojects for modernization of the State's small-scale agriculture. In addition, about US$36 million, or 11% of project costs, would finance support services, including institutional strengthening, research, technical assistance, training and project administration. A summary project cost estimate is presented in Table 4.2, while detailed cost tables, including total project costs by component and disbursement category, are provided in Annex F. Table 4.2 Annual Project Costs (US$ million) Year Year Year Year |Year | 6a T | | ~~~~~~~~~~~~~1 |2 |3 |4 |5 |6 |Toa L Poverty Alleviation Investment Component A. Social Investments Infrastructure 25.7 57.7 29.7 7.7 5.8 1.9 128.7 Equipment j 12.2 19.3 12.0 6.6 4.8 1.9 56.8 Sub-total X 37.9 77.1 41.7 14.4 10.6 3.7 185.5 B. Natural Resources Management and Agricultural Modernization Natural Resources Management 10.9 13.2 11.1 6.8 3.2 3.0. 48.2 Rural Feeder Road Rehabilitation 7.4 7.4 7.4 7.4 3.7 3.7 37.0 Agcultural Modernization 3.7 6.2 7.2 6.8 2.9 1.5 28.4 Sub-total 1 22.1 26.7 25.7 20.8 9.8 8.2 113.6 Component Total 60.0 103.8 67.4 35.2 20.4 11.9 299.1 IL Technical Support Services Component A. Research 1.1 1.3 1.2 0.8 0.4 0.3 5.0 B. Training 1.7 1.9 1.8 1.1 1.2 0.7 8.5 C. Institutional Strengthening 4.3 3.5 3.5 1.3 1.2 1.2 15.6 D. Studies 1.2 0.8 0.7 0.2 0.2 0.2 3.3 E. Project Management Unit (UGP) 0.4 0.3 0.3 0.3 0.3 0.3 1.7 F. ProjectAdvisoryUnit(UAP) 0.4 0.3 0.3 0.3 0.3 0.3 1.9 Component Total 9.4 8.1 7.8 4.0 3.7 2.9 36.0 Total Baseline Costs 69.4 111.9 75.3 39.3 24.2 14.8 335.1 Physical Contingencies 0.6 0.6 0.6 0.5 0.3 0.2 2.8 Price Contingencies 0.7 3.6 4.1 3.0 2.4 1.8 15.6 Total Project Costs 70.8 116.2 80.0 42.8 26.9 16.9 353.5 of which: Taxes 1.6 1.5 1.5 1.2 1.1 1.1 7.9 Foreign Exchange 8.4 15.2 9.5 4.3 2.8 1.7 41.9 G. FINANCING PLAN 4.48 The proposed Bank loan of US$175 million would be made to the State of Parana with the guarantee of the Federal Government and would finance 49.5% of project costs. The proposed loan would be at the standard variable interest rate for a term of 15 years, including five years of grace. Bank financing would cover: (i) 50% of expenditures for small civil works and equipment for community subprojects; (ii) 45% of goods and - 27 - vehicles; and (iii) 100% of technical assistance, training and studies. Eligible expenditures incurred during the early stages of implementation as of March 18, 1996 to the date of loan signature would be considered for retroactive financing, up to a maximum amount of US$4 million equivalent and 12 months prior to Loan signing. 4.49 All expenditures for salaries (US$10.9 million) for project-related staff and activities, as well as taxes and duties (US$7.9 million), would be financed exclusively by the State of Parana. Project beneficiaries are expected to contribute the portion of poverty alleviation subproject costs not covered by the project (estimated at US$47 million), equivalent to 16% of the investment costs of poverty alleviation activities. - 28 - 5. PROJECT IMPLEMENTATION 5.1 Since the execution of project activities will be undertaken directly by the beneficiaries, the successful implementation of the project would heavily rely on three basic elements described in detail in this section: (a) A simplified institutional structure to provide the required technical support services to beneficiary communities for subproject implementation, as well as decision-oriented monitoring of subproject performance. (b) Effective and well-qualified human resources at the local level to provide direct assistance to beneficiaries. (c) A subproject processing cycle which features agility and well defined requirements as well as institutional roles and responsibilities, in order to ensure procedural transparency and satisfactory responsiveness (both technical and financial) to community proposals. A. INSTITUTIONAL ARRANGEMENTS' 5.2 State LeveL The State Secretariat of Agriculture (Secrelaria de Agricultura e Abastecimento, SEAB), with a mandate for promoting agricultural and rural development, would be responsible for project implementation and coordination of project activities with other public institutions working in the rural sector. A Project Management Unit (Unidade de Gerenciamento do Projeto, UGP), within SEAB, would be established and be delegated all technical and administrative functions related to project implementation. The Center for Coordination of Government Programs (Centro de Coordenacao de Programas do Governo, CCPG) of the Secretary of Planning would have responsibility for overall coordination of the State's participation in the Project. An Advisory Unit (Unidade de Assessoramento do Projeto, UAP), within the CCPG, would act as liaison between the project and the World Bank as well as facilitate and participate in project evaluations and supervisions. 5.3 The Project Deliberative Commission (Comissao Deliberativa do Projeto, CODEPRO) would coordinate project-related public sector activities. It would be composed of nine members: seven State Secretaries, CCPG, and the General Manager of the UGP, who would be the Commission's Secretary General. The Member Secretariats would include Planning and Coordination, Agriculture, Transportation, Housing, Finance, Labor, Children and Family Affairs. and Environment. The CODEPRO would normally meet every six months. The draft decrees for the establishment of CODEPRO, UGP and UAP, incorporating the institutional structure and description of the main positions, were Annex F. - 29 - presented to the Bank in fulfillment of one of the conditions of negotiations. The establishment of the UGP would be a condition of loan effectiveness, 5.4 The UGP would rely on SEAB's regional network to promote the project at the regional and local levels. UGP would consolidate the Annual Operating Plans (Plano Operativo Anual, POA), and present the Project POA to the CODEPRO. The draft Annual Operating Plan (POA) for Year 1 of the project was presented as a condition of negotiations. The UGP would be staffed by a small group of highly qualified local professionals, and would administer project financial resources, draft project related agreements and contracts for signature of the Secretary of SEAB, give guidance to the implementing institutions, monitor project activities, prepare progress reports, and present project accounts to the Government and the Bank. In addition, the UGP would analyze and approve proposals for agricultural modernization subprojects and all other subprojects, except natural resources management subprojects, exceeding US$30,000. 5.5 The Companhia de Desenvolvimento Agropecuario de Parana (Agricultural Development Corporation of Parani, CODAPAR), with extensive experience as a financial channel for State development programs and a comprehensive network of field offices throughout Parana, would be responsible for transferring funds to beneficiaries of approved subprojects as well as providing intensive monitoring of subprojects, on a sample basis. The draft agreement between SEAB and CODAPAR, including a detailed description of the operational procedures to be implemented by CODAPAR for the transfer of project funds to beneficiary communities and the subsequent monitoring of subproject execution, were presented to the Bank as a condition of negotiations. The signed final agreement, satisfactory to the Bank, would be a condition of loan effectiveness. 5.6 With respect to the provision of technical services, the project would be supported by several decentralized State entities. SEAB's Technical Assistance and Extension Agency (Empresa Paranaense do Assistencia Tecnica e Extension Rural, EMATER/PR), a semi-autonomous decentralized public corporation, currently responsible for technology transfer, would provide technical assistance through social promoters and agricultural extensionists to beneficiary groups and communities. Agreement on a detailed plan for project promotion and training of field staff in the priority mesoregions, to be initiated prior to project effectiveness, were reached during negotiations. The Department of Rural Economics (Departamento de Economia Rural, DERAL), also within SEAB, would be strengthened to implement an agricultural price information system to be made available to project beneficiaries through EMATER. Other State entities which would participate in project implementation would include the Institute of Agricultural Research (Instituto Agronomico do Parand, IAPAR), responsible for agricultural research, the Housing Corporation of Parana (Companhia de Habitacao de Parana, COHAPAR), responsible for housing subprojects within the Vilas Rurais, the State Environmental Institute (Instituto Ambiental do Parand, IAP), by assisting the UGP in the subproject environmental screening and monitoring, and the Road Department (Departamento de Estradas de Rodagem, DER), which would implement feeder road rehabilitation within the project microcatchments as described in para. 4.33. The draft agreements between - 30 - SEAB and each participating agency, including EMATER, DERAL, DER, IAPAR, COHAPAR, IAP and SEPL/CCPG were presented to the Bank as a condition of negotiations. 5.7 Regional LeveL The Regional Project Commissions (Comissoes Regionais do Propjeto, CRPs) would be composed of the regional SEAB chief, who would act as the president of the commission, and the regional representatives of EMATERIPR, who would be the CRP's Executive Secretary; CODAPAR, which would allocate project financial resources to beneficiaries within each region; other State Secretaries; COHAPAR; and up to two other regional representatives, to be selected within each region. In addition, on a rotating basis, Municipal Councils (see below) would select two representatives for a one-year term to participate in the CRP. A representative from each Municipal Council would participate in the annual CRP workshop meeting which discusses and defines the POA. All Each CRP would: (i) coordinate regional project activities; (ii) review project proposals included in the Municipal POAs for technical soundness and consistency with regional plans; (iii) consolidate individual Municipal POAs into Regional POAs; and (iv) organize and monitor the flow of demands from the Municipal Commission. In addition, the CRP would approve funding for natural resource project proposals, as identified in the Municipal POAs. At full project implementation, a total of 19 CRPs would be established, one for every SEAB administrative region. 5.8 Each CRP would have a Regional Technical Assistance Unit (Unidade de Assessoria Tecnica Regional, UATR), composed of existing EMATER/PR technical staff, which would assess the quality and consistency of subproject proposals with the regional development plan. In addition, the UATR would analyze the technical, economic and environmental soundness of: (i) poverty alleviation and social investment subproject proposals exceeding US$5,000 and under US$30,000; (ii) all proposed natural resource activities; and (iii)small farm modernization/diversification subproject proposal with costs exceeding US$5,000 and under US$30,000. The Unit would forward their findings to the CRP, which would approve subproject funding. 5.9 Local LeveL The Municipal Councils (Conselhos Municipais, CM) would be established in each participating municipality to promote the project at the local level. The CM would encourage qualified communities to participate in the project; inform beneficiary groups of the project's conditions and procedures; coordinate the preparation of the Municipal POA; and review and recommend for approval social investment subprojects under US$5,000. The CM would be composed of representatives of: the mayor's office (Prefeitura Municipal); rural organizations (two); EMATER/PR; NGOs or private entities providing technical assistance; and potential beneficiary groups (four). Established under the LMI project, 183 CMs are currently functioning in Parana. The project would provide technical assistance to strengthen existing CMs and support the establishment of new ones. 5. 10 Within each CM, EMATER's local team (extension workers and a social promoter) would function as the Municipal Technical Assistance Unit (Unidade de Assessoria Tecnica Municipal, UATM), which would analyze technical issues of - 31 - subproject proposals. At negotiations, agreement was reached on the establishment of at least three regional councils as well as municipal councils in at least 50 municipalities as a condition of loan effectiveness. 5.11 Beneficiary groups would direct their requests for technical assistance to EMATER. Upon reviewing the request, EMATER would decide either to perform the service or to direct the beneficiaries to a roster of certified private firms and NGOs capable of performing the service. Beneficiaries would evaluate the firms and select the firm for the UGP to draft the TORs and conditions for the service contract, to be transmitted to the UGP. To ensure adequate coordination of private sector involvement in project implementation, all technical assistance would be contracted by the UGP. 5.12 Beneficiary Groups. Beneficiary groups, formal or informal, registered with the CM, would be the basic unit for project implementation. For natural resources management activities, these groups would consist of all eligible farmers within microcatchments. For all other subproject activities, these groups, consisting of at least three members, would be formal or informal and preferably within a microcatchment. In the case of the Vilas Rurais, certain subprojects would require participation of all beneficiaries living within the Vila, while others would be proposed by smaller groups vithin the community. B. SUBPROJECT CYCLE 5.13 The sequence of procedures and events required for the processing of subprojects presented by beneficiary communities has been designed to achieve an acceptable balance between the need for simplicity and agility, but with due regard for accountability and sustainability of activities to be supported by the project. In addition, the project cycle is also required to incorporate minimum planning requirements which ensure that financial resources are available to meet beneficiary demands. 5.14 Taking all these factors into consideration, the subproject cycle to be implemented builds on proven procedures used for the design, evaluation and financing of subprojects financed by the ongoing Land Management Project. Project procedures also incorporate adjustments to further decentralize the subproject approval process, and account for the higher number of subprojects to be financed and the need to incorporate effective mechanisms for monitoring and evaluation. A summary of the cycle for each type of subproject to be financed is provided in the following box. - 32 - Identification and Preparation: Groups of potential beneficiaries, in collaboration with EMATER or private technical assistance, would discuss, identify and rank, in order of importance, their social, productive and infrastructure requirements and identify and prepare subproject proposals. All proposals would be submitted to the CM for initial review. Approval Level Type and Cost of Subprojects Municipal Council => Social Investments, costing US$5,000 or less (with EMATER technical clearance) Regional Project = Social Investments, costing more than US$5,000 and Commissions less than US$30,000 > Rural road rehabilitation = Natural Resources Management, on the basis of a Microcatchment Development Plan UGP => Social Investments, costing US$30,000 or more => Income-generating investments from groups with fewer than 10 members => Small-scale Agricultural Diversification After the proposal is approved, CODAPAR would sign an agreement with beneficiaries, specifying the terms and conditions for implementation, and transfer the funds to a designated beneficiary account. In the case of housing subprojects for beneficiaries of the Vilas Rurais Program, an agreement would be signed l between the beneficiaries and COHAPAR. 5.15 Because of the demand-driven nature of the project, substantial flexibility and minimum micro-planning requirements are considered important for an effective implementation strategy. However, standard project administration procedures would be difficult to fulfill without the development of mechanisms for budget preparation and resource allocation prioritization. For this, an Annual Operating Plan (POA) would be prepared by the UGP, incorporating a consolidation of demand estimates elaborated at the local and regional levels. Based on a mostly informal compilation of demands from beneficiary groups, established Municipal Councils (CM) would approve an annual municipal plan to be elaborated by the technical secretariat of the CM. The projected municipal plans would be reviewed and integrated at the regional level, and subsequently submitted to the UGP for final consolidation, and prioritization if required, into the project, POA and annual budget. - 33 - 5.16 The site of beneficiary groups would vary depending on the type of subproject (activity, economics of scale, operational functionality, etc.), and the geographical location of beneficiaries. As microcatchments would be the basic unit, most natural resources activities would involve groups of 20 to 100 small farmers, while the typical community for social subprojects would include all members of a Vila Rural (about 50 families). However, in order to avoid excluding eligible poor households from the project, a minimum group size of three families has been established. Regardless of the total cost and number of beneficiaries included in each proposal, the project would incorporate a graduation mechanism based on a maximum level of support per beneficiary. The level of financial support to be provided to each beneficiary family would be limited to US$6,000 (with a maximum of US$4,000 for diversification subprojects). While proposals would be presented by groups, depending upon its nature, assistance could be provided to the individual or to the groups. In addition to individual and group eligibility criteria, the subproject identification, preparation and screening process would be further simplified by the development of a list of activities that would not be eligible for financing (land acquisition, new road construction, destruction of native vegetation and tree coverage, and subprojects in urban locations) as well as a comprehensive set of standard designs and specifications for subprojects, to be included in the Project Implementation Manual. 5.17 Project Incentives, Cost-Sharing and Cost Recovery Mechanisms The project would establish a multi-tiered project incentive and cost-sharing structure which would specify the level of project support according to subproject type and socio-economic conditions of the beneficiary group and/or community (Table 5. 1). The underlying purpose of this approach is to provide the highest project support for those social or non- income generating investments (e.g. soil conservation and forestry) whose benefits: (i) are primarily for the poorest segments of the target population; (ii) are public goods; or (iii) have externalities and relatively long establishment periods. Activities directly benefiting the poorest or having the greatest effect on natural resource conservation and protection would receive grants covering the highest levels of subproject costs (80%). On average, beneficiary contributions would be approximately 20% of subproject costs. 5.18 As the benefits of the natural resources management activities are of a long-term nature and extend beyond the direct project beneficiaries, a considerable part of the costs of the subprojects are regarded as a public expenditure contribution. Consequently, the beneficiary cost-sharing level would not exceed 50% of investments, in the case of more developed groups of small farmers (PSM2 and 3). In selecting a microcatchment for participation in the project, preference would be given to those microcatchments with the greatest concentration of poor farmers. Once a microcatchment is selected, all farmers of the microcatchment, provided they are within the targeted categories, would be eligible for project assistance. - 34 - Table 5.1 Beneficiary Cost-Sharing Levels Beneficiary Social Natural Resources Income- Type Management Generating PS 20% 30% 20% PSM1 20% 40% 20% PSM2 & 3 n.a. 50% 65%' 1. Tentative level to be confirmed by the conclusions of the cost recovery study. 5.19 For productive investments aimed at the poorest segment of the target beneficiaries, the beneficiary cost-sharing level would be 20%. These investments would include small income-generating and/or subsistence improvement subprojects, such as kitchen gardens, cottage agro-processing facilities or workshops. For income-generating investments to help small farmers eligible for project assistance to diversify their productive systems, the project contribution would represent no more than 35% of investments for proposed activities. Beneficiaries would be required to contribute at least 65% of the investment costs, either with their own resources or with funds borrowed from private sources. 5.20 The project would establish cost recovery mechanisms for social investments which finance private goods. In the case of housing subprojects, the project would adopt the cost recovery mechanisms used in the State urban housing program. In addition, the contractual agreement for financing of all subprojects (including feeder road rehabilitation) would include provisions to ensure that 0 & M costs are fully assumed by the beneficiaries. 5.21 The study to be conducted during the first year of the project (para. 4.44), would analyze the options for establishing cost recovery mechanisms for the implementation of the agricultural diversification component. The results of the study would be shared with the Bank, with a view to reaching agreement on a time schedule for the application of measures recommended by the study. Draft terms of reference for this study were presented to the Bank as a condition of negotiations. C. PARTICIPATION ACTION PLAN 5.22 The project was designed in close collaboration with beneficiaries. Participatory rapid rural appraisal (PRA), case studies, and focus groups were used to identify and test criteria for targeting groups, and design the project's rural poverty alleviation strategy and institutional framework. Selected communities, representative of different mesoregions and types of beneficiaries, helped to identify key constraints, expectations and viable alternatives for reducing rural poverty. 5.23 During implementation, beneficiary participation would be strengthened through training and technical assistance. To ensure that the beneficiaries' demands continue to drive the project, participatory methodologies would be used to publicize the project and - 35 - to organize beneficiary groups. Periodic consultations evaluating the project's impact on beneficiaries would be formulated within the CM and discussed at the regional and state levels in UGP-sponsored workshops. D. MONITORING AND EVALUATION SYSTEM 5.24 A comprehensive Monitoring and Evaluation System (M&E) would be established (Annex H). The UGP would implement a Management Information System (Sistema do Monitoramento Gerencial, SMG) to monitor physical and financial progress of the project. A specialist within the UGP would be responsible for the SMG and the overall supervision of the decentralized data collection process. The SMG would: (i) define the input and output indicators to be measured and incorporate these into the agreements with the relevant implementing entities; (ii) establish the baseline data; and (iii) ensure that the institutions would transfer the required information accurately and in a timely manner. All participating agencies would be required to submit full progress reports, as well as other relevant project information, to the UGP with information to be subsequently consolidated and submitted to the Bank twice a year. Agreement on the project reporting structure and format were reached at negotiations. 5.25 Institutions participating in project implementation would collect data on agreed indicators regarding the activities they execute. CODAPAR, as the principal financial agent for subproject financing, would collect, analyze and verify, at the field level, financial data related to support provided to beneficiaries. In addition, it would provide information relevant to project management to the UGP. The UGP would ensure adequate follow-up for progress of subprojects carried out at the municipal level. Based on the SMG quantitative information, progress in all participating municipalities would be monitored and problem areas would be identified for further investigation. Finally, under the M&E System, CODAPAR would conduct annual in-depth monitoring of a sample of 10% of subprojects. No later than 90 days after the loan effectiveness, the project monitoring system would be fully established. 5.26 An entity independent to the UGP, the Project Advisory Unit (UAP), within the Center for Coordination of Government Programs (Centro de CoordenaVao de Programas do Governo, CCPG) of the State Secretariat of Planning would be responsible for the coordination of project evaluation activities, including the Mid-Term. Standard evaluation procedures would be complemented by beneficiary assessments. Participatory techniques would be used to ensure that the beneficiaries' perceptions of project activities and the impact on their communities are properly incorporated into periodic project reviews and evaluation. In addition, the project's socio-economic impact on the beneficiaries' quality of life would be assessed through three sets of periodic evaluations which would focus on: (i) socio-economic impacts on the rural communities; (ii) the performance of the Vilas Rurais; (iii) the direct and demonstrative effect of project assistance to producer groups assisted by agricultural diversification activities and (iv) the socio-economic impact of the natural resources management activities. The Bank, assisted by FAO/CP, would conduct supervision missions every six months (except three - 36 - missions during Year 1) generally coinciding with the submission of project progress reports. In addition, to routine supervision tasks these missions are expected to provide ongoing technical support to project implementation based primarily on the information generated by the projects' M&E system, with emphasis in the implementation of beneficiary subprojects. Annex J provides the details of the tentative supervision plan for the project. The draft TORs for all evaluations (including socioeconomic impacts, performance of Vilas Rurais, and the Mid-Term Review) and consulting services for the first year of project implementation were presented to the Bank as a condition for negotiations and agreement was reached during negotiations on the implementation of the Mid-Term Review and the study on financing mechanisms for income-generating subprojects. E. PROJECT PERFORMANCE INDICATORS 5.27 The Project Monitoring System would assess the project's ability to achieve its two development objectives through qualitative assessments as well as baseline and periodic measurements against specific project performance indicators (Table 5.2). The full list of indicators to be monitored is provided in Annex I. Table 5.2 Overall Project Development Objectives and Performance Monitoring Indicators Development Objective Impact Indicators * net household income * farm production Rual Poverty Alleviation * crop yields * production costs * rural employment * adoption rate of better farm practices * utilization of durable materials in housing * access to educational and health services * access to running water and sanitation * community infrastructure * soil erosion and other soil physical characteristics * kilometers of roads rehabilitated Improved Natural Resources Management * crop yields * adoption rate of appropriate conservation practices * crop diversification F. PROJECT IMPLEMENTATION MANUAL 5.28 UGP would prepare a Project Implementation Manual which would, inter alia, include: (i) procedures for project implementation; (ii) prioritization of microcatchments; (iii) beneficiary eligibility criteria; (iv) definition of institutional and relations among local, regional and State agencies and institutions participating in the project; (v) subproject economic, social and environmental monitoring indicators; (vi) subproject approval cycle; (vii) subproject selection criteria; (viii) model agreements; and (ix) specifications for - 37 - design and implementation of (a) soil and water conservation works and agricultural development programs at the microcatchment and farm level; (b) procedures for subproject financing; (c) subproject selection criteria, including economic, social and environmental aspects; and (d) TORs for key staff of the UGP and UAP. The table of contents of the Implementation Manual is included in Annex K. The draft Project Implementation Manual was presented to the Bank as a condition of negotiations. The presentation of the final version of the Manual would be a condition of loan effectiveness. During negotiations, agreement was reached that amendment to or modifications of the Implementation Manual would require Bank consent. 5.29 In addition, as a supplement to the Implementation Manual, the UGP and EMATER would prepare a Project Field Guide. The Field Guide would be a practical resource book for field staff municipal councils and beneficiary organizations. It would provide basic information regarding beneficiary identification, participatory methodologies, the essential elements of subproject profiles, the roles of the various institutions and other important project procedures and information. The Guide would also contain standard technical designs and specifications for typical social and productive subprojects. G. PROCUREMENT 5.30 Procurement of goods, works and services under the proposed project would be carried out in accordance with Bank Procurement Guidelines (January 1995) and using standard bidding documents satisfactory to the Bank for National Competitive Bidding (NCB). Consultants to be financed under the Loan would be selected and contracted in accordance with the Bank's Guidelines for the Use of Consultants (August 1981). Agreement on the use of Bank procurement guidelines for procurement of works, goods and services under the project, including the Bank's Standard Bidding Documents for ICB and agreed bidding documents for NCB, was reached at negotiations. Operationally, the UGP would be responsible for all procurement to be carried out under the project. This would include the development of the implementation plan, and ensure that the agreed procurement methods and thresholds are complied with by the beneficiaries. The procurement procedures and conditions to be followed would be incorporated into the Project Implementation Manual and the Field Guide (paras. 5.28- 5.29). Adequate procurement expertise would be available in the UGP, as all staff involved in procurement matters would be transferred from the unit responsible for the highly satisfactory administration of the Land Management project during the past five years. 5.31 The majority of the project funds would finance relatively small social investments. Consequently, procurement procedures are expected to incorporate substantial flexibility given that most subprojects would be: (i) small and/or implemented in relatively remote areas where it may be inefficient and uneconomic to obtain competitive proposals; (ii) managed directly by the communities; (iii) selected by the beneficiaries, who would implement and maintain the investments; and (iv) designed to provide a mechanism for communities to play an active role in the local development process. - 38 - 5.32 Adequate support to beneficiary groups on procurement matters would be provided locally through technical assistance and training events. In addition, the basic procedures and purchasing mechanisms to be followed would be fully incorporated into the Implementation Manual and the contractual agreements that would be signed by beneficiaries. Compliance with these contractual obligations would be closely monitored on a regional basis through the ongoing supervision of the physical and financial performance of a sample of 10% of approved subprojects, to be conducted by the UGP with assistance from the network of CODAPAR supervisors. 5.33 The procurement of goods for beneficiary subprojects costing less than USS100,000, up to an aggregate amount of US$104,000,000, would be carried out through national shopping, requiring the comparison of quotations from at least three suppliers. Although no larger contracts are expected, any contract for goods estimated to cost over USS100,000 would be awarded on the basis of NCB. Subprojects involving the construction of small works estimated to cost less than US$50,000, up to an aggregate amount not to exceed US$154,000,000, would be carried out by beneficiaries through lump-sum fixed-price contracts awarded on the basis of the comparison of price quotations from at least three contractors. For those community subprojects with an estimated value exceeding US$50,000, procurement would be made utilizing NCB procedures acceptable to the Bank. 5.34 For the implementation of the remaining project activities (institutional strengthening, research, training, studies and technical assistance), no expenditures on civil works are expected. For goods, procurement arrangements would be as follows: (a) Computers and vehicles, estimated to cost US$7.6 million, would be procured through International Competitive Bidding (ICB), using the standard bidding documents issued by the Bank; (b) Vehicles estimated to cost less than US$100,000 equivalent per contract, up to an aggregate amount not to exceed US$300,000 equivalent and computers estimated to cost up to an aggregate amount not to exceed US$100,000 would be procured under contracts awarded on the basis of intemational shopping procedures and, (c) Other office supplies and furniture estimated to cost an aggregate of US$900,000 would be procured through NCB. 5.35 Consultant services required to provide technical assistance to beneficiaries and institutions, conduct studies and evaluations, and implement adaptive research and training programs, amounting to an estimated US$25 million, would be carried out by consultants, contracted in accordance with the Guidelines on the Use of Consultants by World Bank Borrowers (August 1981) using Bank-issued standard forms of contracts, as appropriate. Procurement arrangements are summarized in Table 5.3. - 39 - 5.36 Prior Review. All procurement documentation and decisions for goods purchased under ICB, and for those NCB contracts for works estimated to cost US$100,000 or more would be subject to prior review by the Bank. In addition, Bank's approval required for the first 25 community subprojects, including the first five subprojects for beneficiaries of the Vilas Rurais, would include the review of the proposed procurement method. Contracts, short lists, and selection procedures for technical assistance and training would require prior review by the Bank when the estimated value of the services exceeds US$100,000 for consulting firms or US$50,000 for individual consultants. Regardless of value, Bank prior review would be required for all consulting terms of reference, the single-source selection of consulting firms and assignments of a critical nature. Given the nature of the project, the prior review arrangements would cover a relatively low proportion of project procurement (about 20%). However, this would be compensated for through the following: (a) the evaluation of the effectiveness of procurement procedures applied by beneficiary communities to be conducted by UGP through CODAPAR; (b) the inclusion of procurement issues in the evaluation of physical performance of subprojects to be conducted on a sample basis by CODAPAR and COHAPAR (paras. 5.24 and 5.25); (c) the development of a comprehensive list of market prices for items frequently included in community subprojects to be prepared and updated on a quarterly basis by SEAB's Department of Rural Economics (DERAL), and included in the project's Field Guide (para. 5.29); (d) the comparison of subproject costs using the data in the project's Management Information System (MIS) (para. 5.25); (e) the revision of procurement aspects related to subproject implementation including field visits and subproject documentation to be conducted on every Bank supervision mission. - 40 - Table 5. 3 Procurement Arrangements (US$ million) PROCUREMENT METHOD ICB NCB OTHER NBF I Total % 1. Poverty Alleviation Subprojects I Civil Works 30.5 146.9&1 7.6 183.0 51.8 (15.2) (73.5) (88.7) _ Goods and Materials 103.9b/ 103.9 29.4 (51.9) (51.9) 2. Technical Support Services _ Goods 7.6 0.9 0.4c/ 8.9 2.5 (3.4) (0.4) (0.2) (4.0) Consultants and Technical Assistance 27.6 27.6 7.8 (27.3) (27.3) Operating Costs 3.1d/ 16.1 19.2 5.4 (3.1) (3.1) Salaries 10.9 10.9 3.1 PROJECT TOTAL 7.6 31.4 281.9 34.6 353.5 100.0 (3.4) (15.6) (156.0) (175.0) ICB - Interstioral Compeitive Bidding; NCB = National Competitive Bidding; 'Other" includes National and International Shopping and Conulat Services; NBF: Not Bank-financed. * Fipr in parwenth indicate anount financed by the Loan. at Small woks procedures; thOe quotations bf Ntionel showing prooedu 1 Ineraatoal shopping procedure for vehicle, and comnputers dt Opwating cods for UGP (supplies, travel, per diem etc.) 5.37 All procurement documentation for goods and services would be available for and could be subject to ex-post reviews by the Bank and/or independent auditors, and would be maintained by the UGP. H. DISBURSEMENTS, SPECIAL AccouNT, AND PROJECT AccouNT 5.38 The proposed Bank loan is expected to be disbursed over a period of five years and eight months (5.8 years). The project would be completed by May 31, 2002 and have a Closing Date of September 30, 2002. The disbursement period shown in the projected Disbursement Schedule is shorter than the Bank's standard disbursement profile for rural development projects in Brazil, but is in conformity with recent experience under the reformulated poverty alleviation projects in the Northeast and other Bank-financed social fund projects in Latin America. The allocation of loan proceeds by disbursement category is shown in Annex L. 5.39 The State of Parana would open and maintain a Special Account in US Dollars in a commercial bank to cover expenditures eligible for Bank financing under the project. The authorized allocation would be US$12 million, adequate to cover the expected average four-month flow of disbursements under the project. Disbursements for all expenditures would be made on the basis of Statements of Expenditure (SOEs), except for those requiring prior review by the Bank, including all ICB contracts goods and works - 41 - exceeding US$100,000 and US$50,000 equivalent respectively; contracts with consulting firms above US$100,000; and contracts with individuals above US$50,000 equivalent. Relevant documentation in support of SOEs would not be submitted to the Bank but would be retained by the implementing agencies. Copies of such documents and disbursement applications would be submitted by the implementing agencies to UGP, and would be made available to Bank supervision missions. Agreement on the requirements for the establishment of the Special Account were reached during negotiations. 5.40 In addition, to facilitate project implementation and assure the timely availability of counterpart funds, the Borrower would open and maintain in SEAB a Project Account under terms and conditions satisfactory to the Bank. This account would maintain at all times a minimum balance of US$2.0 million. The establishment of the Project Account would be condition of loan effectiveness. The adequacy of the account's balance would be assessed by the Bank and the Borrower at the end of the first year of project implementation. T. ACCOUNTS AND AUDITS 5.41 The UGP would maintain separate project accounts and be accountable for the funds transferred to the various entities involved in project execution. These accounts would be maintained in accordance with sound accounting practices, acceptable to the Bank. An accounting plan, including the procedures for recording of subproject financial information, was agreed upon during negotiations. The project accounts including the Special Account and SOEs, would be audited by independent auditors, acceptable to the Bank. It was agreed during negotiations that copies of the audit reports would be provided to the Bank not later than six months after the end of each fiscal year. The audit reports would include the auditor's comments, opinions and recommendations on all aspects of project accounting and administration, including the overall quality of the records and control system established, methodology utilized - the preparation of soils, the appropriateness of supporting documents, and the compatibility of subprojects financed with respect to legal agreements. During negotiations, it was agreed that project accounts would be established, maintained and audited by independent auditors and in accordance with generally accepted auditing principles, both acceptable to the Bank. The copies of the auditor's reports would be submitted to the Bank within six months of the end of each fiscal year. - 42 - 6. PROJECT BENEFITS, IMPACTS AND RISKS A. BENEFITS 6.1 The proposed project is expected to have a considerable impact on the social, productive and environmental conditions of the rural areas of Parana. It would benefit poor rural municipalities in Parana by improving the targeting of public investment to priority needs of the poor in these municipalities for infrastructure and income-generating investments. As a result of the project, the municipal capacity to plan, design, implement and maintain key rural investments, benefiting primarily the rural poor, would increase. The project would also strengthen the participation of the rural communities in municipal decision-making, providing them an active role in the selection and implementation of investments. 6.2 The project would benefit more than 255,000 rural families, more than 25% of the rural poor population, by improving their living conditions, increasing household income, generating rural employment and introducing better natural resource management practices. By requiring considerable levels of beneficiary participation in terms of subproject identification and preparation, as well as beneficiary cost-sharing, the project would facilitate the mobilization of local resources towards sustainable social and economic development and growth in the rural areas. This project is considered highly affordable as the cost of the replication of its poverty alleviation approach to cover all rural poor households would represent less than an estimated 2.5% of the State's GDP. 6.3 The main group of project beneficiaries, approximately 100,000 beneficiary famnilies currently living below the extreme poverty line, would benefit from the project's poverty alleviation component as well as its natural resource management activities. The poverty alleviation component would improve the quality of life of these families by providing better social services and household infrastructure, as well as increasing their income and employment opportunities through small-scale income generating activities and employment-oriented training. Families of migrant agricultural workers, participating in the Vilas Rurais program, representing 20% of the project's poor beneficiaries, would receive a significant share of the resources under this component to help them obtain adequate living conditions. In addition to the direct poverty alleviation beneficiaries, an estimated 150,000 families would benefit from natural resource management activities and technological improvements in their agricultural production systems. 6.4 The project's natural resource management component would directly reduce the degradation and begin the replenishment of the State's valuable soil and water resource. By introducing sustainable natural resource management practices to over 8.5 million ha, rehabilitating 8,000 km of rural roads, and reforesting 13,700 ha., the component would - 43 - provide productivity gains and better market access to more than 180,000 rural families. The economic benefits derived from these activities are estimated in the following section. B. ECONOMIC ANALYSIS 6.5 The project would raise the real income of poor rural households by providing the resources and know-how to increase their purchasing power through greater farm production and additional income generated from farm sales and off-farm employment. The project would improve farm productivity through better natural resources management, and increase net household returns by promoting crop diversification, vertical integration of primary production and the expansion of off-farm employment opportunities. 6.6 Based on the findings of the participatory assessments and evaluations carried out in four selected communities", possible beneficiary-demanded investments would range from very small investments, such as on-farm maize storage infrastructure, costing less than US$ 4,000, to larger investments, such as collective grain dryers, requiring investments over US$ 100,000 (see Table 6.1). The estimated internal economic rates of return for these investments ranges from 18% to 23%. Reasonable and adequate returns would be assured from these investments as the project would finance only economically sound proposals, i.e., those with internal economic rates of return (IERR) exceeding 12%, the estimated opportunity cost of capital. 1 See Local Preparation Team (1996), "Diagn6stico Participativo. Experiencia em Quatro Comunidades do Parana", (Parana: LPG, January). - 44 - Table 6.1 Economic Analysis of Selected Income-Generating Subprojects (US$ Dollars) Investment1' Investment Operational Value of IERR % Cost per Costs at Production1' Beneficiary1 On-Farm Storage for Maize 2,774 139 72 2,523 18 On-Farm Storage for 2,114 106 120 3,618 21 Horticulture Vegetable Washing and 6,322 316 430 9,408 20 Packing Unit Cottage Fruit Packing Plant 10,500 525 720 18,816 19 Collective Drier for Grains 106,000 5,300 9,600 144,000 23 1/ Includes labor 2J for groups of 20 members 3/ At full development 6.7 Project impact on poor farmers' income would depend upon the farmers' "without- project" situation and survival strategies. For the very poor farmers, i.e., those earning one SMM or less, on-farm activities, such as improved soil and water management, would improve subsistence crop production. While the impact of these measures on farmers' income is important in relative terms, this would still leave the household income below the extreme poverty line of less than two SMM. In these cases, project-financed off-farm activities would be critical in assisting these households to significantly increase their incomes. 6.8 As a result of the project's activities, more market-oriented farmers would realize substantial increases in their income from improved agricultural and livestock production. Some farmers would be able to increase their family income to just over the poverty line with the proposed improved natural resources management and cultivation practices, while others, like those with dairy production potential, could expect a four-to-six fold increase in their family income, sufficient to remove them completely from poverty. A similar approach was used to assess the likely returns to investment in modernization activities. Expected intemal economic rates of returns for a sample of modernization and diversification activities proposed by potential beneficiaries averaged 30%. 6.9 The internal rate of return for the natural resources management activities was estimated at 23.5% based on the application of a sample of project-promoted actions which farmers could implement. It includes the costs of short-run relatively low-return activities, essential to improved natural resources management and the adoption of - 45 - sustainable agricultural production systems. While the secondary benefits of these actions, such as less soil run-off and erosion, generate tangible benefits to farmers, these were not estimated in the analysis. The calculation included the incremental on-farm costs for the adoption of improved natural resources management, costs of improving feeder roads, incremental costs of technical assistance to farmers, and the UGP costs. The benefits considered included increased production, lower farm costs, increased market sales, and reduced transaction costs. In addition, such benefits as reduced road maintenance and water treatment costs were considered. 6.10 The estimated benefits were conservative as neither long-term benefits accruing from reduced soil run-off and erosion, nor the "without project" productivity losses (a project benefit) due to declining soil fertility, was considered. The sensitivity analysis indicates that, if benefits were to decline or costs to increase by 25%, the component's IERR would remain above 12%, taken as the opportunity cost of capital. 6.11 Analyses were performed for the natural resources management activities to measure the sensitivity of the IERR to the estimated expected benefits and costs, and the stream of benefits. These indicated that if benefits were to fall by 20% from their expected estimates, the IERR would be 16%. Similarly, were costs to exceed their expected values, the IERR would be 17.2%. Finally, if both situations were to occur simultaneously, the 1ERR would fall to 10%. Furthermore, the IERR would exceed 12%, the assumed opportunity cost of capital, even if benefits were 30% below their expected value or costs were to exceed their expected value by 41%. Were the stream of benefits to occur one, two or three years later than expected, the IERR would be 17.8%, 14.4% and 12.1%, respectively. Analysis of the Sensitivity of the IERR to Changes in Benefits and Costs Assumptions IERR - Basic Internal Economic Rate of Return 23.5% - Benefits reduced by 20% 16.0% - Costs increased by 20% 17.2% - Combination of both changes 10.0% 6.12 Price contingencies were excluded and base costs plus physical contingencies less taxes were used for the IERRs. The rate of exchange of the Brazilian Real is currently determined in the open market. Furthermore, given the policy reforms and the opening of the economy that has been taking place in the last 18 months, trade restrictions have been gradually lowered and domestic prices tend to correspond much closer to border economic values. For - 46 - the purposes of economic analysis, border prices were estimated for all tradable produced by the project, based on World Bank projections. A conversion factor of 0.90 was used for machinery and fertilizers, with the exception of urea and potassium phosphate for which specific conversion factors of 0.82 and 0.86 were used respectively. 6.13 While the project would increase on-farm and off-farm employment in the priority areas in which it would be implemented, unemployment and under-eniployment would not be eliminated. Therefore, shadow prices for unskilled labor were estimated at 80% of the market wage rate. In the case of skilled labor, the market rate was assumed to reflect its opportunity cost. In the without-project situation, yields were assumed to remain constant, although there are indications that, in the absence of improved natural resources management, yields have been declining as a result of declining soil fertility. 6.14 Under the assumed adoption rates, the share of poor farmers participating in poverty alleviation activities would be less than 5% of the total rural poor. However, participation would increase in subsequent years, until by the project's fifth year, an estimated 25% of rural poor would benefit from the project's poverty alleviation activities. Given the experience of the LMI project, the adoption rates of the natural resources management activities are expected to be substantially higher. In those microcatchment areas in which project activities would be devoted largely to the completion of work started under the on-going LMI project, annual adoption rates are estimated to be a third of the target farming population during the first three years of the project's life. In the new microcatchment areas, the adoption rate is expected to be between 5% and 10% of total potential beneficiaries in the first year, increasing in subsequent years to reach half the potential beneficiaries in the final year of project implementation. Additional details are provided in Annex M. C. ENVIRONMENTAL ASPECTS 6.15 The watershed-based approach of the proposed project's Natural Resources Management component, based on the successful experience of the LMI project, would increase agricultural production and significantly contribute to soil and water conservation, increase area under forest cover and encourage rational utilization and disposal of agrochemicals. Most income and employment generating subprojects would be small in scale, posing little or no threat to the environment. Nevertheless, the project would ensure proper environmental screening and incorporation of environmental rules for construction contracts, as well as enforcement of measures to prevent any negative impact, especially for civil works and larger agro-processing investments. 6.16 An environmental specialist from the Environmental Institute of Parana (Instituto Ambiental do Parana, IAP) would be incorporated as a member of the UGP to ensure that all projects would be subject to environmental screening process, as presented in the Project's Implementation Manual, and that any required mitigative actions are implemented. In addition, environmental considerations have been taken to account for the development of the list of subprojects that would not be eligible for project support, restricting the financing of proposals involving destruction of natural vegetation, land - 47 - clearing or new road construction. Finally, the project would provide training to implementing entities to strengthen their capacity to evaluate environmental impacts, design mitigation actions, and monitor impacts. 6.17 All proposals submitted to the Municipal Council would be screened for their potential environmental impacts. Screening would require the application of a check-list to classify the proposals for environmental purposes. The incorporation of this check-list into the Implementation Manual would be a condition for loan effectiveness. On the basis of this check-list, proposals would be classified as: "A", requiring no further environmental analysis; "B", which require an environmental study of predetermined areas; or "C", which would require a full environmental impact analysis (Annex N provides a more detailed discussion of the project's environmental aspects and procedures). D. RisKs 6.18 One of the project's strengths is that it builds upon the foundations established under the highly successful LMI project. However, as the project covered only natural resources management objectives, special attention would be needed to ensure that this proposed project can effectively implement natural resources management activities within the expanded context of rural poverty alleviation goals. To ensure that beneficiary participation is strong, especially in subproject identification and implementation, the project would provide field workers extensive training in group dynamics, diagnostic methodologies, selection criteria and development impact indicators. 6.19 Several project features ensure against possible manipulation by more powerful segments of the community. First, demand would be generated by community groups which satisfy the project's beneficiary eligibility criteria. These criteria have beer designed to target the project to the weakest segments of the rural community. Within the group, peer pressure would ensure that proposals represent the demands of the entire group. The beneficiary ceiling of US$6,000, along with the project's procedural requirements and the type of investment funded, reduce the desirability of abuse on the part of the community's better-off. However, should discrepancies arise, the aggrieved groups or members could appeal to the Regional Councils or the UGP for review. 6.20 Because the project is highly decentralized, sound project controls would be established to strengthen project accountability and transparency. An integral part of the project's M&E system would be the annual spot-checks of 10% of the subprojects to be conducted by CODAPAR. 6.21 Unlike many projects in Brazil, Bank-assisted projects in Parana have not suffered from an uneven or insufficient flow of counterpart funding. The establishment of the Project Account would further ensure the timely availability of required counterpart funding. 6.22 Weak local institutions could threaten the project's success. The proposed institutional strengthening component, which includes technical assistance, training, - 48 - workshops and seminars, would mitigate this risk. Resistance to decentralization and privatization by local vested-interests could interfere in project implementation, but these pressures are considered minor relative to the overall momentum of the decentralization process. And finally, it is crucial to the project that beneficiaries can quickly and adequately prepare investment proposals. To assist them, the project would provide extensive support at the beneficiary level, including promotional campaigns and training, applying participatory methodologies. 6.23 Because a considerable share of Parana's agricultural production would be exported, the estimation of project benefits are dependent upon the accuracy of projected world commodity prices. Prices forecasts for basic grains appear to be fairly reliable as short and medium term market trends will be dominated by the changes which have been introduced by the Uruguay Round and other trade agreements, including MERCOSlTL. Future world market developments for other commodities are more difficult to identify. The project's estimated economic benefits are also based on macroeconomic stability, of which there is strong evidence of the Government's commitment. - 49 - 7. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION A. AGREEMENTS REACHED 7.24 During negotiations, agreements were reached on the following: (a) final scope of the research programs to be implemented (para. 4.42); (b) a detailed plan for project promotion and training of field staff in the priority mesoregions to be initiated prior to project effectiveness (para. 5.6); (c) the establishment of at least three regional development commissions (para. 5.7) and at least 50 municipal councils as a condition of loan effectiveness (para. 5.10); (d) a project reporting structure (para. 5.24) and the scope and detailed terms of reference for the preparation of the Mid-Term Review and Cost Recovery Study, to be conducted prior to the implementation of agricultural diversification subprojects (para 5.26); (e) implementation of the project in accordance with the Project Implementation Manual, which would not be amended without Bank prior consent (para. 5.28); (f) the use of Bank procurement guidelines for procurement of works, goods and services under the project, including the Bank's Standard Bidding Documents for ICB and agreed standard bidding documents for NCB (para 5.30); (g) establishment of the Special Account and project account (para. 5.39); (h) preparation of audit reports acceptable to the Bank by independent auditors, including project accounts, the special account and SOEs (para. 5.41); and (i) a plan of accounts, acceptable to the Bank, for project administration, including the procedures for recording of subproject financial information to be introduced within 90 days of loan effectiveness (para. 5.41). - 50 - 7.25 The following would be conditions of Loan Effectiveness: (a) establishment and adequate operation of the UGPand CODEPRO (para. 5.3); (b) signed agreement between SEAB and CODAPAR (para. 5.5); (c) the establishment of at least three regional development commissions (para. 5.7) and at least 50 municipal councils (para. 5.10); (d) approval, on terms satisfactory to the Bank, of the Project Implementation Manual (para. 5.28), including the incorporation of the environmental check-list for subproject screening (para. 6.17); and (e) establishment of the Project Account (para. 5.40). 7.26 In addition, the Borrower would establish no later than 90 days after loan effectiveness, to the Bank's satisfaction the project monitoring and evaluation system (para. 5.25). B. RECOMMENDATION 7.27 Subject to the above assurances and conditions, the proposed project would be suitable for a Bank loan of US$175 million equivalent to the State of Parana with a guarantee of the Federative Republic of Brazil. - 51- Annex A PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT ASSESSMENT OF RURAL POVERTY IN PARANA Rural Poverty in Brazil 1. Of the 155 million Brazilians, more than 24 million live in poverty, about 17.4 percent of the national population. While the number of poor is distributed fairly evenly between urban and rural sectors, the incidence of poverty is 2.5 times greater in the rural sector than in the urban sector. One in every four of the nearly 9 million people living in the rural sector is poor. About 63 percent of the rural poor reside in the Northeast. Of the remaining rural poor, 41 percent are concentrated in Brazil's southern states (see Table 1). Table 1. Poverty Data in Selected Rural Regions Rural Region Rural Poor to Regional Regional Rural Poor to Total Regional Rural Poor to Rural Populationi Regional Poor National Rural Poor Percentage (%) South 35.9 59.5 15.1 MG/ES 39.5 47.5 12.3 SP 14.7 22.4 2.9 Rio 27.4 16.9 1.8 NE 55.7 58.7 63.2 Brazil 42.6 50.7 N/A South: Parana, Rio Grande do Sul and Santa Catarina; MG/ES: Minas Gerais and Espirito Santo; NE: Northeast; SP: Sao Paulo; Rio: Rio de Janeiro Source: IPEA O Maoa da Fome 1993. Rural Poverty in Southern Brazil and Parani 2. More than 18 million people live in the Southern states of Parana and Rio Grande do Sul. Approximately a quarter of this population is rural. In absolute terms, poverty in the South, unlike the rest of the country, is primarily (59 percent) a rural phenomenon, concentrated among those households supported by agricultural activities (Table 1). After - 52 - Annex A the Northeast, the South, with 2.42 million rural poor, has the greatest number of rural poor in Brazil. 3. In the South, 47.8 percent of the rural households are extremely poor, having family heads earning less than one SM.' (see Methodological Note and Table 2). Close to 80 percent of all persons engaged in agriculture receive less than 2 Sm. Nearly all (93 percent) of the heads of poor households in the rural South are engaged in agricultural pursuits, the majority of whom are farmers, but who also include farm laborers and sharecroppers. The share of poor women-headed households (11.8 percent) is disproportionately high compared with the share of households headed by women (8.7 percent) in the rural South. In the rural South, the relatively high share of unpaid family labor (farm workers without remuneration), nearly twice as high as the national average, gives testimony to the prevalence of the family farm in the South. As a consequence of the family farm structure, the participation of young children in the rural labor force is relatively high. In the rural South, some 20 percent of children between 10 and 13 years old work, as compared to the national level of 14 percent. These children generally must forfeit school attendance to work on the farm or elsewhere and contribute to the family survival. 4. The provision of certain social services in the Southern rural areas is substantially inferior to the national levels, and is even worse in rural areas with the highest concentrations of poor households. More than 40 percent of poor rural households are without electricity. Among the rural poor in the South, nearly 60 percent of the households are without internal plumbing. Table 2. Salaries of Persons in Agricultural Occupations (Compared with the 1990 Minimum Monthly Wage) Monthly Salary Brazil Southern Region (in terms of minimum salary) unpaid family labor 4,006,316 28.2 1,425,850 43.3 up to 1/2 1,644,468 11.6 177,267 5.4 1/2 to 1 3,124,441 22.0 412,910 12.5 1 to 2 2,830,187 19.9 562,851 17.2 2 to 5 1,797,973 12.7 494,667 15.1 5 to 10 395,100 2.8 115,956 3.5 more than 10 268,718 1.9 79,712 2.4 not declared 113,316 0.8 20,756 0.6 TOTAL 1,4180,5 19 100 3,289,969 100 Source: National Household Survey, 1990 5. Small farm dominate in the rural South. More than 90 percent of farms in northern Rio Grande do Sul, are under 50 ha. and cover 45 percent of the farmland. Farms under Project Parana 12 Months, Executive Summary, October 1995, p.20 - 53 - Annex A 10 ha account for 40 percent of the farms and occupy 7 percent of the farmland.2 Even in southern RGS, where farms tend to be larger, 71 percent and 37 percent of the farms are under 50 ha and under 10 ha, respectively. In Parana, the farm structure is even more concentrated. Fully 90 percent of the farms are below 50 ha in size, and cover only 30 percent the state's farm area. 6. Rural poverty is most pronounced among small family farms and landless agricultural workers. Typically the small farm is a mixed arable/livestock enterprise combining crops for family consumption with commercial crops and livestock. The main summer commercial crops are soybeans and maize. The principal livestock of small farmers are pigs, poultry and dairy cattle. Depending on market or processor access, some small farmers specialize in various higher-value crops- e.g. tobacco, peaches, apples, citrus. potatoes, onions or vegetables. 7. Small farms depend mainly upon family labor, using hired labor only occasionally. Where the terrain permits, some farms own a tractor for land preparation. Use of fertilizer, lime, pesticides, veterinary products and other inputs is common on more commercial farms. Application is very limited for crops or livestock produced primarily for on-farm consumption. Generally, the land of the poor farmer is degraded (not better than subclass IV) and steeply sloped The steepness of much of the farmland precludes mechanization and, because of the inappropriate cultivation practices applied, contributes to serious soil erosion. 8. Poverty, limited employment opportunities and inadequate social services are contributing to the exodus of the working age population, leaving the elderly and young behind in the rural areas. In Rio Grande do Sul, for example, the rural population of 2.4 million represented 23 percent of the 1991 total, down from 32 percent in 1980 and 47 percent in 1970. Many of those who move to the cities fail to find satisfactory employment and the social costs of the migration are considerable. 9. Temporary workers or Boias Frias, constitute an important segment of the labor force. According to IAPAR, some 80,000 families or 300,000 Boias Frias live in Parana (Moura 1988; CEMlCNBB 1991). In Parana, temporary workers constitute the largest group in the labor force, usually employed locally, while permanent workers constitute a smaller proportion. Boias Frias tend to live clustered in small rural towns selected by the people for the possibilities they offer to have access to additional income sources. Crowding and subletting are particularly problematic among Boias Frias, many of whom rent rooms on a weekly basis. Less than 60% of the rural inhabitants are home owners and more than 40% of the families have to rent or sublease, live in extended households, or are illegal occupants. To survive these families try to find as many sources of income as possible. Generally speaking, Boias Frias are extremely poor and face great instability as they do not have steady income sources and their living conditions are extremely precafious. 2 based on Agricultural Census of 1985 - 54 - Annex A 10. Women and youth are specially affected by rural poverty in the South. Because of the prevalence of the family farm, women are often left alone to assume the responsibilities of the farm and caring for the children and aged. Children are called away from their education pursuits to help support the family by working on the farm or elsewhere. As a result, in the rural South, one in every five children between the ages of 10 and 13 has already joined the work force. As attractive rural economic opportunities are scarce, few youth can ever hope to achieve a satisfactory standard of living in the rural areas. 11. Some 7,500 indigenous people from 5 different ethnic groups live in Parana. Most communities have demarcated reservations, covering an area of 78,000 ha, scattered in 16 municipalities throughout the state. Although there are no official statistics regarding poverty among indigenous groups in Parana, based on their survival strategies and living conditions most of them should be considered extremely poor. To survive, indigenous families combine subsistence farming and hunting and gathering activities with occasional off-farm employment, mainly as seasonal agricultural workers. 12. Unfortunately, the magnitude of poverty in the Northeast can obscure the severity of poverty elsewhere. For this reason, most national and international poverty programs tend to focus on the Northeast, to the exclusion of the rest of the country. Yet, for the other, largely neglected Brazilians living in rural poverty much could be done to increase their productivity and improve their standard of living, by improving infrastructure, providing technical assistance and, above all, generating rural employment. - 55 - Annex A Methodological Note: Rural Poverty Profile 1. In Its Brazil: Poverty Assessment, the Bank applied a per capita poverty line, equivalent to the estimated value of the food basket, satisfying the minimum caloric requirements (adjusted by region, age and sector). However, due to methodological constraints, the results were strongly influenced by urban patterns, that Is, providing a better measurement of urban poverty than of rural poverty. To calculate the value of the rural food basket consumption, the study applied a differential factor to the value of the metropolitan food basket. Because of data limitations, the study used the margin between the values of the metropolitan and rural food baskets dating back to 1974-75 conditions. In 1974-75, the difference between the metropolitan and rural consumption patterns was relatively large. Depending upon the region, the value of the metropolitan index was between 50 and 60 percent higher than that of the rural basket. 2. By applying the 22 year-old food patterns, the study could not capture the convergence which has occurred between metropolitan and rural food habits. Over time, the actual dfference between the value of the two baskets has been cut by more than half, with the rural value representing some 75 percent of the metropolitan. As a result, the rural poverty line used in the Assessment did not reflect the actual value of the rural food basket for satisfying minimum caloric Intake, leading to an underestimate of the magnitude and Incidence of rural poverty In Brazil. Applying higher adjustment factors, the authors found that, not only did the share of the poor relative to the national population Increase from 17 to 24 percent, but the contribution of rural poverty to national poverty increased from 43 to 50 percent. 3. In the case for the rural South, the estimated value for the rural food basket was 55% of the value of the metropolitan (food basket, equivalent to 0.30 percent of the minimum monthly wage. This level Is considerably below rural poverty lines used in other poverty assessments, which generally range between 75 percent and 200 percent of the minimum monthly wage. 4. An additional factor contributing to the under-estimation of rural poor Is the classiflcation of all counties (municipios) as urban. However, since many of these municiplos are themselves very small (less than 20,000 Inhabitants), some areas classified as urban, particularly in the more rural areas, are more rural than urban. To illustrate, 12 percent of the heads of households in the urban areas work In agriculture and this share rises to 27.5 percent for the poor households. Merely changing the classification of these agricultural households from urban to rural increases the contribution of the rural areas to national poverty to 52.5 percent. 6. It was concluded that to have a better estimate of rural poverty, the approach used In the Mapa da Fome would be more appropriate. According to the Mapa da Fome, the household Indigence line, equivalent to the minimum salary needed to acquire the basic food basket, Is set at two minimum monthly salaries (salIrlos mrnImos mensales, SMM) and the household poverty line, equivalent to the salary needed to acquire the minimum food basket and other family needs, Is approximately three SMMs. Farm Types and Survival Strategies of the Rural Poor in Paranai 13. There are about 466,000 agricultural producers in Parana, of which over 300,000 are small-scale poor farmers. Existing information indicates that there is a wide heterogeneity among the rural poor. This variation result from the different productive and socio-economic characteristics of the rural poor. Looking at the income sources of the rural poor, at least three main types can be identified in Parana's countryside. First, there is a type of rural poor that subsists mostly from on-farm agricultural and livestock production. Second, there is a segment of the rural poor that combine various on-farm - 56 - Annex A and off-farm income sources. Finally, there are those that subsist primarily from off-farm income. From a technological-productive standpoint, different types of farmers can be identified based on their technological level and their use of family labor and hired labor. 14. Five main types of agricultural producers are identified in a farm typology developed by IAPAR (1994), based on the following variables: (i) use of hired labor, (ii) degree of capitalization, (iii) technological level, (iv) net agricultural income and, (v) sale of labor force, in. Table 3 shows the distribution of farm units by farm types and their main characteristics. According to IAPAR (1994), sixty five percent of all agricultural producers are small farmers, whose net incomes are below three SMM. These producers account for only 22% of the agricultural land of the State (see Table 7). Table 3. Distribution and Main Characteristics of Different Farm Types in ParanA Farm Type Number Area Farm Land Use of Labor' Production" of Size Ownership Farmers ('000 Ha) (Ha) (%) Family Hired Family Market Subsistence Farmers 97,625 635 6.5 50 2.3 0.1 31.3 68.7 Small Market 207,268 3,074 14.8 60 Oriented Farmers 2.9 0.4 20.4 79.6 Family Farm- 117,127 4,998 42.7 80 Enterprise 2.9 0.7 27.0 73.0 Low Tech. 18,082 1,772 98.0 76 Capitalized Farmer 1.6 11.5 15.4 84.7 High Tech. 28,188 6,219 237.5 89 Capitalized Farmer 1.6 8.3 22.7 77.3 Total 466,290 16,698 79.9 66 Source: IAPAR 1994 * Equivalent of man/day Percentage of total agricultural and livestock production 15. From these five types, the subsistence farmers (Produtor de Subsistencia) and small market oriented farmers (Produtor Simple de Mercaduria), mostly correspond to the rural poor. However, the geographic distribution of these types is not homogeneous across the State. Subsistence and small market oriented farmers are concentrated in three regions, characterized by poor, rapidly deteriorating natural resources, small operations with little capital and highly dependent on family labor (see Table 4). - 57 - Annex A Table 4. Regional Distribution of Farm Types Mesoregion Subsistence Small Family Low Tech. High Tech. Total Farmers Market Farm Capitalized Capitalized Oriented Enterprise RI Litoral e Alto Ribera 6,075 5,791 1,054 172 143 13,235 R2 Curitiba e Ponta Grosssa 30,551 40,853 15,189 1,163 2,984 90,740 R3 Pitanga 23,949 39,160 8,109 1,230 1,725 74,182 R4 Wenceslau Braz 5,162 9,836 3,875 995 866 20,734 R5 Apucarana 3,896 13,533 4,810 1,338 1,106 24,683 R6 Londrina, 8,784 33,881 35,455 7,082 12,155 97,357 Maringa-Cascabel R7 Sudoeste 13,841 44,183 21,184 903 2,143 82,254 R8 Paranavai e Umuamara 5,367 20,022 27,451 5,199 5,060 63,105 Total i 97,625 207,268 117,127 18,082 26,188 466,290 Source: IAPAR 1994 16. Subsistence farmers are small farm units, operated mainly with family labor, from 0.5 ha to 15 ha, with and average farm size of 6.5 Ha. Over 75% of the units have less than three hectares and less than 50% have land ownership. These units rarely hire labor and if they do it is only during harvesting and represent less than 5% of total labor required. However, in average, these units sell out more that 15% of their available labor force throughout the year, reaching in some cases up to 50%. Technological levels are low and dependent mostly on draught animals. Capital investments are extremely low and access to credit is very difficult for these producers. Monthly household income average 0.5 SMM, ranging from 0.3 SMM to 0.7 SMM, with a significant component of off-farm income. 17. Small market orientedfarmers are the single largest type of farmers in Parana. They account for 45% of the total number of farmers and, along with subsistence farmers they represent 65% of total. Average farm size is 15 ha, ranging from 13 ha to 21 ha. Use of family labor varies from an equivalent of 2.7 to 3.3/man, and hired labor is less than 20% of total labor. These farmers, normally sell out less than 15% of their available labor force and they draw their income mainly from on-farm production. Average household income is 2.8 SMM, however, about 60% of these farmers receive 1.7 SMM. Capital investments and technological level are low. 18. Mesoregions R2, R3 and R7 (see Annex B) concentrate about 70% of subsistence farmers and almost 60% of small commercial farmers (see Table 4) of the State. However, in region RI, although there are few agricultural producers (3% of total), almost 90% correspond to subsistence small farmers. Capitalized farmers are concentrated in regions R6 and R8, as well as the family farm enterprise type, which is also relevant in R7. - 58 - Annex A 19. Within each one of the described types, it is possible to distinguish sub-groups according to their farm size, income level, and use of labor. Table 5 provides a summary of the key variables for each sub-type. It is important to underscore that this further analysis allows to better identify those small producers that are under the poverty line, which correspond to the SUB 1, SUB2 and PSM1 sub-types, about 226,000 producers, or 49% of all agricultural producers in Parana. Table 5. Distribution and Main Characteristics of Different Farm Types in Parana Farn Type Number Area Fa=m Income Land Use of Labor* Production* of ('000 size SMM Ownership Farmers Ha) (Ha) - - - Family Hired Fanily Market Subsistence 97,625 635 6.5 0.5 50 2.3 0.1 31.3 68.7 Farmers l | SUBI 50,440 286 5.7 0.3 51 2.3 0.1 38.6 61.4 SUB2 47,185 349 7.4 0.7 48 2.5 0.1 22.9 77.1 PSM 207,268 3,074 14.8 2.8 60 2.9 0.4 20.4 79.6 PSM1 128,430 1,631 12.7 1.7 59 2.7 0.1 22.3 77.7 PSM2 47,054 790 16.8 3.9 67 3.1 0.3 17.3 82.7 PSM3 31,784 653 20 5 5.7 64 3.3 10 12.7 87.3 Source: IAPAR 1994 * Equivalent of person/day -* Percentage of total agricultural and livestock production 20. SUB 1 farmers have a significant smaller farm size and depend fully on family labor (see Table 5). These farmers have the lowest income level and draw a significant amount of their income from off-farm activities. The different ratios of family and wage labor in each type indicate the amount of labor in the production process and the degree of capital intensity in the system. Capital intensity in SUB 1 type farmers is the lowest as well as their technological level. Their survival strategy is based on simple reproduction, combining off-farm and on-farm activities, with a heavy emphasis on subsistence production. SUB2 farmers are not significantly larger than SUB 1 farmers, however, they have higher incomes and a they are better integrated to the market. Unlike the former sub-type, SUB2 farmers have a higher technological level and a more diversified agricultural production. Also, they make adjustments to their income generating capacity by synchronizing farm and off-farm activities with less seasonal variations than SUB 1 farmers. 21. In the case of the market-oriented small farmers (PSM), there is a gradient from the PSM1 to the PSM3 subtype (see Table 5). Alike to what is observed among subsistence farmers, there is a clear relation between farm size and income level in these three farm sub-types. From the three sub-types, only PSM1 is under the poverty line. - 59 - Annex A PSM1 farmers have a significant larger farm size than subsistence farmers and they are more technified. When required, off-farm activities are carried out in such a way that they complement rather than compete with agricultural production activities, to ensure household income. Income level is 1.7 SMM and there are no significant differences in income levels amongst PSMI farmers in different regions. 22. Concluding SUB 1, SUB2, and PSMI sub-types are similar in that all these farm households adapt to risks by employing a variety of strategies to ensure household income. These strategies involve a variety of resource management techniques, such as crop diversification, sale of productive assets such as livestock, encroach on marginal or private lands, hiring of their family labor, temporarily migrating to other areas or borrowing cash particularly from informal sources. However, they diverge in the main element that articulates their survival strategies. While SUB 1 households rely heavily on off-farm income, SUB2 and PSMI combine both on-farm and off-farm activities and have a greater productive potential as small agricultural producers. SUB I households are subsistence farmers who orient their production to secure a minimum household income, relying on extensive livestock and traditional crop production. SUB2 and PMS I farmers diversify their survival strategies into more dynamic and competitive production systems. 23. The agro-ecological characteristics of a region contribute to define the ways in which capital, technology, and labor are organized. The regional distribution of farm types reflects these relationships as well as the production systems that have evolved in each region. The shifting sectoral and macroeconomic policies regarding credit access, interest rates, pricing, subsidies and technological support favored the expression of regional imbalances and the development of specialized agricultural production systems between and within regions. The natural resources endowment and the differential access to other productive resources among agricultural producers had a regressive impact upon the small farmers, increasing the gap between the small, less capitalized, and the more technified operations. -61- Annex B PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT AGRICULTURE AND NATURAL RESOURCES IN PARANA 1. Parana is the second largest of the three southern states of Brazil, with a total area of about 199.5 thousand square kilometers (2% of Brazil) reaching from approximately 22 degrees south to 27 degrees south of the equator. It is bordered on the north by the state of Sao Paulo, on the west by the state of Mato Grosso and on the south by the state of Santa Catarina. To the east Parana faces the Atlantic Ocean. NATURAL RESOURCES Climate 2. Most of the state has a subtropical climate which allows for both tropical and subtropical agriculture. Mean annual rainfall increases from 1250 mm in the north to 2000 nmm in the south and south-east. Rainfall is distributed throughout the year without a distinct dry period, although short dry spells may affect crop production if they coincide with critical growth periods. Intense storms with rainfall intensities exceeding 100 mm/h and 200 mm/24h, occur in spring and during the hot summer months, which coincide with land preparation and post harvesting periods when soils are without ground cover and easily eroded. 3. The state has been divided into eight agro-ecological or mesoregions (paras. 7 to 15). Mesoregions 2, 6, 7 and 8 have a humid subtropical climate with mean monthly temperatures below 18 degrees centigrade during the coolest month (July) and below 22 degrees centigrade during the hottest month (January) and frequent frosts. A subtropical climate with warm summers prevails in mesoregions 3, 4 and 5, where mean temperatures exceed 22 degrees centigrade during the hottest month and are below 18 degrees centigrade during the coolest month and frosts are rare. Finally, in the superhumid tropical climate of meso-region 1, mean monthly temperatures are always above 18 degrees centigrade, the area is frost-free and rainfall exceeds potential evapotranspiration by 60 mm during the driest month. Soils 4. Sedimentary soils occupy the first 250 km when moving inland from the Atlantic coast. They give way to basalt soils in the elevated center of the state, and then to soils derived from sandstones as the land falls away again towards the north-western border of the state. Latosols, Terra Rossa, Podsols and Litosols occupy almost 75% of the state. - 62 - Annex B Table 1 summarizes their relative importance, location and main limiting factors. The latter refer mainly to high acidity/low fertility and susceptibility to erosion limitations for mechanized agriculture. Soils in subtropical areas have particularly low pH levels and require intensive liming for an increased production. Maintenance of an adequate level of organic matter is a main concern for cultivated lands in tropical areas. Deficiency of phosphorous is general throughout the state. 5. Soil fragility, combined with inadequate resource management, has resulted in widespread soil degradation, reducing farm productivity and threatening the state's important agricultural resource base. Erosion starts when the bare soil is exposed to the highly erosive spring and summer rainfalls. The impact of rain detaches small soil particles which clog soil pores and seal soil surfaces. Water which cannot infiltrate is lost as surface run-off, carrying more soil particles and causing erosion damage, silting and flooding. To prevent water-induced soil erosion the technical strategy for land management must achieve three objectives: (a) minimize the rain splash effect by protecting the soil from surface scaling, (b) minimize the excess run-off by maximizing the rate of infiltration, and (c) minimize the run-offs to flow and form gullies by limiting its accumulation and velocity. 6. The rapid and unplanned expansion of the agricultural frontier over the past 60 years has devastated the state's original vegetative cover, declining from 87% to less than 10% of the state area. Despite the positive impact of the World Bank financed Land Management Project, more than 40% of the State's agricultural land require the adoption of extensive and appropriate soil management practices to increase and sustain productivity. Compounding the situation is the fact that those zones with the greatest agro-ecological limitations tend to have the highest concentration of small farmers. Agroecological Mesoregions 7. IAPAR has defined eight homogeneous agroecological mesoregions composed of municipalities with similar climate, geomorphology, land use capability, type of farmers, actual land use and production systems, among other characteristics. The general objective of this zoning is the preparation and implementation of specific development programs. 8. Mesoregion 1 covers an area of 0.78 million ha, including 13 municipalities along the Atlantic coast and in Alto Ribeira. The area is characterized by a rough topography, largely occupied by tropical forest, including natural parks. Sedimentary and hydromorphic soils predominate. Agricultural land is mostly occupied by citrus orchards and sugar cane. Small holdings predominate. About 90% of the 13,200 farmers are smallholders (subsistence and small-scale commercial farmers) occupying about 31% of the land. 9. Mesoregion 2 in the south-east of the state comprises about 4.6 million ha and 58 municipalities including the metropolitan area of Curitiba. The land has an undulating to strongly undulating topography, sedimentary and to a lesser extent basalt soils and is partly covered by subtropical forest, mostly re-growths. Nearly 79% of the 90,700 - 63 - Annex B farmers are small-holders and occupy about 26% of the land. Agricultural production includes mainly food crops. Consumption of agricultural inputs is low and cultivation is mostly based on family labor and animal traction. 10. Mesoregion 3 in the center of the state comprises 2.4 million ha and 34 municipalities. The area has basalt soils and an undulating to strongly undulating topography. Much of the area is covered by natural vegetation. About 85% of the 74,200 farmers are small-holders and occupy 33% of the land. Although agricultural production is partly mechanized, the consumption of fertilizers and other inputs is still low. The main crops are maize, soybeans, beans, rice, cotton, wheat and improved natural and artificial pastures. 11. Mesoregion 4 comprises 20 municipalities in the north-east of Parana and was originally covered by subtropical forest. The region covers some 0.62 million ha with an undulating topography and poor sedimentary soils. Smallholders represent about 73% of the 20,700 agricultural producers and about 26% of the area. Predominant crops are maize, beans, rice and pastures. Higher value crops, such as garlic, onion, strawberry and guava, have been recently introduced but occupy only small areas. 12. Mesoregion 5 represents 0.52 million ha and 18 municipalities in the Ivai valley. Its undulating to strongly undulating topography and basalt soils were originally covered by subtropical forest. About 70% of the 24,700 agricultural producers are low technology small-holders. Main crops are coffee, cotton, maize and beans. 13. Mesoregion 6 extends across Parana from the northern to the western state border and represents about 3.5 million ha and 97 municipalities. The land has a slightly undulating topography and was originally covered by subtropical forest. The predominant basalt-derived soils are fertile and support modern agricultural development. About 1.2 m-fillion ha are dedicated to soybeans and 1,1 million ha covered with improved natural and artificial pastures. An important dairy production developed in the center of this meso- region. About 42% of the state's rural work force lives in this area. Small farmers represent 44% of the 97,400 agricultural producers but hold only 10% of the land. 14. Mesoregion 7 in the south-east of Parana covers about 1.5 million ha distributed in 54 municipalities. The original subtropical rainforest has disappeared and the basalt- derived soils are mainly farmed by smallholders with less than 20 ha each. About 70% of the 82,300 holdings occupy nearly 37% of the land. Around 45% of the farms are mechanized and use reasonable levels of inputs. Agriculture production includes maize, beans and pigs. 15. Mesoregion 8, located in the north-west of the state, covers about 2.6 million ha distributed among 75 municipalities. The land has a slightly undulating topography and highly erosive sandstone-derived soils and was originally covered by subtropical forest. Today'large parts of the area are grazing lands for cattle production. The predominant crops are coffee, maize, cassava and cotton. Smallholder farmers represent 40% of the 63,100 agricultural producers but only 9% of the land. - 64 - Annex B Vegetation and Land Use 16. Much of the natural forest, which originally covered over 85% of Parana, had been removed by 1960 when the agricultural frontier reached state boundaries. With the intensification of agriculture since then, and import saving regulations in the 1970s which compelled local industries to switch from oil to wood fuel, only a reduced area of natural forest remains. Land use in 1994/95 is summarized in the following table. AGRICULTURAL PRODUCTION Production Systems 17. Typical small farms in Parana combine food grains with industrial crops and/or pastures for livestock production and pursue food sufficiency along with generation of a commercial surplus. Encouraged by government subsidies to substitute imports, wheat became the main winter crop. The principal summer crops are soybeans, maize and cotton. Beans are a regular part of the small farmer production systems, destined mainly for on-farm use. Permanent activities include coffee and pastures. Livestock production includes beef, dairy, pig and poultry production. 18. Some farmers retain grains on the farm to expand commercial pig or poultry production as a vertically integrated operation. Part of the winter cropped area may also be planted with fodder, such as oats instead of wheat, which together with natural and/or artificial pastures support the dairy production. 19. Small farms operate mainly with family labor, using animal traction or sometimes manual labor for light work, an hiring or owning a tractor for land preparation. The use of lime, fertilizers, pesticides, veterinary products and other modern inputs is only common for commercial crops or livestock, where farmers have been integrated with processing industries and markets. Also farmers who have benefited from the Bank-financed Land Management Project (Ln. 3018-BR) have an increasing demand for modem inputs. The remaining small farmers use traditional farming methods and a limited amount of fertilizer and agrochemicals. Commodity Production and Trends 20. About 90% of the state's farm area is cultivated with soybeans, wheat, maize, beans, cotton and coffee. Declining international grain prices in recent years, along with changes in government policies, including removal of subsidies, the opening of wheat imports and the reduction of credit subsidies has had an important impact on agricultural production in Parani. Table 2 compares average yields, areas and output of major crops during 1989-1992 with corresponding values for 1993 and 1994. 21. Soybeans occupy about 2.1 million hectares in Parana and produced about 5.4 million tons in 1994, almost 22% of the national production. The area planted remained fairly constant over the past several years but productivity increased to present yields of - 65- Annex B about 2.4 t/ha, significantly above the 2.1 t/ha national average. Parana is the second producer of soybeans in Brazil after Rio Grande do Sul. About 95% of the farmers have their production mechanized, and about 88% apply soil conservation measures to minimize soil degradation. 22. Wheat is generally grown in rotation with soybeans and therefore cultivation is highly mechanized and include soil conservation practices. Production decreased significantly from an average of 2.0 million tons between 1989 and 1992 to an average of 1.0 million tons in 1993 and 1994, after removal of subsidies and opening Brazi] to wheat imports. Average yields range around 1.6 t/ha and are above the national average (1.4 t/ha) although poor if compared with Argentina. Frosts during the flowering period and poor rainfall distribution are the main reasons for yield variability between years. A graminaceous species is desirable for phytosanitary reasons as a winter rotation crop with summer soybeans, but apart from wheat there are few alternatives. This demand together with recent international price increases, is expected to level or even partially reverse the downward trend of wheat production in Parana. 23. Maize has become the most important grain crop in Parana. About 265,000 farmers planted more than 2.5 million hectares in 1994 with a production of 8.1 million tons, which converted the state into the main producer of the country accounting for 27% of national production. Yields increased from 2.5 t/ha between 1989 and 1992 to about 3.0 t/ha in 1993 and 3.2 t/ha in 1994 and are above the national average (2.5 t/ha). These increases are due to a wider use of hybrids and fertilizers and productivity is expected to further improve in the future. About 68% of the area under maize is mechanized, but only 50% benefits from soil conservation practices. 24. Bean yields are highly dependent on climatic conditions, being susceptible to both drought and excess rainfall during the growing season. In Parana yields increased significantly over the past several years from an average of 570 kg/ha between 1989 and 1992 to almost 850 kg/ha in 1993 and 1994, and are above the national average of 600 kg/ha. Beans are planted by about 180,000 producers on relatively small areas of up to 3 ha. Only about 60% of these producers employ tractors and modern farm machinery for land preparation and seeding, and 36% apply soil conservation practices. Being a crop mainly for on-farm use, the area planted has remained fairly constant. Total production amounted to almost 500,000 tons in 1994 and represented about 20% of the national total. 25. Cotton is grown by about 35,000 farmers on areas of up to 8 ha. About 85% of the cotton farmers use farm machinery for land preparation, seeding, and pest and disease control and about 60% apply soil conservation practices. Harvesting is done by hand. Yields in Parana are low. Peak yields of above 1.7 t/ha have been recorded in 1989, 1990, and 1994, meanwhile in 1992 and 1993 yields only ranged around 1.3 t/ha. Cotton productivity is highly dependent on the incidence of pests and diseases and therefore related to climatic conditions. The total area planted decreased from an average of 560,000 hectares between 1989 and 1992 to less than 300,000 hectares in 1993 and 1994. Productivity is expected to increase since with decreasing areas cotton will occupy better- suited soils and climatic regions. The 1994 production of cotton amounted to 415,000 and represented 30% of national production. - 66 - Annex B 26. Coffee yields in Parana are significantly below the national average, having suffered from periodic frosts. The total area planted dropped from 842,000 ha in 1975 to almost 200,000 ha in 1994 and production from 1.2 million tons (42% of the national total) to less than 100,000 tons during the same period due to frosts and declining coffee prices. Productivity is expected to increase in the future from the present low of about 450 kg/ha as plantations concentrate on more suitable soils in less frost-prone areas and with the establishment of high-density plantations. Only about 27% of the estimated 20,000 coffee growers in Parana use tractors and modem farm equipment for cultivation and pest and disease control. 27. Livestock is an important element in agricultural production. Parana has about 8.5 million head of cattle which account for a production of 935 million liters of milk and slaughtering of 750,000 head per year. Beef cattle are raised extensively, mainly by larger farmers, and their offlake and productivity are low. Animals are slaughtered at about 48 months with an average carcass weight of 240 kg. Carrying capacities of pastures average around 1.3 head per hectare. Confinements are still rare but where adopted, they have improved the quality of the carcass and reduced the slaughtering age. Dairy production is mostly practiced by small-holders and tends to be from genetically unimproved animals with an average output of less than 1,200 I/cow/year and long calving intervals. The productivity compares with a national average of less than 1,000 I/cow/year. Beef and dairy productivity could be raised significantly with relatively simple improvements in nutrition, health care and herd management. 28. The state has about 3.7 million pigs and slaughters about 1.8 million head annually. Pigs and poultry are part of the traditional farming system. An increasing number of smaller farmers started rearing genetically improved breeds using home-grown feed. Traditional pig production systems have a low productivity with about 10 finished animals per sow annually. Smallholders in the south-east of the state working with genetically improved breeds increased their productivity up to 20 finished pigs per sow annually. Smallholder poultry production is for home consumption, supply for local consumers and lately increasingly integrated with an industry. A growing number of farmers receive one- day chicks and deliver up to five cycles of finished birds of between 38 and 45 days of age to private poultry slaughterhouses and processors. - 67 - Annex C PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT CREDITWORTHINESS ASSESSMENT Background I. The government of Parana has enjoyed a positive reputation for financial management and administrative innovation in recent years, under both the last administration and the administration which entered office at the start of 1995. The table below displays that the state government has had some financial difficulties in recent years, however, even if those difficulties were not as severe as many other states in Brazil. Table I Parana-Executcd Budgets: 1993-1995 1995 Share Dcc. 1995 $R (1,000) 1994 1995 of Net Cur Net Current Revenues 2611363 2,818,086 100% Current Expenditures 2078398 2,512,273 _ 89% Personnel 1641313 1,992,000 71% Interest on the Debt 68020 105,273 __ 4% Other 369064 415,000 15% Curreni Savings 532965 305,813 11% Capital Revenues __ _ 19776 30,039 1 %_ Capital Expcnditurcs 634175 490,379 17% Ov,erall Balance -81434 -154,527 -5% Gross Borrowing 98956 273,763 10% Amortizations 87349 214,638 8% Memo: Primarv Surplus -13413 49,2541 -2% 2. Financinpg of the 1995 deficit. Revenue growth slowed in the second half of the year as both the national and local economies slowed. An estimated budgetary deficit of $R 155 million, or 5 percent of net revenues, opened up by the end of the year. This operating deficit combined with amortizations of $R215 million represented a gross financing need of $R370 million. This gap was financed by a combination of sources: (1) a $R120 million loan from BNDES (National Social and Economic Development Bank) for financing part of the thirteenth wage (end of year salary bonus); (2) $R 47 million in loans from multilateral development banks; (3) $R 98 million in arrears to providers of goods and services ("floating" debt accumulation); and (4) $R 105 million of debt service capitalization on the stock of bonded debt. -68 - Annex C L Financial Proiections 3. Prospects for limiting the expansion of deficits and the stock of debt depend upon continued restraint on public employment and renewed efforts to restrict transfers to public enterprises for financing public works. These capital transfers accounted for almost half the 1995 capital budget. The government is working on both fronts: imposing a hiring freeze, and seeking private sector partnerships for investments in areas like roads and water supply. 4. The stock of debt is large, R$2.6 billion, or 90 percent of net current revenues. Most of the debt, however, was refinanced under the government programs for refinancing internal (Law 8727/93) and external (Law 7976/89) debt, thus making this debt stock more manageable. In addition other external debt was refinanced in 1994, with generous grace periods and soft terms. The table below presents the composition of the stock of debt at the start of 1996. Due to the renegotiations, the state essentially has two types of creditors: the federal government (and federal financial institutions), and multilateral development banks (also with a federal guarantee). Even the "other internal" debt below is state-backed debt of the electric company that is owed to private banks, but was arranged through the federal development bank, BNDES as an intermediary. Table 2: Stock of Debt, Start of 1996. Debt stock (saldo devedor) as of Dec. 31, 19 8727 617 7976 632 other internal 182 external _! 627 94 Reneg. Ext. wl grace 107 94 Reneg. Ext.w/o grace 120 Bonds _ 314 flutuante:aros 0 flutuante: restos 96 New 1995 debt (BNDES) 120 total I ° 2615 5. Assumptions. In the projections below, the following "most likely scenario" assumptions are made with respect to the key variables. Revenues: Grow at the World Bank's most recent projected growth rate of the national economy. Personnel Expenditures: Employment levels are assumed fixed, and wages are assumed to grow at the projected rate of national GDP per capita growth. The same is true for pensioners, the number of which has been quite stable in recent years. Payments to retired workers (inafvos) are assumed to grow at the rate of per capita income, plus one percent per annum growth in the number of retirees. Non-personnel current operating expenditures: These are assumed to grow at the rate of economic growth. Capital expenditures: direct administration capital expenditures grow at the same rate as national GDP, and capital transfers to public enterprises are eliminated. Interest rates and amortizations are projected on the basis of the terms of the various categories of debt described above. - 69 - Annex C Arrears (negative net cash flows) are assumed to be fully amortized immediately in the following year. No new borrowing or capital revenues are allowed in future years. Table 3: Financial Projections in the "Most Likely" Scenario l________ 1996 1997 1998 1999 2000 Current revenues 2931 3063 3210 3370 3539 xpenditures non-debt current 2469 2544 2630 2724 2822 non-debt capital 281 293 308 323 339 debt service 511 622 698 738 749 subtotal 3260 3460 3635 3785 3909 Cash flow surplus -330 -397 426 415 -371 Capital receipts 0 0 0 0 0 net cash flow -330 -397 426 415 -371 net cash flow/rev -110 -13% -13% -12% -10% stock of debt/rev 0.89 0.93 0.94 0.92 0.88 personnel as % expenditure 70% 68% 67% 66% 65% debt service/revenue 17% 20% 22% 22% 21% ownworks/rev 10% 10% 10% 10% 10% prirnary surplus 181 225 272 323 378 primary surplus/rev 6%. 7% 8% 10% 11% primary surplus/debt service 35% 36% 39% 44% 50% overall operational balance/rev - 1% 1% 2% 4% 5% |current account balance/rev 9% 10% 12%f 13% 15% 6. Results. Our results show a primary surplus/revenues ratio and a debt/revenues ratio by the year 2000 are within reasonable levels for proceeding with the proposed loan. The sensitivity of these results to variations in the assumptions made displays a moderate degree of risk, in terms of sustained fiscal balance. Slower economic growth rates would push the debtr to revenue ratio by 10 to 15 percentage points and lower the primary surplus to revenue ratio by 2 percentage points. A ten percent rise in the real minimum wage also would lower the primary surplus to revenue ratio by 7 percentage points. Qualitative Issues: Management Effectiveness 7. On a "yes or no" basis, state management is judged to be "adequate," given the country context. The current administration enjoys a national reputation for solid public management, partially due to its successes when the Governor was mayor of the capital city. The administration also has a relatively solid legacy left by the last administration, despite the large public debt (largely accumulated during the late eighties). The administration's political support in the Legislature is made up a strong majority coalition of parties. Legislation to facilitate privatization of state enterprises passed the Assembly years ago. Now, with more solid political backing, the current administration is moving ahead with privatization efforts, including state roads, which have reached a fairly -70 - Annex C advanced stage of preparation. Many future infrastructure projects involve plans for private sector involvement, either in partnerships or in the lead role. - 71 - Annex D PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT POVERTY ALLEVIATION INVESTMENT COMPONENT Introduction 1. The project seeks to contribute to the alleviation of rural poverty, protection of natural resources and stimulation of the rural economy by providing technical and financial assistance to eligible communities or groups of beneficiaries, for the improvement in the standard of living of the rural poor, introduction of proven natural resource management practices and support small-scale initiatives for modernization/diversification of production systems. The project's strategy is based on well-targeted financial and technical support for beneficiary-demanded economic and social investments, using microcatchments as the primary operational unit. In addition, within the microcatchment, the project would help small farmers introduce improved natural resource management practices as well as encourage innovations to increase sectoral competitiveness and income. The project strategy would also seek to strengthen the linkages between on-farm and off-farm activities to generate employment opportunities and raise the income levels of the rural poor. 2. The project is fully consistent with the Bank's Program of Targeted Interventions. Project investments would be targeted directly to beneficiaries, through a mechanism which takes into account household poverty levels, concentration of small farms, types of agricultural producers and agro-ecological characteristics of the area. 3. Main implementation features of the component include: (i) decentralized decision-making mechanisms that rely mainly on existing institutions, including local governments and beneficiary organizations, rather than promote the creation of new project-specific entities; (ii) high beneficiary participation, including demand-driven identification of subprojects and the development of participatory methods to ensure that project implementation benefits from adequate and continuous feedback from beneficiaries; (iii) accurate beneficiary selection criteria, based on extensive analysis and validation of socio-economic data for targeting purposes; (iv) adequate project promotion, to ensure widespread awareness of project features within potential beneficiary communities; (v) simplified subproject processing cycle, including standardization of typical subproject designs, intensive training of field staff providing technical assistance to beneficiaries; and (vi) sustainability-oriented implementation of subprojects, through community integration and accountability, beneficiary commitment to 0 & M of subprojects, establishment of financial limits per individual beneficiary, and -72 - Annex D adequate levels of technical assistance and specialized monitoring during subproject implementation. 4. The Poverty Alleviation Investment Component would finance: (i) Poverty Alleviation and Social Investments, including family and community infrastructure, rural development, and income generation sub-projects as well as (ii) Natural Resource Management Investments, including introduction of better practices, road rehabilitation and agricultural modernization sub-projects. Each investment type would have a well- defined sub-project selection and processing cycle. Targeting 5. Drawing from existing experience in poverty alleviation investment projects, the project incorporates well-defined targeting mechanisms based on a series of socio- economic indicators specific to the rural population of Parana. To identify potential beneficiaries, correlates of poverty in rural areas would be used. By means of simple, expiicit and verifiable eligibility criteria, the different project activities would be targeted to: (i) specific communities within microcatchments defined by their agro-ecological as well as socio-economic conditions; and (ii) groups of households defined by their socio- economic and productive characteristics. 6. Priority Mesoregions. As the targeting mechanisms used would allow the project to focus on beneficiaries regardless of geographical areas, all qualifying poor communities and microcatchments would be eligible for project assistance. However, given the high concentration of potential beneficiaries in certain areas of the State, the project would initially prioritize implementation efforts in a limited number of mesoregions. Initial project activities would consequently be primarily oriented to mesoregions 2, 3 and 6 (map), where 60% of Parana's 300,000 poor small farmers are concentrated and soil deterioration is substantial. This strategic approach would allow a more concentrated effort towards decentralized institutional strengthening, staff training, project promotion and implementation of monitoring systems. 7. The identification of the priority mesoregions was based on: (i) the preparation of small farm households; (ii) the severity of soil and water problems; and (iii) the degree coverage provided by the LMI project. It is anticipated that approximately 68% of project beneficiaries would be located in these mesoregions. 8. Approximately 70% of the rural population of the priority mesoregions are small farm households. Farm land, covering more than 11 million ha, is primarily dedicated to traditional crops including wheat, maize and soybeans. Most of the soils in these mesoregions have low natural fertility and are susceptible to erosion, while the majority of small farmers do not apply adequate natural resource management practices. 9. Microcatchment Eligibility Criteria. For the implementation of Natural Resources Management Subprojects, priority would be given to those microcatchments where the LM1 project initiated soil and water conservation activities, so that the package of recommended practices can be completed and consolidated. Identification of "new" -73- AnnexD microcatchments would be based on demand. Requests for support in new microcatchments would be prioritized according to: (i) concentration of small farmers; (ii) beneficiary interest, organization and participation, including commitment to maintain infrastructure; (iii) erosion potential or intensity of soil degradation; (iv) downstream water use or urban water demand; and (v) location in a priority mesoregion which had received less support from the LM1 project. All three categories of beneficiaries would be eligible for natural resources management subproject financing. 10. Beneficiary Household Eligibility Criteria: Project benefits would be targeted to households classified as Subsistence Farm Households (PS) and Small Market-Oriented Farm Households (PSM) described in Annex A. The criteria to be used to verify eligibility of potential beneficiary groups would be follows: 11. Subsistence Farm Households(PS) would be identified by the following correlated poverty indicators: (i) farmers with less than 15 ha of land; (ii) earnings below one SMM; (iii) minimum use of hired labor and reliance on animal or/and manual traction; (iv) low levels of on-farm investment; and, (v) household members are employed farm laborers more than 15% of days worked in a year. 12. Small-Market-Oriented Farmers (PSM) are divided in three subcategories: PSM1, PSM2 and PSM3. The average PSMI would: (i) cultivate under 15 ha; (ii) earn less than 3 SMM; (iii) rely predominantly on family labor, with hired labor accounting for up to 20%; (iv) use animal as well as some mechanical traction; (v) make minor on-farm investments; and (vi) work off-farm as contracted laborers for less than 15% of days worked in a year. 13. The PSM2 and PSM3 have similar characteristics to those PSM1, except that household area is less than 50 ha and earnings represent less than 5 SMM. Groups of such farmers would be eligible for a limited range of project support activities and be required to: (i) apply recommended natural resource management practices; and/or (ii) have received assistance from the LM1 project. 14. Table 1 illustrates the different categories of project beneficiary groups, the targeting eligibility criteria to be applied and the types of project investments available to each category. -74 - Anncx D Table 1. Targeting/Eligibility Criteria for Project Beneficiaries Beneficiary Eligible Project Activities Targeting/Eligibility Criteria Household Subsistence Farmer Poverty Alleviation and Social Investments under 15 ha of land earn less tha 1 SMM (PS) minimum capital investment Natural Resource Management animal or manual traction over 15% off-farm employment Training predominantly family labour Small Market Poverty Alleviation and Social Investments under 15 ha of land Oriented Farmer ~~~~~~~~earn less than 3 SMM Oriented Farmer low capital investment (PSMI) Natural Resource Management animalmechanised traction under 15% off-farm work Training under 50 ha of land Small Market Natural Resource Management earn less than 5 SMM Oriented Farmerlow capital investmnent (PSM2&3) Agricultural Modernization/Diversification animaUmechanised traction under 15% off-farm work Training must apply appropriate natural resource I management practices Social Investment Activities 15. The Poverty Alleviation and Social Investment activities are based on requests of beneficiary groups. Reflecting on the nature of the investments, there would be three types of activities: (i) family social infrastructure; (ii) community development; and (iii) income generation. At least one family social infrastructure group is expected to be established in each community. Various smaller groups may emerge, according to the interests among groups for the different types of investments. Community development groups would result from the need to develop solutions for health, education, child care, agricultural development, construction/repair of community sheds, etc. The typical income generation group is expected to be the smaller, emerging from the diversity of activities to be developed in terms of generating and/or expanding income and employment, regardless of gender or age. The purpose of off-farm income generating activities is to add value to agricultural products, increase household income and encourage small community enterprises, and generate employment for beneficiaries' families. 16. When beneficiaries are organized into a formal entity (i.e., associations or cooperatives), interaction with the project would occur through group meetings who, in turn, would nominate representatives to the Municipal Council. These entities, which include producer associations and service cooperatives would seek well grounded solutions to respond to key community issues. To increase efficiency, technical advisors may encourage interaction among organized groups or between these groups and private organizations. - 75 - Annex D 17. Upon learning about the project, potential beneficiaries would collectively discuss the activities that would be selected as well as the necessary arrangements for implementation. When required groups would seek technical assistance from EMATER or private institutions. This technical assistance would be contracted directly by farmers' groups or by the formal entities which bring the beneficiaries together. EMATER Technicians involved would have received training from the Project, and would be thoroughly familiar with the project's Technical and Operational Manuals. Table 2. Degree of Participation by Agencies and/or Institutions Involved in the Implementation of the Poverty Alleviation and Social Investment Component BASIC INSTITUTIONS ACTIONS CM CR CCPC CONS COOPS MUN EMATER CODAPAR COHAPAR GOVT. Promotion A A N M N A A A A Organization A A N M B A A B M Advice to Groups M N N A B N A N N Operating A A N M B A A A B Plan of Action Social Assistance N N N A N A A N M On-Farnm Technical Assistance N N N A B A A N N Monitoring N N A N N N A A A Evaluation N N A N N N N N N A - High; M - Moderate; B - Low, N - None CM - Municipal Council; CR - Regional Council; CCPG - Government Program Coordinating Center, UGP: Project Management Unit; CONS - Consultants or NGOs 18. After the first discussion, it is then suggested that other issues be discussed, applying participatory methodology, including: (i) an analysis of the group's situation and identification of individual and collective needs; (ii) an assessment of these needs; (iii) identification of interested persons; (iv) types of organizations that would benefit from the project and the responsibilities of parties involved; and (v) responsibilities with respect to the proposal for sub-project preparation, implementation, maintenance and evaluation. 19. The expert from the selected technical assistance institution would then prepare the proposal and submit it to the group for approval. Once approved by the beneficiary group, the proposal would be sent to the Municipal Council. The Municipal Council would verify the study's compliance with the project regarding: poverty indices, agricultural potential, agro-industrial priorities (community enterprises), and determine whether financing is available to support the request. In addition, the Municipal Council would include these proposals in its preparation of the POA for the Regional Councils. - 76 - Annex D 20. Once reviewed by the Municipal Council, the study would be sent to the UAT which would analyze the proposal, verifying its compliance with the project in terms of the population's socio-cultural and economic development. This will be followed by the issuance of a technical opinion approving or disapproving the comprehensive technical assistance plan. This opinion would then be returned to the Council. Natural Resource Conservation and Management Activities Background 21. Soil degradation and erosion are a major constraint to agriculture production in Parana. Continuous cultivation of formally forested land, with inadequate equipment which pulverizes the soil surface and/or causes soil compaction and without correction of acidity or replacement of removed nutrients, has caused physical, chemical and biological degradation. Rain falling on bare surfaces of poorly structured soils has increased runoff, reduced infiltration, and caused soil erosion. The combination of these factors also lead to reduced moisture storage in the soil profile, poor root development and greater susceptibility to eventual short dry spells. As a result, crop yields have been static or declining. 22. To reverse this trend, the World Bank supported Land Management Project (Loan 3018-BR) introduced innovative technical approaches for economically viable investments in soil conservation and management. The objectives of this project were to increase agriculture production and farm incomes by promoting the adoption of sustainable modem forms of land management and soil and water conservation by Parana's farmers. It was expected that these techniques would (a) improve farm profitability through cost effective and sustainable productivity gains and better land use, and (b) halt soil loss, silting of riverbeds, floods, destruction-of rural roads, pollution of water sources and depletion of natural resources. The project was expected to act in about 2100 microcatchments. Project implementation started in 1989 and will be completed in 1996. 23. The Land Management Project has been highly successful in developing effective soil and water conservation techniques under the State's prevailing climatic, soil, social and agricultural production conditions. Project implementation took place as scheduled and the State Government has requested a subsequent project which, in addition to soil and water conservation and management aspects, would include components for modernization of agricultural production within a broader context of poverty alleviation. 24. The Land Management Project has been a major factor in the widespread introduction of soil conservation in Parana. Although direct project financing of soil conservation work is limited to 632,000 hectares, the project has indirectly initiated a process and program which expanded soil conservation activities (mainly terracing, subsoiling, minimum and zero tillage, protection of natural vegetation, reforestation along river banks and of fragile unstable areas) to 2,346 microcatchments, benefiting some 208,000 farmers and about 6.8 million hectares. The project also promoted liming, and the use of animal and green manure to improve physical and chemical soil conditions and - 77 - Annex D fertility. The combined effect of these activities increased productivity of major crops in the selected microcatchments significantly (soybeans from 2.0 to 2.6 t/ha, wheat from 1.2 to 2.0 t/ha, maize from 2.1 to 3.9 t/ha and beans from 0.7 to 1.1 t/ha). This increase represented in 1995 an incremental production of 777,000 tons of grains at state level and an estimated additional tax return to the state of almost US$20 million. Total incremenital returns to farmers have been estimated at US$115 million. 25. Systematic sampling and measurement of sediments in watercourses of 16 representative microcatchments recorded an average 50% decrease in sediments between pre-project and post-project conditions, confirming the effectiveness of the recommended soil conservation and management actions. Reduction of sediments also decreased water treatment costs for urban areas. The rehabilitation and integration of rural roads into the soil conservation concept resulted in a 50% reduction of annual road maintenance costs, from US$850 to US$425 per kilometer. Natural Resource Conserivation and Man agenient Subprojects 26. The proposed Natural Resources activities would continue the initiatives implemented under the Land Management Project, but with emphasis on areas with high concentration of small farmers. Its main objectives would be to contribute to improving the living conditions of the rural poor by increasing agricultural production and farm incomes by further promoting the adoption of sustainable, modern forms of land management and soil and water conservation, safeguarding the farmers' income and the state's natural resources. This would be achieved through (a) an increase of the extent and duration of vegetative cover on the soil, thus protecting it from sealing and erosion under intense rainfall; (b) improvement of internal soil structure and drainage, thus increasing water infiltration; and (c) safe disposition of any remaining run-off, either within or outside farm boundaries. The result would contribute to increase the viability of small farmer production systems, while environmental consensus such as soil loss, silting of water courses, floods, destruction of rural roads and water pollution would be reduced. Following the experience of the Land Management Project, these subprojects are expected to have a positive environmental impact (See Annex N). 27. Strategy and Implementation. The project would complete unfinished soil conservation and land management actions in microcatchments which started under the Land Management Project and initiate programs in new microcatchments. The inclusion of new areas would be on an "on demand" basis. Design and implementation of requested microcatchments would be prioritized considering: (i) the concentration of small holders dedicated to food crops; (ii) interest, organization and level of participation of the beneficiaries; (iii) soil constraints affecting agricultural production; (iv) soil stability and susceptibility to erosion; (v) down- stream use or demand for urban water supply; and (f) location in priority Mesoregions 2, 3, and 6, which received less support under the Land Management Project. Although the proportion of small holders is an important parameter, once prioritized, the microcatchment would be worked as one integrated unit benefiting all farmers independent of size of holdings. The State Soil Conservation Law (Law No. 8014 of December 14, 1984) and the corresponding by-law (Decree 6120 - 78 - Annex D issued in July 1986) oblige all farmers to participate if a majority within a microcatchment decides to proceed with a collective soil conservation program. 28. The project would: (i) complete soil conservation and management activities in about 1,100 microcatchments initiated under the Land Management Project which benefit some 90,000 farmers and about 3.2 million hectares and (ii) intervene in approximately 1,200 new microcatchments which would be located largely in Mesoregions 1, 2, 3, and 4 and benefit an estimated global area of about 3.5 million hectares and 96,000 farmers. 29. Beneficiary farmers would participate in all phases of microcatchment development, including the diagnosis of prevailing production systems, the definition and design of viable solutions, and decisions related to recommended alternative technologies. 30. To establish a frame of reference, planning would be based upon a survey of the microcatchment's resources. The survey data would provide the technician with an assessment of natural resource use, management and conservation, facilitating the preparation of a natural resource management plan. Techniques and activities of common interest, such as road repair, community supply posts, toxic waste dumps, terracing, community mechanization, and community warehouses, would be planned at this stage. The direct beneficiaries would be the farmers of the microcatchment, while the indirect beneficiaries would be populations living downstream Microcatchment planning would not be treated separately, and interaction with neighboring catchments and urban areas would be considered. In this regard, the Municipal Councils and Regional Commissions would establish priorities for aspects external to the microcatchment at municipal and regional levels. 31. Farm planning would immediately follow microcatchment planning. Most planning would be done among farmers whose farms are contiguous. At this level, the proposed techniques would deal with improving or modifying production systems, in accordance with the surveyed problems and technological level of each farmer. On-farm assistance would consist of technical guidance and the implementation of recommended practices on individual farms. Guidance and technical-administrative support activities, carried out with organized groups of farmers, would be aimed at practical activities of community interest (for example, road repair projects, community supply posts, and machinery and equipment). Monitoring would consist of periodic control and assessment of programming, activities and practices carried out to ensure consistency among the actions performed and the technical strategy, as well to assess the use of component supports. The component's development will include the participation of agencies and institutions in all basic actions. 32. The selected microcatchments would become part of the Natural Resource Management Activities Annual Action Plan. During the first half of the first year, in each registered microcatchment, a survey of natural resource needs would be conducted by the Technical Assistance team with participation of the UATM. These surveys would be analyzed and discussed with the Municipal Council and consolidated into a single municipal proposal that would be sent to the Regional Commission. The Regional Commission would analyze the municipal requests and transmit their recommendations to - 79 - Annex D the UGP. The UGP would reconcile these requests with the State priorities and availability of funds, and would incorporate selected plans into the Project's Annual Operating Plan. 33. The Regional Commission would be informed of the UGP-approved financial levels. The Commission would inform the Municipal Council, which would ensure that the responsible technicians inform the beneficiary groups of the microcatchment and that corresponding actions are performed. 34. Detailed subproject features are the result of actual data from 1,100 microcatchments under implementation and indicative figures for the 1,200 new microcatchments, based on a detailed analysis of five microcatchments and experience gathered under the Land Management Project. The main features are summarized below. (a) collective land management practices, such as vegetative contours, stone walls, bundling, and terraces; (b) conservation and/or establishment of permanent vegetation on river banks and other unstable or fragile areas through provision of planting material for reforestation and fencing of protected areas; (c) provision of planting material for reforestation of fragile non-agricultural lands; (d) provision of limestone and seeds for green manure crops to improve physical and chemical soil conditions and fertility; (e) construction of agrochemical mixing points and about manure deposits to avoid pollution of water-ways and streams; (f) provision of specific farm equipment for groups of farmers such as zero tillage equipment, rippers, spreaders for lime and manure, and harvesters; and (g) road alignment and erosion control work spread over 8,000 kin, including resurfacing, construction of road-terrace junctions, drainage facilities and flood control tanks, which allow for quick permeation of excess run-off 35. Construction of agrochemical mixing points, and manure deposits would be based on standard designs. Rehabilitation of rural roads within microcatchments are an integral part of the soil conservation program and have been classified into: (i) type 1, requiring alignment and correction of side slopes; (ii) type 2, requiring road alignment and resurfacing; (iii) type 3, requiring road alignment, correction of side slopes and resurfacing; (iv) type 1A, requiring road crowning and drainage; (v) type 2A, requiring realignment and drainage; and (vi) type 3A, requiring realignment, correction of side slopes, primary gravelling and drainage. Technical manuals and guides for design and construction of soil conservation works and rural roads have been prepared. -80- Annex D 36. The project would also provide funds for applied agricultural research and studies as needed to optimize the efficiency of the soil conservation and management component and of recommended farm production systems (Annex D), and a systematic program for monitoring and evaluation of the project's socio-economic and environmental impacts at state, microcatchment and farm level (Annex H). 37. The tentative number of microcatchments to be assisted, including the kilometers of roads to be rehabilitated, during each year of the project is as follows: Table 3. Number of Microcatchments to be Assisted Year 1 2 3 4 5 Total Completion of unfinished microcatchmients _ ficrocatchments (units) 370 370 360 - - 1100 Roads (Ian) 480 480 480 - 1,140 New Microcatchments Microcatchments (units) 180 300 300 300 120 1,200 Roads (Ian) 1,120 1,120 1,120 1,600 1,600 6,560 38. Microcatchment programs would be implemented according to action plans prepared jointly by EMATER, municipal or private extensionists with the beneficiaries. Private consultants or DER staff would design and supervise the construction of rural roads. Designs of rural roads, except for type 1, would be based on topographic survey and would include a contour map with the location of the existing road, vertical profile with indication of possible cuts and fills and location of existing and proposed structures, vertical and horizontal cross-sections and sample designs of proposed structures. Road construction would be carried out by private contractors (80%) and DER (20%). Agricultural Modernization Subprojects Objective 39. The main objective is to improve profitability and competitiveness of small- holdings (primarily PSM and 3 categories) by providing financial support for diversification and verticalization of existing production systems. 40. Subproject proposals would be presented by groups of at least small farmers. The following would be examples of such groups: * Community groups: Most groups are expected to be established microcatchment or community, composed of approximately 15 farmers. Community groups are farmer organizations centered on a single enterprise or diversification initiative (activity, equipment, machinery, or investment); - 81 - Annex D * Jointly-owned enterprises: This type of organization would represent a promising alternative for increasing the economic efficiency of family farming. Community groups with commonly-owned property would form into "jointly- owned enterprises"; * Specialized Groups: These groups, such as Grape Producers' Group and Milk Producers' Group, perform non-traditional activities and require specialized knowledge regarding a particular activity. The members of this type of group could be scattered among several microcatchments or communities within a municipality; and, * Youth Groups: Specific support aimed at young farmers, those working on their father's farms or just beginning to administer their own farms, would be facilitated and encouraged. 41. Research regarding the potential for vertical integration would analyze market opportunities and competition; on-farm and off-farm resource availability, and the suitability of agro-ecological conditions. Studies related to diversification would concentrate on farmers with ready access to potential markets and capable of sufficiently expanding their operation either independently or in a group to benefit from economies of scale. These activities would develop possible marketing strategies (e.g., formation of a standard, a brand, dissemination, or advertising), and provide technical guidance. These efforts would be guided by the State Government's Agro-Industrialization and Development Centers and by the opportunities indicated in studies of productive linkages. They would also be supported by the guidelines of the Small- and Medium-Scale Business Service (SEAB) located in the major cities of SEAB's administrative regions. 42. Support for partnership between a private firm and a participating farm or a group of participating farms could cover the following activities: (i) investments for technical modifications to meet the firm's requirements; (ii) development of modified farm models; (iii) training; (iv) financial support for productive infrastructure at group or farmers' levels; and (v) technical assistance. Support would be obtained through a document which explains the proposal's economic viability, together with a formal request for support, containing contract conditions and evidence of the group's and farmer's actual earnings. Priority and support will be given to partnerships in the areas of marketing, distribution and processing of agricultural products. 43. The following conditions would be needed for the project to support a partnership between a private firm and a farm or a group of farms: * identification of opportunities: survey of economic organizations with businesses in the group's area of interest; * group analysis and discussion aimed at analyzing the group's possibilities of adjusting to the potential partner's expectations, and vice versa; * explanation of intentions: negotiations with the potential future partner; * designation of intentions and obligations by means of a contract. - 82 - Annex D 44. Implementation of subprojects would be strictly "on demand". Demand estimates detailed in the project preparation documents are indicative only and are based on discussions in open meetings with municipal and regional authorities, field technicians, cooperatives and farmers and are therefore expected to change. Only organized groups or firmer' associations within microcatchments with sound soil conservation and management practices would be qualified as potential beneficiaries. Thus under the proposed project, promotion and implementation of the subprojects would concentrate in Mesoregions 5, 6, 7, and 8 where most of the soil conservation and management work has been carried out under the Land Management Project. In addition potential beneficiaries would need to demonstrate that their average production data exceeds average levels within their municipality and, together with their request, submit a report on the technical and financial feasibility of the planned undertaking. 45. The eligibility criteria would exclude subprojects related to traditional crops (soybeans, wheat, maize, beans and cotton) whose improvements in productivity and profitability would be part of the Natural Resource Conservation and Management Component. Preference would also be given to groups or associations already organized around a joint undertaking, such as a "condominium" for hog production, which provides piglets to individual associated farmers for raising and finishing and who would also require a feed mixing plant or a slaughtering facility. 46. The project would provide financial support to subprojects aimed at: (a) diversification of agriculture production, including the establishment or expansion of orchards, introduction of horticulture crops, high-density coffee plantations, establishment of artificial pastures for intensive dairy production, fish farming and other similar activities; and (b) post-harvest facilities and vertical integration of agricultural production, such as on-farm storage, collective dryers for grains, collective packing houses for fruits and vegetables, feed mixing plants, livestock "condominium" and slaughtering facilities, among others. 47. Procedures and institutional participation and responsibilities for implementation are detailed in Annex ... "Institutional Aspects of Project Implementation" and further detailed in the Operational Manual. Project requests would be made on a collective basis although a proportion of investments could be made on individual holdings. Specialized technical assistance for project design, financial evaluation and support during implementation would be provided through official services or contracted with specialized consultants. Subproject Cycle 48. The sequence of procedures and events required for the processing subprojects presented by beneficiary communities has been designed in order to achieve an acceptable balance between the need for simplicity and agility, but with due regard for accountability and sustainability of activities to be supported by the project. In addition the project cycle is also required to incorporate minimum planning requirements that allow to make the necessary budgetary provisions to ensure financial resources are available to meet beneficiary demands. - 83 - Annex D 49. Taking all these factors into consideration, the subproject cycle to be implemented builds on existing and proven procedures utilized for the design evaluation and financing of subprojects financed by the Land Management Project, incorporating the necessary adjustments to further decentralized the subproject approval process, the higher multiplicity of subprojects to be financed, and the need to incorporate effective mechanisms for subproject monitoring and evaluation. The summary of the subproject cycle for each type of subproject to be financed is as follows: Identification and Preparation: Groups of potential beneficiaries, in collaboration with EMATER or private technical assistance, would discuss, identify and rank, in order of importance and their social, productive and infrastructure requirements and identify and prepare subproject proposals. All proposals would be submitted to the CM for initial review. Approval Level Type and Cost of Subprojects -, Social Investments, costing US$6,000 or less Municipal Council (with EMATER technical clearance) =, Social Investments, costing more than US$6,000 and less than Regional Development Council US$30,000 => Natural Resource Management, on the basis of Microcatchment Development Plan =, Social Investment, costing US$30,000 or more UGP -, Small Farm Modernization\Diversification After the proposal is approved, CODAPAR would sign an agreement with beneficiaries, specifying the terms and conditions for implementation, and transfer the funds to a designated beneficiary account. In the case of housing subprojects, an agreement would be signed between the beneficiaries and COHAPAR. 50. Because of the demand-driven nature of the project, substantial flexibility and minimum planning requirements are considered important elements of an effective implementation strategy. However, standard project administration procedures would be difficult to fulfill without the development of mechanisms for budget preparation and resource allocation prioritization. For this, an Annual Operating Plan (POA) would be prepared by the UGP, incorporating a consolidation of demand estimates elaborated at the local and regional levels. Based on a mostly informal compilation of demands from beneficiary groups, established Municipal Councils (CM) would approve an annual municipal plan to be elaborated by the CMs technical secretariat. The projected municipal plans are reviewed and integrated at the regional level, and subsequently submitted to the UGP for final consolidation, and prioritization if required, into the project, POA and annual budget. 51. As part of the eligibility criteria for subproject approval, all proposals are required to include a minimum of three beneficiaries. Regardless of the value and number of - 84 - Annex D beneficiaries included in each proposal, the project would incorporate a graduation mechanism based on a maximum level of support per beneficiary. The established level of financial support to be provided to each individual beneficiary is limited to US$6,000 (with a maximum of US$4,000 for modernization and diversification subprojects). In addition to individual and group eligibility criteria, the subproject identification and preparation process would be further simplified by the development of a list of activities that would not be eligible for financing (land acquisition, new road construction, land clearing, subprojects in urban locations, etc.) as well as a comprehensive set of standard designs and specifications for subprojects. 52. Each year, UGP would determine with SEAB decentralized agencies, as well as the Regional and Municipal Councils: (i) priority areas; (ii) potential beneficiaries; (iii) constraints; and (iv) levels of financial support. Based on this information, and Municipal Councils would publicize the project to potential beneficiaries and provide technical assistance for beneficiaries could apply for assistance offered by the Project. 53. The Municipal Councils would prepare their POAs by the end of the first half of the calendar year to be transmitted to the Regional Commissions. The Regional Commission would issue an initial opinion concerning compliance with project regulations. After this initial screening, the POAs would be sent to the UGP. The UGP would consolidate and discuss these with the Advisory Unit of the State Central Coordinator for Government Programs (CCPG), proposing the inclusion of the activities in the State budget for the following year. Once this phase is completed, the UGP would inform the Bank on annual programming, at the same time reporting to Regional Commission and Municipal Councils. 54. With the support and recommendation of Municipal Councils, the beneficiary groups would begin to formalize the investment process. Poverty alleviation and social investment proposals up to US$6,000 would be reviewed by the Municipal Council which would decide whether to approve them and would authorize expenses. It would inform the Technical Assistance Unit responsible for monitoring the proposal. This unit, in turn, together with beneficiaries, would send expense vouchers to the UGP, which would authorize CODAPAR to make payments. 55. When proposals exceed US$6,000, beneficiaries would prepare a simplified economic study to be sent to the Municipal Council for analysis and an initial opinion. The proposals endorsed would be sent to the Regional Commission for transmission to the UGP, together with analyses and opinions, for approval. Once the proposal is approved, the UGP would authorize CODAPAR (or COHAPAR, when applicable) to begin the process of releasing funds. 56. If subproject proposals exceed US$30,000 or contain an agricultural modernization initiative the Municipal Council would transmit the proposal through the Regional Commission to the UGP. The UGP would analyze the technical features of the proposal, and when justified by the complexity or magnitude of the subproject would contract a private firm to assess the proposal and prepare a feasibility study. - 85 - Annex D 57. EMATER and the private firms, including NGOs, would assist the beneficiaries in subproject preparation. Official assistance would be provided through the Municipal Councils. For private technical assistance to prepare subproject proposals, the beneficiaries would, when the first tranche of funds is due, receive sufficient funds to pay for the services. In the case of small technical assistance for subprojects which: (i) include organization, planning, monitoring and implementation of actions; and (ii) require technical assistance as a condition for implementation, funds would be released to the beneficiary group in accordance with the disbursement timetable stated in the proposal. Project Incentives, Cost Sharing and Cost Recovery Mechanisms 58. The project would establish a multi-tiered project incentive and cost-sharing structure which would specify the level of project support according to sub-project type and socio-economic conditions of the beneficiary group and/or community. The underlying purpose of this approach is to provide the greatest project support for those social or non-income generating investments (e.g. soil conservation and forestry) whose benefits: (i) are primarily for the poorest segments of the target population; (ii) are public goods; or (iii) have externalities and relatively long establishment periods. Activities directly benefiting the poorest or having the greatest effect on natural resource conservation and protection would receive grants covering the highest levels of sub- project costs (80%). On average, beneficiary contributions would be approximately 20% of subproject costs. 59. As the benefits of the natural resource management activities are of a long-term nature and extend beyond the direct project beneficiaries, part of the costs of the subprojects are regarded as a public expenditure contribution. Consequently, the beneficiary cost-sharing level would be about 50%. In selecting a microcatchment for participation in the project, preference would be given to those microcatchments with the greatest concentration of poor farmers. Once a microcatchment is selected, all farmers of the microcatchment, provided they are within the eligible categories, would benefit from the activities. However, project support to the microcatchments would vary according to the composition of the farm population. Microcatchment with relatively high concentrations of small farmers would receive higher levels of support. Table 4. Beneficiary Cost-Sharing Levels Beneficiary Social Natural Resource Income- Type Management Generating PS 20% 30% 20% PSMI 20% 40% 20% PSM2 & 3 n.a. 50% 65%' 1. Tentative level to be defined by the study on cost recovery mechanisms. - 86 - Annex D 60. For productive investments aimed at the poorest segment of the target beneficiaries, the beneficiary cost-sharing level would be 20%. These investments would include small income-generating and/or subsistence improvement subprojects, such as kitchen gardens, cottage agro-processing facilities or workshops. For income-generating investments to help small farmers eligible for project assistance to diversify their productive systems, project contribution would represent no more than 35% of investments for proposed activities. Beneficiaries would be required to contribute at least 65% of the investment costs, either with their own resources or with funds borrowed from private sources. 61. In case of small farmer modernization subprojects requiring extended and specialized technical assistance the project would finance the cost of contracting technical assistance on a declining basis with the following coverage of total costs: 100% for the first year, 70% for the second year, 50% for the third year, 30% for the fourth year, and no support for subsequent years. 62. The project would establish cost recovery mechanisms for social investments which finance private goods. In the case of housing subprojects, the project would adopt the cost recovery mechanisms used in the State urban housing program. Through a study to be conducted during the first year of implementation, prior to initiating implementation of agricultural diversification subprojects, the most feasible financing and cost recovery mechanisms for other project activities would be analyzed. - 87 - Annex E PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT TECHNICAL SUPPORT SERVICES COMPONENT Extension and Technical Assistance 1. The project would support rural extension and technical assistance to: (i) increase the incomes and quality of life of poor rural families, through professional training of farmers and agricultural laborers in farm management and administration; (ii) encourage groups and producer organizations to provide better productive, agro-industrial, marketing and other services needed for rural development; (iii) help protect natural resources and to recover soil fertility through introduction of better natural resource management practices; (iv) increase the supply of agricultural commodities to meet the food and agro-industrial needs; and (v) strengthen the competitive position of the agro- industrial complex by advising on handling, processing and marketing; (vi) help to dampen the exodus of rural workers by improving rural social services; and (vii) develop studies and strategic projects on priority issues for the development of the rural sector. 2. Poverty Alleviation and Social Investments. Technical assistance aimed at rural poverty alleviation would be offered through: (i) EMATER-PR; (ii) other relevant State agencies; (iii) the municipalities, through their Secretariats of Agriculture; (iv) NGOs; and (v) other private entities. Involvement of the municipalities and NGOs is consistent with the State governments desire to promote decentralization and private sector participation. Discussions with the beneficiaries would determine the nature of the type of assistance to provided, but it would be related to health, education, nutrition, child care, cottage industries etc. These activities would complement and strengthen State social programs in the rural sector, especially in the selected microcatchments. 3. Natural Resource Management. There would be three activity programming levels: (i) the project level; (ii) the microcatchment or microcatchment level; (iii) the farm, including planning and implementation of communal and individual plans, level; (iv) the group level; as well as, (v) administration and follow-up. Given its experience, EMATER- PR would be responsible for management of these activities. Sound project level coordination would be critical to the success of these activities because there would be numerous agencies involved in technical assistance delivery. EMATER-PR would also be primarily responsible for the provision of technical assistance services to relatively formal groups. 4. In keeping with the government's policy to increase priv-te participation in provision of rural services, NGOs and other private firms, would, depending upon their regional and professional expertise, be heavily involved in the provision of these services. - 88 - Annex E These firns, identified by the Municipal Council and selected by the beneficiaries, would prepare microcatchment plans, provide technical assistance to farmers and assist in the preparation of community and individual farm plans. 5. Both private and public implementing agencies would provide follow-up and administrative support. 6. Farm Modernization and Agricultural Diversification. EMATER-PR would supervise the: (i) orientation phase, which involves discussing with producers, their communities and their associations the prospects for the family farm in Parana; (ii) promotional phase, which encourages and assist the community and producers to prepare their Action Plans; (iii) assistance phase, which involves providing support to groups, including informal and formal farmer groups, producer organizations, associations and Municipal Councils; and (iv) technical orientation to the interested parties regarding the strategies of implementing their Action Plans. The Municipalities, through their Secretariats of Agriculture would also participate in this process. Cooperatives, especially those involved in providing marketing, both for commodity and farm inputs and processing, would participate in the diagnostic and preparation of the Action Plans and would have fundamental role in the technical orientation. Private firms would provide assistance, primarily to individual farms, in the analysis and preparation of Action Plans, technical orientation and assistance to the more market oriented farmers. 7. Technical Staff Requirements. The project's Rural Extension and Technical Assistance would require an estimated 1,499 technicians, at least 35% of whom would come from the private sector. Assuming each rural team could attend six groups of 20 farm households and that the Poverty Alleviation activities would reach 36,000 rural households, these activities would require 209 rural technicians and 209 rural social workers, 70% of whom would be from EMATER-PR and 30% from the municipalities, NGOs and private sector. The Natural Resource Management activities would need an estimated 583 rural technicians, 80% from EMATER-PR and 20% from the private sector to attend the project, placing an initial emphasis on the priority micro-regions. Modernization activities, including promotion, assisting community groups and specialized groups and supervising the network of reference farms (see Research, below) is expected to need 498 technicians, 42% of whom would come from official sources and 58% from private sources. 8. Sources of Rural Extension and Technical Assistance. EMATER-PR has 20 administrative regions, whose teams are responsible for 370 municipal and 23 district office. Each team is composed of a chief, technical coordinators in crops, livestock, natural resources, rural organization, post harvest, and rural development and an admninistrative coordinator. There are an estimated 1,134 public and private agronomists and 500 agricultural technicians in Parana. 9. Accreditation and Selection of Private Technical Assistance Firms. The Municipal Annual Operational Plan would specify the technical assistance requirements and beneficiaries, as well as their expected output and the activities involved, with their timetables. At the municipal level, the Executive Secretariat (usually EMATER-PR) - 89 - Annex E would review these needs and, in light of the physical and technical capacities of the official technical assistance, would submit to the Municipal Council their recommendations for the allocation of the responsibilities for delivery of technical services among public and private sources. 10. To qualify to participate, private firms would, at a minimum: (i) have to have an office and the necessary infrastructure to implement the activities in the area of the activity; (ii) have professionals available to deliver the services; (iii) have completed the registration form and signed the Agreement of Cooperation for Technical Assistance with the UGP/SEAB, through the Executive Secretariat of the Municipal Council; (iv) participated in the project's basic courses and any other courses indicated by the project; (v) have experience in the preparation and implementation of plans of relevant projects. 11. Interested firms need to present to the Municipal Councils their request for accreditation. These are reviewed and approved by the Municipal Council. The request is transmitted, through the Regional Commission, to the UGP for approval and for preparation of the Agreement of Cooperation. 12. Remuneration of Private Technical Assistance Firns. The Executive Secretariat would review the requests for technical assistance as contained in the Action Plans of the groups, producers, communities and microcatchments. The Secretariat would submit to the Municipal Council the estimated costs for technical assistance based on the hours worked and the standard professional fees as published by the relevant professional associations. Once approved by the Municipal Council, these requests and estimates would be transmitted, through the Regional Commission, to the UGP. To coordinate private assistance, the UGP would approve all proposals, regardless of value, for private technical assistance. 13. Technical assistance for individuals and communities, including for the preparation of proposals, technical studies and sub-project implementation, would be supported by the project. The maximum payment for such services would be 3% of the estimated cost of the sub-project. Half the agreed payment for technical services would be made when the proposal is approved. The remainder would be paid at the end of the year, when accompanied by proper documentation. For contracts of longer than one year, the first half of the payment would be allocated and paid in six-month tranches throughout the life of the project. The final half would be paid at the completion of the contract, when accompanied with proper reporting documentation. 14. Private assistance for poverty alleviation activities would primarily help to (i) organize and promote beneficiary groups; (ii) support existing beneficiary groups; (iii) provide technical orientation; and (iv) prepare subproject proposals. Accredited firms would present to the beneficiaries their annual work plans with cost estimates, including payment for technical services, and an indication of beneficiaries and benefits. The beneficiaries would review and adjust the plan and submit the final version, with a draft service contract, with the Municipal Council's recommendation, through the Regional -90 - Annex E Commission, to the UGP. The UGP would approve the contract and authorize the release of funds every four months, based on proper reporting documentation. 15. Private assistance for microcatchment planning would be limited to supporting producer associations in microcatchments as indicated by the Municipal Council and authorized by the UGP. The firm would prepare with the association a Microcatchment work plan, which would be transmitted, with the recommendation of the Municipal Council, through the Regional Commission to the UGP for approval. Once approved by the UGP, the association would present its request for funds for the technical assistance. Payment would be limited to US$14,000 annually, with payments made every four months, based on proper reporting documentation. Contracts would be negotiated annually. Each association could access these services for up to two consecutive years. 16. Private technical assistance for specialized modernization, diversification and integration needs could be requested from groups of market-oriented farmers. Requests for such technical assistance, along with a draft service contract, would be presented to the UGP, through the Regional Commission, with the recommendation of the UGP. Payments would be made according to the services rendered, and would be based on the standard fees as published by relevant professional associations. In the case of services required beyond one year, the contracts would be renegotiated annually. Payments in the first year would be limited to US$7,000 per group, and the project maximum would decrease to in the second year to 70%, in the third year to 50%, and in the fourth year to 30% of the first year's level. No project support would be given in the fifth year. 17. Private technical assistance to design the plans to improve rural feeder roads would be on road stretches as indicated by the Municipal Council and authorized by the UGP, based on the project's Natural Resource Management activities. Payment for these services would be limited to 6% of the estimated cost of the civil works. Payment would be authorized by DER, based on proper reporting documentation, and made through CODAPAR. 18. Costs. Project technical assistance would cost an estimated US$27 million; with US$15 million for EMATER-PR and US$12 million for private technical assistance. Training Activities 19. The project's training activities are essential to the project's operational strategy of effective beneficiary participation from subproject formulation to implementation, decentralization of the planning process with clearly defined roles, and inter-institutional partnership. These activities are divided into three parts: (i) coordination of training processes; (ii) training staff responsible for coordination and technical implementation; and (iii) training the strategic and beneficiary population. Coordination of Training Processes 20. The Project Management Unit (UGP), through a multi-disciplinary team, would coordinate the training processes. The State Coordination Unit would: (i) establish - 91 - Annex E guidelines and criteria for the organization, realization and evaluation of training plans and programs; (ii) establish mninimum training curricula for technicians and beneficiaries; (iii) define the financial resources for each region; (iv) identify the implementing institutions in each region of the State; (v) provide financial management; (vi) establish partnerships, both for the implementation of Agricultural and Rural Development Centers (CDARs) and for other actions; (vii) guide the preparation of regional and municipal training plans; (viii) analyze and approve regional training plans and programs; (ix) carry out the training of the Project's coordination structures; and (x) monitor and evaluate training programs. 21. The UGP would manage funds for training. Once regional training plans have been approved, the UGP, by means of an agreement between SEAB and the partner unit or beneficiary, would transfer the required funds. Partnerships with public or private institutions would be established and formalized through agreements. Partnerships would be established to implement Agricultural and Rural Development Centers (CDARs) with the following institutions: INSTITUTIONS LOCATION OF CDARs SEED - Agricultural Colleges Rio Negro, Palmeira, Castro, Irati, Guarapuava, Clevelandia, Foz do Iguacu, Apucarana, Santa Mariana, Arapoti MaringA State University Diamante do Norte, Cidade Gaucha COCAMAR Maringa CCLP Castro FAEP Ibipora and Assis Chateaubriand COPEL Tres Barras do Iguaqu and Cruzeiro do Igua9u EMATER-PR-PR Cetre Rural - Pinhais, Lapa Religious Institutions Toledo and Umuarama NGOs Guarapuava 22. The UGP would be responsible for the training of project coordination staff. Training would be carried out through: (i) a State seminar, directly organized and carried out by the UGP; (ii) Regional seminars, organized and carried out by Regional Comrmissions, and guided by the UGP; and (iii) skills improvement and basic courses to be held in Curitiba, coordinated by the UGP and presented by specialized institutions. Within the UGP, the offices responsible for the specific project activities, such as Rural Poverty Alleviation, Natural Resource Management and Agricultural Modernization/Diversification, would program training for the rural technical staff. These offices would contract the instructors, define the courses' venue and timetable, and request the release of the technicians from their institutional employers for training. The offices would contact the implementing institutions to ensure that their staff training programs correspond to the needs of the project. These offices would also create a "bank" of instructors for the training of technicians. - 92 - Annex E 23. The Regional Commission would be responsible for the training of at least one municipal technician, preferably the person who would organize and implement the Municipal Council on administration, management and organization. With advice from the Regional Commission, the municipal technician would be responsible for promoting Regional Training Seminars for Municipal Councils and other training events. The resources needed for these activities would be included in the funding budgeted for the Regional Training Plans. 24. The Municipal Councils, through the UAT, would prepare and implement the municipal training plans for beneficiaries. The preparation of these plans, as well as the training programs, would define the activities and responsible entities. By means of participatory methodologies for consultation with the beneficiaries, the executing technician working with the community or group of farmers would identify training goals and needs, objectives, methodologies, and resource requirements. He would prepare the training program, along with the schedule, for the community and/or group of farmers to be sent to the UAT for approval. 25. The UAT would assess the program proposals from the various communities and submit them to the Municipal Council to ensure their consistency with the overall project objectives. The Municipal Council would prepare the Training Plan and seek approval and necessary resources from the Regional Commission. Research Activities 26. Research Institutions: In Parana, official agricultural research is conducted by: (i) the Instituto Agronomico do Parana (IAPAR), the State research institute; and (ii) the Empresa Brasiliera de Pesquisa Agropecuaria (EMBRAPA), the national agricultural research institute, which maintains a national center for soybeans in Londrina and for floriculture in Colombo. The Federal University in Curitiba and the four State universities (Ponta Grossa, Londrina, Maringa and Cascavel) conduct research and provide instruction in agronomy, zoology, and veterinary sciences. The Catholic University in Curitiba has a Center of Agrarian Sciences. The Inslituito Paranaense de Desenvolvimento Econoniico e Social (IAPARDES) within the Centro de Coordenacao de Programas do Governo (CCPG) conducts research related to agricultural technologies and production. 27. LAPAR would directly conduct about 60% of the research program. The remainder would be competitively bid among the various research institutions. IAPAR's research would include: (i) the nine identified research areas (see below); (ii) collaboration with EMATER-PR on the establishment of the network of the reference farms; and (iii) as yet unspecified research areas. Part of the unspecified research would be assigned to IAPAR and part awarded to the other research institutions through competitive bidding. 28. Research priorities to determine which areas the project would support would be set by beneficiary demands. Project management would prioritize these demands and propose lines of research. Based on the project management's proposed lines of research, IAPAR would draw up the terms of reference (TORs). Firms to carry out the research - 93 - Annex E would be selected by the project management on the basis of competitive bidding. IAPAR would provide technical assistance in the final evaluation of the research findings. 29. IAPAR would conduct research in the following nine areas: * Technology transfer methodologies in direct tillage for small farms; Methodologies to transfer technologies in the central-southern region; * Soil fertility management with low tillage on small farms with basic technical bases; * Development and evaluation of floriculture productive systems and technologies; Evaluation of the microbiology of the soil preparation and crop management; Study of soil sedimentation and erosion; Techniques for recuperating soil fertility in low-altitude lands; Evaluation and development of appropriate farm tools and equipment for soil sustainability; Crop rotation system for the western region; * Agricultural residue management to minimize soil and water pollution; and * Evaluation of production of biomass for winter cover, food and feed. 30. Networks of Reference Farms. In addition, IAPAR, in collaboration with EMATER-PR, would establish the network of Reference Farms. Reference farms are farms typical of a certain productive system. These farms would become the basic unit for the technician and the "reference" farmer to investigate methods to improve the production system. The study would facilitate analysis and decision-making by farmers who use similar systems. Reference farms would also test and validate technologies. Observed problems would also provide feedback to research programs. 31. The network would be comprised of approximately 400 farms, distributed among 19 of SEAB's administrative regions. Within these, the reference farms would represent the predominant production systems in the respective regions. In administrative regions, the network would be set up in the following order: (i) regional analysis, to indicate the region's predominant systems; (ii) selection of systems: the Regional Commission, supported by Municipal Councils, would define the systems to be monitored; (iii) reference farm monitoring, beginning with an analysis of the farm, followed by periodic visits which allow the system's performance, limitations and potential to be analyzed through records and controls; and (iv) preparation of references. Technical proposals would be prepared in accordance with the farms' structure and adjusted to regional conditions. The reference proposes an economic result for this type of modified system which is considered, a priori, more efficient. When validated, such modified systems would generate results such as technical and economic references that are adapted to farmers' needs. 32. The results from the studies of the reference farms would be used to: (i) disseminate technology to a large number of farmers; (ii) target technologies when - 94- Annex E results are suited for specific situations; and (iii) compare the results of the reference farm with a control farm, to identify the weaknesses and strengths of the reference farm. 33. The reference farm networks would be established at the regional, microcatchment and farm levels. The Network Regional Coordinating Committee would be the public authority that would promote the program, survey farmers' concerns and define the systems to be monitored. It would be comprised of government institutions (IAPAR, EMATER-PR, and local government) and private institutions (cooperatives, labor unions, and NGOs) working at the microcatchment level. The Technical Committee would be responsible for the microcatchment-level analyses and would propose to the Coordinating Committee the priority production systems. The Implementation Teams would be responsible for classification, diagnostics, monitoring, data collection, analysis, and dissemination of results. 34. Farm monitoring would be carried out by an EMATER-PR technician in each SEAB administrative region. The technical teams of three technicians (two from IAPAR and one from EMATER-PR), located at five Training Centers, would coordinate the EMATER-PR technicians' work and analyze the data collected. On the basis of their analysis, production modifications and technologies would be recommended. The State Coordination Office, comprised of two technicians (one from IAPAR and one from EMATER-PR), would ensure the proper operation of the network and provide logistical support. The Centers, affiliated with the State Coordination Office, would be located in IAPAR's installations in Curitiba, Ponta Grossa, Londrina, Paranavai, and Pato Branco. Studies 35. The project would conduct the following studies: (a) An Assessment of Rural Poverty; (b) An Assessment of the Environmental Impact of the Project on Microcatchments; (c) An Assessment of the Communication and Technology Transfer Methods for Small Farmers; (d) Marketing Study for Fruits in Brazil's Southern-Central Region; (e) An Assessment of a Pilot Study to Decentralize Technical Assistance; (f) An Analysis of the Feasibility of Cost Recovery Mechanisms; and (g) Preparation of a Follow-up Project. 36. Based on preliminary TORs prepared by the UGP, a synopsis of each is provided below. The UGP would provide detailed final TOR as a condition of negotiations. - 95- Annex E 37. An Assessment of Rural Poverty. This assessment would provide a typology of municipalities according to the level of poverty and social needs which would be used in targeting poverty alleviation resources. Using secondary sources, the study would characterize poverty in Parana. Rural poverty would be typified and localized on the basis of specially developed indicators. Finally, case studies of rural poverty in selected municipalities would be analyzed. The study would begin soon after project initiation, and would be completed in 18 months. 38. An Assessment of the Environmental Impact of the Project on Microcatchments. This study would evaluate the environmental impact of the project's activities in the three project microcatchments on the basis of a comparison with three control microcatchments. The assessment would analyze soil erosion and water quality indicators. 39. An Assessment of the Comnmunication and Technology Transfer Methods for Small Farmers. While methods for reaching large commercial farmers are well- developed, little research is available on the best methods for reaching small farmers in Parana. This study would identify and validate mass communication and multi-media techniques to distribute information and transfer technology to small farmers. By means of bibliographic searches and case studies, selected methodologies would be tested for their effectiveness of reaching small farmers. The results would be documented and recommendations relevant to the project would be proposed. The study would begin with project initiation and would be completed in two years. 40. Marketing Study for Fruits in Brazil's Southern-Central Region. This study would investigate the market prospects, including demand trends, emerging consumption patterns, farm-gate, wholesale and retail price trends and an analysis of supply, including competitive domestic and foreign sources. The study would recommend alternative marketing strategies and corresponding investment projects. The study would begin at the end of the project's first year and would be completed in 6 months. 41. An Assessment of a Pilot Studly to Decentralize Technical Assistance. This study would assist the government in its efforts to decentralize the official rural technical assistance program. By means of quantitative indicators and qualitative investigations, the evaluation would compare the effectiveness of different modalities of service delivery, including official, private sector and NGOs at the State, local and community levels. By means of cluster analysis, ten municipalities with similar characteristics would be analyzed. Half of these municipalities would receive private technical assistance and the other half would receive official assistance. The findings would be documented, accompanied with recommendations relevant to the project. The project would begin 6 months after the project begins and would be completed in 25 months. 42. An Analysis of the Feasibility of Cost Recovery Mechanisms. The study would provide an analysis of the rural financial markets in Parana, with a particular examination of the access of farmers to long-term investment credit, including an evaluation of the costs and the terms of such investment. The study would identify potential constraints farmers face in accessing credit. The study would analyze the nature of the benefits - 96 - Annex E transferred to beneficiaries in the project's natural resource management and small-scale modernization/diversification subprojects. In addition, the study would evaluate the desirability of requiring partial or full cost recovery for these benefits. Finally, the study would assess the administrative feasibility of recovering costs and the use of recovered funds. This study would begin during the first year of project implementation, and would be requisite for the implementation of agricultural diversification activities. 43. Preparation of Follow-up Project. This study would evaluate the desirability of extending and expanding some or alL of the project's activities to improve rural social welfare, develop the rural economy and protect natural resources. This study would be based in part on the findings of the socio-economic evaluations of the poverty alleviation, especially the Vilas Rurais, natural resource management and family farm modernization/diversification activities, as well as complementary quantitative and qualitative data gathered during field surveys. Institutional Strengthening 44. The project would support SEAB's ability to deliver project services by strengthening EMATER, with personnel and vehicles, and DERAL, for its Agricultural Price Information System. 45. Support to EMA TER for Rural Technical Assistance To strengthen the capacity of EMATER to delivery rural technical assistance to the project micro-regions, the project would finance the purchase of 72 vehicles and the fees of 69 social workers to complement EMATER staff's of rural workers. 46. Support to DERAL for the Agricultural Price and Market Data SystemL The State Secretariat of Agriculture and Supply (SEAB), through the Rural Economics Department (DERAL), would be responsible for the Agricultural Price and Market Data System. The data system would include data collection, evaluation, treatment and dissemination. and would produce agricultural price data, business analyses, and reference studies. 47. The price data to be researched would include the following: farm gate prices (weekly); wholesale prices (daily and weekly); retail prices (weekly); harvest forecasts and estimates (quarterly); forest product prices (monthly); farm input prices (monthly); and production cost estimates (monthly). The system would monitor quotations for nine types of grains and cotton; five types of animals and animal products; 26 species of fruit; and 45 species of vegetables and legumes. Its data sources would include direct research of registered information sources (wholesalers, retailers and producers) in the following agencies or organizations, which would assist in project administration and implementation, would be established and formally created: (i) the Deliberative State's major marketplaces; similar institutions in other States and MERCOSUL countries under a system coordinated by the Ministry of Agriculture and Agrarian Reform; and international commodity exchanges in the case of soybeans, through cooperatives connected with the Chicago commodity exchange. -97- Annex E 48. Business analyses would be carried out by means of domestic and world market outlooks, analysis of agricultural policy and its instruments, analysis of factor prices, and expected production costs and profitability. Reference studies take a longer term perspective and analyze the dynamics of the agricultural sector, including agricultural market trends. While the topics of most of these studies would be determined by the demands expressed during project implementation, issues related to the survival of the family farming, including environmental sustainability, relationship with ago-industry and intersectoral relationships, would be investigated. 49. Price data would be made available to farmers and their organizations through: (i) mass media (newspapers, radio and television); (ii) partnerships with major institutions and companies operating in the State (BANESTADO, OCEPAR, FAEP, FETAEP); (iii) telephone and facsimile; (iv) notice boards at places visited by large numbers of farmers; and (v) electronic mail. Business analysis bulletins would be sent electronically to the SEAB's regional centers, which would transmit these to farmers' organizations (cooperatives, labor unions, associations) as well as to the implementing institutions operating in the region. 50. The system would expand the existing agricultural price data bank in DERAL, and would be implemented with the existing staff. The project would improve and streamline data collection and transmission. - 99 - Annex F PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT DETAILED PROJECT COSTS BRAZIL PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES WiANAGEMENT PROJECT Cenypnflaby flunehde State of PFaran uld Ebuik Total LedS Onas O1dMee & Arnourt % Amount % Amnount % For. ExchL Taxe s Taxes Po-aty AMnddtbon Basis htadnek md _ n Ge on InrastnLrctue 67,377,192 50.4 66,390,866 49.8 133,768,059 37.8 26,632966 107,135,003 - EquIpment 33,081,952 55.8 28,251,370 44.2 59,333,323 16.8 1,282887 58,050,436 Subtotal:Badcinfastucbture&Income Generation 100,459,145 52.0 92,642,237 48.0 193,101.381 54.6 27,915,853 165,185,520 - NaR Resobnurce NMnagwunf NtbS Rsouces 28,516,895 52.5 24,004,670 47.5 50,521,565 14.3 2,611,034 47,1M0,531 Roede 19,501,635 47.7 21,396,357 52.3 40,899,992 11.6 7,647,700 33,25Z2 Subtotal: a Resource Managewmen 46,018,530 50.3 45,403,027 49.7 91,421,557 25.9 10,256,734 81,1B2,823 - Mod1rnmlan 14,389,417 47.8 15,740,428 52.2 30,129,846 8.5 555,352 29,316,874 257,610 Reesewc 2,851,629 52.2 2,616,058 47.8 5,467,688 1.5 123,982 4,142,405 1,201,32 Subtal: Poverty AlklvIion 163,718,721 51.1 156,401,750 48.9 320,120,472 90.6 38,853,911 279,807,631 1,456,930 , ndbihtlon Strnteing and Trabing 0 isdkItnal Strngthning EMATER Logical Support: Poverty Albvton 7,449,863 93.9 486,914 6.1 7,936,777 2.2 161,452 2,840,611 4,934,714 Logftical Support Nabnl Resource Mgrrt. 1,836,937 42.0 2,536,276 58.0 4,373,213 1.2 789,854 3,583,359 - Logsical Support: ModenIzto 1,607,517 46.3 1,861,805 53.7 3,469,322 1.0 1,128,651 1.543,846 797,026 Subtoal: EMATER 10,894,317 69.0 4,884,995 31.0 15,779,312 4.5 2079,957 7,967,616 5,731,740 DERAL 467,595 70.4 196,370 29.6 663,965 0.2 99,088 442,854 122,043 Subtotal bIitutonal Strengthening 11,361,912 69.1 5,081,365 30.9 16,443,277 4.7 2,179,025 8,410,469 5,853,783 Tminhg 981,078 10.4 8,440,369 89.6 9,421,447 2.7 839,938 8,459,404 122,105 Studi 1,827,067 51.0 1,755,417 49.0 3,582,484 1.0 - 3,295,885 286,599 Project4Mausgerent Unit (UGP) 487,212 25.8 1,398,770 74.2 1,885,982 0.5 11,722 1,716,580 157,681 Advsory Unit (UA) 15,158 0.7 2,027,850 99.3 2,043,008 0.6 44,095 1,988,909 10,004 Subttal: instutonal Strengthening and Training 14,672,427 44.0 18,703,772 56.0 33,376,198 9.4 3,074,780 23,871,246 6,430,171 Total DIsbursemnt 178,391,148 50.5 175,105,522 49.5 353,496,670 100.0 41,928,691 303,678,877 7,889,101 5-1 .m : .30 BRAZIL PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT Project Components by Year - Base Costs (US$ '000) Base Cost 96/97 97/98 98199 99/00 00/01 01/02 Total Poverty Alleviation Basic Infrastructure and Income Generation Infrastructure 25,738 57,738 29,738 7,738 5,803 1,935 128,691 Equipment 12,164 19,309 12,042 6,622 4,757 1,864 56,758 Subtotal: Basic Infrastructure and Income Generation 37,902 77,048 41,780 14,360 10,560 3,798 185,449 Natural Resurce Management Natural Resources 10,964 13,192 11,079 6,771 3,229 2,973 48,208 Roads 7,400 7,400 7,400 7,400 3,700 3,700 37,002 Subtotal: Natural Resource Managemnent 18,365 20,592 18,479 14,172 6,929 6,673 85,210 Modernization 3,752 6,232 7,177 6,811 2,942 1,482 28,395 Research 1,106 1,271 1,226 757 397 266 5,023 Subtotal: Poverty Alleviaton 61,125 105,143 68,663 36,099 20,828 12,219 304,076 Institutional Strengthening and Training Insdtutonal Strengthening EMATER Loglsbtal SuppoDt: PovertyAlvlMtion 1,894 1,119 1,134 1,134 1,103 1,103 7,487 Logistcal Support: Natural Resource Management 1,369 1,359 1,311 74 40 40 4,194 Logistical Support: Modernization 1,009 1,007 1,045 115 88 25 3,289 Subtotal: EMATER 4,272 3.484 3,491 1,324 1,231 1,169 14,971 DERAL 379 48 48 48 48 48 620 Subtotal: Institutional Strengthening 4,651 3,532 3,539 1,372 1,279 1,217 15,591 Training 1,719 1,942 1,851 1,056 1,243 696 8,508 Studies 1,216 777 678 218 241 150 3,280 Project Management Unit (UGP) 364 271 270 270 270 255 1,700 Advisoiy Unit (UA) 355 325 305 325 305 305 1,921 Subtotal: Institutional Strengthening and Training 8,306 6,848 6,643 3,241 3,338 2,623 31,000 Total BASELINE COSTS 69,431 111,991 75,306 39,341 24,166 14,642 335,077 Physical Contingencies 585 608 599 496 296 241 2,826 Price Contingencies 735 3,572 4,052 3,008 2,400 1,827 15,594 Total PROJECT COSTS 70,751 116,171 79,958 42,845 26,862 16,910 353,497 Taxes 1,593 1,496 1,477 1,140 1,103 1,079 7,889 Foreign Exchange 8,474 15,183 9,527 4,265 2,758 1,722 41,929 5/20/96 m:Icanrrlromnarcost-4.30 BRAZIL PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT Projec Component by Yew - Totdl g Conlnga (US$S00) Totals inkdIng Contlnoeds 96197 S7/91 9U99 990 00/01 01102 Tdal Pyn Bsck hdratractu and hcoon enaontn lnfrasbucke 26,009 59,570 31,326 8,323 6,372 2,169 133,768 Equpmt 12,291 19,922 12,685 7,122 5,224 2,069 59,333 Subtotl: Basic _ucteand ince Generation 38,300 79,492 44,011 15,445 11,596 4,258 193,101 NatuRal Rfwl Muugauwt Naud Remoume 11,079 13,611 11,670 7,283 3,545 3,333 50,522 Roeds 7,826 7,991 8,159 8,330 4,252 4,342 40,900 SuMotI: NIua Rource l Mnunmt 18,906 21,601 19,829 15,613 7,798 7,675 91,422 M an'm ion 3,794 6,463 7,597 7,360 3,250 1666 30,130 Resac 1,161 1,367 1,346 845 447 302 5,468 Subtdotal: Povetty Alkvation 62,161 108,923 72,783 39,262 23,091 13,902 32D,120 _ hIthlWni S _trgth and Traing inilutona Stregenng EMATER LolilcalSupport PoertyAlvWian 1,915 1,155 1,197 1,222 1,211 1,237 7,937 Logltci Support: N aul Resource .i.Mgemeent 1,394 1,412 1,389 84 47 48 4,373 Logisiahl Support: ModentIon 1,035 1,054 1,119 130 101 30 3,469 Subtotal: EMATER 4,345 3,621 3,705 1,436 1,359 1,314 15,779 DERAL 391 52 53 54 56 57 664 Subtotal: instutiona Sbtengtenin 4,736 3,674 3,758 1,490 1,415 1,371 16,443 Trining 1,824 2,104 2,047 1,193 1,433 820 9,421 Sbtds 1,290 842 750 246 278 177 3,582 Proect Management Unit (UGP) 380 293 298 304 311 300 1,886 Advsoy Unit (UA) 359 336 321 350 335 342 2,043 Subtodal: InstitutInal Strengthening and Training 8,590 7,248 7,175 3,583 3,771 3,009 33,376 Total PROJECT COSTS 70,751 116,171 79,958 42,845 26,862 16,910 353,497 S520196 m:n_bod4.30 BRAZIL PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT Disburseenut Accountrs by Financies (USS) State of Parani World Bank Total Local (Exd. Duties £ Amount % Amount % Anmount % For. Exch. Taxes) Taxes Techrncal Assistance 266,387 1.0 25,847,210 99.0 26,113,596 7.4 3,173,395 22,673,814 266,387 Vehices and Eqipnxt 3,775,096 50.0 3,775,096 50.0 7,550,192 2.1 1,379,122 5,229,737 941,333 Corsutencies 99,716 6.7 1,389,899 93.3 1,489,615 0.4 - 1,389,899 99,716 CowpuAe eqdpmnwt 618,473 70.0 265,060 30.0 883,533 0.2 707,009 75,883 100,641 Fund 146,488,315 51.0 140,743,675 49.0 287,231,990 81.3 36,600,197 250,176,867 454,927 Slaries 10,949,108 100.0 - - 10,949,108 3.1 - 5,118,275 5,830,833 Other 16,194,052 84.0 3,084,581 16.0 19,278,634 5.5 68,967 19,014,402 195,266 Total 178,391,148 50.5 175,105,522 49.5 353,496,670 100.0 41,928,691 303,678,877 7,889,101 5/2096 m:RuunolI$puanakxed4.30 BRAZIL PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT Expedu - Acemud by Yew - lam Cool (US$100 m Cod Fandg Excl_ 157 9 71# 6 NM 11 Owl 01/02 Tota % Anount hwsm_t c$5,000): and type (i.e., activities related to changes in land use, generation of point-source pollution, and road rehabilitation). 5. The federal and state legislation applicable to the project area provides all the necessary safeguards for environmental protection. It covers: soil degradation; forestry; damage to flora, fauna, air and water; and risks to human, animal and plant health. Standards for environmental quality meet Bank requirements. The state and federal apparatus for enforcement of environmental laws and regulations has a sound record of effectiveness. The agencies responsible will enforce regulations for activities funded under the project following procedures routinely applied state-wide. Strengthening of several of these agencies, and others related to project implementation in the area of environmental assessment and management, is incorporated as an integral part of the "training" and "institutional strengthening" components of the project. B. ENVIRONMENTAL SCREENING 6. All proposals submitted to the Municipal Agricultural Councils (MACs) to fund feasibility studies (in the case of large sub-projects) or direct implementation (in the case of small sub-projects) will be screened for their potential environmental impact. Screening will require application of a check-list to classify the sub-project for environmental purposes. This check-list will be prepared as a condition for project implementation. (a) Classification "A": no further environmental analysis is needed as part of the feasibility study or for approval of final design in the case of small projects where no analysis of feasibility is required. (b) Classirication "B": further environmental study (ES) of pre-determined areas is needed in the feasibility study or, in the case of small projects, as a pre-condition for approval of final design. (c) Classification "C": a full environmental impact analysis (EIA), with or without feasibility, is required as a condition for approval of final design. In small projects this classification would be tantamount to rejection. - 145- Annex N C. ENVIRONMENTAL PROCEDURES 7. The environmental procedures adopted in the project are determined by two characteristics of the sub-projects to be funded, size and type: Differentiation According to Size of Sub-Project 8. The size of the sub-project determines the approval process within Parana 12 Meses, and, in consequence, which agency would sign off on the acceptability of any environmental impact and required mitigative measures. In small sub-projects the MACs will approve proposals, including their environmental implications, on the basis of the submissions made by beneficiary groups. Proposals prepared with assistance of a range of technical entities (see para. 10), are expected to be technically, economically, socially and environmentally sound, and will be subject to limited review by the UGP. In the case of large projects approved by MACs, there will be full review of all four aspects of the proposals by the UGP prior to funding approval. 9. The UGP will subsequently authorize funding of the small projects approved at the level of the MACs, but will make no judgment on soundness. Responsibility will instead rest with the local authority, subject to approval of environmental aspects by the regional director of IAP or DEFIS. In the case of large projects recommended for funding by the MACs, approval of soundness of the environmental aspects will rest with the representative of IAP or DEFIS in the UGP. Differentiation According to Type of Sub-Project Type 1: Sub-projects which Change Land Use: 10. Specifically, these sub-projects will comprise: (a) management and conservation of natural resources, (b) agricultural management, (c) intensification of production systems, and (d) crop diversification; and are drawn from: (e) Component: Management and Conservation of Family Farming (i) Sub-component: Agriculture Management (ii) Sub-component: Systems Diversification (iii) Sub-component: Diversification of Plant Production - 146 - Annex N These in essence constitute "environmental" projects, and the positive results of these activities are fully documented in the UDP's reports on the Parana Rural project over the period 1989-1995. 11. At the request of beneficiary groups, these sub-projects would be formulated by the municipal office of EMATER. Alternatively the groups may seek assistance from NGOs, rural cooperatives or private consultants in preparation of proposals. The environmental classification of each sub-project will be made by the entity preparing the proposal. 12. In the case of small projects, this classification would be subject to approval by the regional director of IAP or DEFIS, as appropriate, prior to submission of the proposal to the MAC. Since no feasibility studies are contemplated for small sub-projects, a "C" classification would amount to disqualification. In the event of a "B" classification, the regional office of IAP or DEFIS would prepare the TORs for the required environmental study, together with a cost estimate. On approval of a "B" classified project by the MAC, funds for the ES would be authorized by the UGP. In this event, the regional office of IAP or DEFIS would be responsible for: (a) preparing bidding documents for the study; (b) reviewing bids; (c) contracting the study; (d) approval of the ES report; (e) modification of the proposal in accordance with the ES recommendations, i.e., introduction of mitigative measures if economically feasible; and (f) M&E of environmental aspects in the implementation stage, in coordination with the state agency(s) having environmental oversight authority. 13. In the case of large projects it is anticipated that proposals will be in the form of sub-project profiles which will require funding to develop them through the stages of feasibility and final design. The environmental classification will be made by the entity preparing the profile. On recommendation for funding by the MAC, the representative of IAP or DEFIS in the UGP would be responsible for approving or modifying the classification. In the event of a "B" or "C" classification the UGP would take responsibility for preparing the TOR for the ES or EIA respectively and executing the six steps listed in para 10 above. The UGP would have the authority to delegate these responsibilities to the regional office of IAP or DEFIS. - 147 - Annex N 14. Where water resources are involved, all project activities will be subject to oversight by IAP, and in the case of soils, to review by DEFIS in implementation of the soil conservation law.' 15. IAPAR and SANEPAR will conduct a study to evaluate the overall environmental impact of change in land use. This study will involve a baseline assessment of land use, soil quality, water quality and flow regimes in three micro-basins included in the project and three comparable control basins outside the project area. For the six basins, over the six-year project implementation period: (a) farm surveys will be undertaken annually to determine change in technology; (b) aerial photography will be conducted annually to establish change in land use; (c) stratified sampling to determine physical and chemical properties of soil will be undertaken annually; and (d) physical and chemical properties of water and flow regimes at the outlet to each basin will be measured on a daily basis. Type 2. Sub-Projects W tich May Result in Point-Source Contamination: 16. Specifically, these sub-projects will be drawn from: (a) Component: Rural Poverty Alleviation (i) Sub-component: Family Social Infrastructure (ii) Sub-component: Social Development (b) Component: Modernization of Family Farming (i) Sub-component: Verticalization (ii) Sub-component: Diversification of Animal Production 17. For environmental impacts of these activities (rural housing and other buildings, water supply, sewerage, agro-industry and agricultural intensification which generates point-source contamination - dairying, pigs, poultry, fish), the same procedures will apply as those outlined in paras 10-13 above. Projects will be routinely reviewed by IAP and standards will be enforced through fines and closure of operations. 18. IAP will take responsibility for approving the proposal on environmental grounds. In the case of proposals classified "B" or "C", the relevant IAP authority (regional director i Lei No. 8014, 14/12/84, "Preservaqio do Solo Agricola do Estado do ParanA". - 148 - Annex N or the representative in the UGP) will undertake the six steps listed in para 11 and, in those cases where ES is established as a precondition for funding approval, provide the UGP with written clearance. Where the "A" classification is approved, this will also be transmitted to the UGP in writing. 19. Regardless of the classification, the regional office of IAP will be responsible for monitoring environmental impacts of Type 2 sub-projects approved by the UGP. Both the approval and monitoring aspects fall within IAP's mandate for implementation of Resolution 08/ 94 of the Parani State Secretariat for Environment (SEMA). 20. Sub-projects which may involve storage and distribution of agro-toxins or their use in processing of agricultural products, will be routinely subject to approval and inspection by DEFIS in the Parana State Secretariat of Agriculture (SEAB), in compliance with Federal Law No. 7802 and State Law No. 7827. The level of contamination permitted under this legislation meets Bank guidelines. Type 3. Rural Roal Rehabilitation: 21. These are not truly sub-projects since they are incorporated as part of the erosion control measures called for in the microcatchment programs and fall within the sub- component Management and Conservation of Family Farming. They will however be evaluated separately. 22. The criterion for identifying candidate sub-projects of this type will be erosion control. The Conservation component calls for rehabilitation of 8,000 km of rural access roads which are degraded and a cause of severe local erosion. Experience from the Parana Rural Project demonstrates that this sub-component (which will be replicated in similar areas in this project) has generated significant economic and environmental benefits. 23. Sub-projects will be identified by the microcatchment farmer groups in association with the municipal office of EMATER, NGOs, cooperatives or consultants. In developing the proposals these entities will work with the Transport and Agriculture divisions of the Municipal Council in coordination with DER or consultants qualified in highway design. All sub-projects will initially be classified "B" for environmental purposes. Entities preparing the proposals will be required specifically to address a subset of environmental requirements from the check-list.2 These requirements are modeled on those used by the Government of Mato Grosso do Su13 and DER (see Working Paper No. 13B). 2 Rules will be incorporated into bidding documents and construction contracts for road rehabilitation (or similar civil works). They include inter alia, management of quarries and borrow pits, disposal of ovedburden, gravel extraction from rivers, fuel handling, machinery maintenance, construction camps, sewage disposal and worker behavior. 3 'Manual Tecnico-Operativo Para Adecuaco de Estradas Rurais", Projeto de Manejo e Conserva*Ao de Recursos Naturais de Mato Grosso do Sul, Secretaria de Agricultura, Pecuaria e Desevolvimento Agririo, Campo Grande, 1994. - 149 - Annex N 24. Regardless of the size of road rehabilitation projects submitted by the Municipal Councils, the regional office of IAP or the UGP, in coordination with DER, will be required to approve the technical and environmental aspects. DER will be responsible for: (a) preparation of the bidding documents for road works which will include the standard set of environmental safeguards (see para 22 above); (b) review of bids; (c) selection of contractors; (d) approval of contracts which will include a standard clause giving DER the right to rescind the contract or withhold payment in the event of non- compliance with environmental safeguards; and (e) supervision and approval of works. Summary of Steps in the Approval of Environmental Protection Requirements 25. The following sequence will apply in the sub-project cycle: (a) Step 1. The entity preparing a sub-project proposal on behalf of the beneficiary group will present an environmental classification, with justification in the form of a text and analysis, e.g. check-list, matrix or other method. (b) Step 2. Prior to submission of a proposal to UP, the Municipal Council will submit the classification to the regional office of IAP and DEFIS, which will be required to confirm or modify the recommended class. With an "A" classification approved by the regional director(s), no fuirther ES will be required in processing the sub-project. With a "B" or "C" classification, approved by the regional director, environmental processing passes to Step 3. (c) Step 3. The regional office of IAP or DEFIS will prepare the TOR for the ES required with a recommendation to the beneficiary group that it be annexed to the proposal. In the case of road rehabilitation, the TOR would be prepared in consultation with DER. (d) Step 4. The proposal will be reviewed by the Municipal Council and on approval forwarded to the UGP with a recommendation that the ES be funded. (e) Step 5. If the sub-project is in the "small" category, the UGP will authorize the regional office of IAP to implement the steps for incorporation of environmental aspects, in coordination with the relevant state agencies (see paras. 13 and 23). - 150 - Annex N 26. If the sub-project is in the "large" category, UGP will implement these steps in coordination with the relevant state agencies. Where there are legal requirements relating to such aspects as discharges from agro-industries or installations for intensified production of fish, animals or poultry, agro-toxins, water quality or land-use, the relevant state agency will be required to provide the UGP with written approval of the environmental safeguards built into the final design. D. INSTITUTIONAL CAPACITY FOR IMPLEMENTATION OF PROCEDURES 27. Both the IAP and DEFIS are technically and administratively equipped to perform the duties called for in implementing the environmental procedures established for the project. They have an effective record in enforcement of the demanding environmental regulations called for in Federal and State legislation. Their performance in the Parana Rural project is testament to this fact. They will routinely apply regulations to all activities within the Parana 12 Meses project at the same level as they apply state-wide. They will report to the UGP on environmental classification and M&E as outlined in paras. 18 and 19. These arrangements should enable the project to comply filly with its environmental protection requirements. 28. IAP has 20 regional offices and a total staff of 1,100. It executes an extensive system of licensing, monitoring and enforcement covering pollution, land degradation, water use and protection of flora and fauna in sectors such as industry, urban and transport infrastructure, mining, forestry, fishing and agriculture. It issues licenses covering the location, construction and operation of dams, mines, industrial plants, and infrastructure. It may require environmental impact assessments (EIA) and management plans as preconditions for approval, and undertakes routine monitoring of environmental performance. The following activities undertaken in 1995 illustrate the range and extent of IAP operations: certification of environmental damage 20,927 cases legal action for environmental infractions 876 cases authorization of installations (licenses) 1,502 cases authorization to cut trees 3,298 cases monitoring of potential hunting infractions 402 cases monitoring of potential fishing infractions 795 cases review of existing licenses 588 cases 29. DEFIS has broad oversight responsibilities within SEAB for production, disease control, inputs, marketing and trade in agriculture. It has eight divisions, of which the Division for Plant Health is most relevant to the project. Within this division there are 11 sections, of which two will be directly involved with project implementation - the Agro- Toxin Section and the Soils Section. 30. The division has a total professional staff of 65 based in 19 regional offices. Over the past three years it has averaged: (a) review of 3,000 operations engaged in production or distribution of agro- toxins, - 151 - Annex N (b) inspection of 5,000 establishments for processing or marketing agricultural products; (c) suspension of sale of 3-4,000 tons of food products because of irregularities; (d) prohibition of sale of 3-4,000 tons of food due to alteration in quality; (e) supervision of soil conservation programs on 1,700 farms in the Parana Rural Project; (f) resolution of 900 cases of misuse of soils; and (g) inspection of 2,500 small irrigation and drainage schemes financed by the state Irrigation and Drainage Program (PROID). 31. Environmental aspects are incorporated into all the training programs provided under Parana 12 Meses to private and public entities involved in implementation. These programs are considered adequate for providing the necessary skills at the local, regional and state level among both public and private entities, to ensure good quality environmental performance. - 153 - Annex 0 PARANA RURAL POVERTY ALLEVIATION AND NATURAL RESOURCES MANAGEMENT PROJECT LIST OF DOCUMENTS IN PROJECT FILE Project Document Name Date 1. Carta a Cofiex FEB/95 2. Estrategia Global do Projeto APR/95 3. Aspectos Gerais do Programa Parand Rural e seu Papel Frente a JUN/95 Pequena Propriedade Rural 4. Caracteristicas dos Produtores de Subsistencia e os Trabalhadores JUN/95 Volantes no Estado do Parand 5. As Experiencias sobre o Desenvolvimento Comunitario no Estado JUN/95 do Parana 6. Impacto S6cio-Econ6mico e da Qualidade das Aguas em JUN/95 Microbacias Piloto do Programa Parana-Rural 7. Documento Resumo NOV/95 8. Componente Combate a Pobreza no Meio Rural NOV/95 9. Componente Manejo e Conservacao dos Recursos Naturais NOV/95 10. Componente Manejo e Conservacao dos Recursos Naturais NOV/95 11. Componente Modernizacao da Agricultura Familiar NOV/95 12. Anexos - Moderniza,co da Agricultura Familiar NOV/95 13. Componente Capacitacao e Profissionalizac,o NOV/95 14. Componente Organiza,co e Fortalecimento Institutional NOV/95 15. Mecanismos de Apoio Financeiro NOV/95 16. Custo e Analise Econ6mico-Financeira NOV/95 17. Pesquisa Agropecuaria NOV/95 18. Operacionalizac,o Financeira do Projeto Parana 12 Meses NOV/95 19. Manual Operativo do Projeto NOV/95 20. Manual Operativo do Projeto JAN/96 21. Manual Operativo do Projeto - Aspectos Ambientais JAN/96 22. Manual Operativo do Projeto - Rela,co de Estudos JAN/96 23. Manual Operativo do Projeto - Projeto Padrao JAN/96 24. Considera,oes sobre Itens Constantes da Ajuda Mem6ria (Missao JAN/96 Roma) - Subcomponente Moderniza,co da Agricultura Familiar 25. Atividade Capacitacao/Profissionaliza,ao JAN/96 26. Pesquisa Agropecuaria - Documento Complementar JAN/96 27. Pesquisa Agropecuaria - Documento Complementar JAN/96 28. Manejo e Conserva,co dos Recursos Naturais - Anexo - JAN/96 Avaliac,o Econ6mico Financeira de Microbacias - 154 - Annex O Project Document Name Date 29. Subcomponente Combate a Pobreza no Meio Rural - Diagn6stico JAN/96 Rural Participativo - Experiencia em 4 Comunidades do Parana 30. Plano de desenvolvimento de Novas Microbacias MAR/96 31. Indicadores Fisicos de Desempenho MAR/96 32. Plano Detallado de Atividade de Capacitacao MAR/96 33. Estrutura Organizacional de UGP MAR/96 34. Programa Vilas Rurais MAR/96 35. Manual Operativo das Redes de Propriedades de Referencia MAR/96 36. Atribuc6es das T6cnicas Sociais MAR/96 37. Perfil, Situacao e Criterios de Enquadramiento dos Beneficiaros MAR/96 do Subcomponente Modernizaiao de Agricultura Familiar 38. Quadro Detalhado de Custos MAR/96 Other Documents 39. Agricultural Cooperatives in Parana and Rio Grande do Sul September 1995 (Draft). Requejo, Luis 40. 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