CIRCULATING COPY . RESTR I CTED TO BE RETURNED TO REPORTS DESK Report No. P-926 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SPAIN FOR AN AGRICULTURAL RESEARCH PROJECT May 3, 1971 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOIVIENDATION OF THE PRESIDNIT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SPAIN FOR Ai AGRICULTURAL RESEARCH PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$12.7 million for an agricultural research project in Spain. PART I - HISTORICAL 2. The proposed loan would be the Bank's seventh operation in Spain and the first financing of the Bank Group for agricultural research. The project stems from a joint Bank/FAO Mission which surveyed Spanish agriculture in late 1965. This and subsequent missions recommended that high priority be given to strengthening agricultural research, education and extension as a means to introducing modern tech- nology and increasing productivity. 3. The Spanish Government agreed with these recommendations and requested Bank assistance in August 1967. A project prepared with the help of the IBRD/FAO Cooperative Program was submitted to the Bank in October 1969. Agricultural education and training were excluded in a subsequent revision of this project because they were being considered in the general reform of the education system which is currently being carried out. No restructuring of extension services has been attempted at this stage because this requires further planning, but liaison arrangements between research and extension have been incorporated in the project. The revised project was submitted to the Bank in May 1970 and appraised in November-December. Negotiations took place in Washington from March 26 to 31, 1971 . The negotiators for the Bor- rower were led by Sr. Don Jaime Nosti Nava, General Director of the Ministry of Agriculture and Sr. Don Ricardo Tellez Molina, President of the Instituto Nacional de Investigaciones Agronomicas (INIA), and included representatives of the Ministry of Finance. 4. The following is a summary statement of Bank loans to Spain as at March 31, 1971: -2 - Loan number Year Borrower Purpose Amount Undisbursed (TUS$ milfion) 360-SP 1963 Spain Highways 32.2 --- 387-SP 196J4 REM Railways 65.0 --- 429-SP 1965 Spain Ports Devt. 4O.o 6.7 507-SP 1967 RENFE Railways 50.0 14.3 633-SP 1969 Spain Livestock 25.0 25.0 699-SP 1970 Spain Education 12.0 12.0 Total (less cancellations) 224.2 of which has been re- paid to Bank and others 14.0 Total now outstanding 210.2 Amount sold 3.3 of which has been repaid 2.9 0.4 Total now held by Bank 209.8 Total undisbursed 58.0 5. Disbursements on several loans are proceeding at a slower pace than scheduled. Construction under the Ports Project (Loan 429-SP) was affected by time-consuming procedures for placing contracts and changes primarily in respect of traffic and technical aspects which created difficulties in design. These problems have now been solved and the final contracts are under execution. The closing date for this loan had to be postponed from March 31, 1971 to March 31, 1972. On the Second Railway Project (Loan 507-SP to Red Nacional de los Ferrocarriles Espanioles - RENFE), progress in physical works and improvements in management have been satisfactory. However, utiliza- tion of the proceeds of the loan will not be completed by the closing date, July 31, 1971, and a postponement by one year has been requested. As of iiarch 31,, 1971, US.$14.3 million remained undisbursed, mostly for freight cars and locomotives. Investment in rolling stock normally takes place after all infrastructure has been installed; contracts -3- have now been placed and disbursements for about US$14 million are expected to take place before the end of the calendar year. No disbursements have yet been made in respect of the loans for Livestock Development (Loan 633-SP) and Education (Loan 699-SP). In the case of the former, administrative delays occurred in the creation of the project unit (Agency for Livestock Development) and also in the processing of sub-loans; the situation has now improved and disbursements should start soon since sub-loans eligible for reimburse- ment out of the proceeds of the Bank loan have already been made. Difficulties in establishing the project unit have also affected the Education Project. Disbursements are expected to start in the third quarter of 1 971. 6. IFC has made two investments in Spain totalling US$4 million. The first was in three different transactions in 1962, 1965 and 1967 totalling US$3.4 million in Fabrica Espafiola i4agnetos S.A. (FEMSA), an automotive electrical equipment manufacturer, of which US$2.5 million was as a loan and the remainder in equity; as a result of sales of equity and repayments, IFC held US$600,000 of the loan and US$575,000 in equity as of H4arch 31, 1971. The other investment is a US$0.6 million equity participation in Banco de Desarrollo Economico Espafiol S.A. (BANDESCO), a privately owned development finance company. A proposal for an investment in a liner-board project by INPACSA (Indus- trias del Papel y de la Celulosa) is in an advanced stage of prepara- tion. 7. A third loan to the Spanish railways is likely to be pre- sented to the Executive Directors before the end of the current fiscal year. In earlier stages of preparation are ports and education projects. - 4 - PART II - DESCRIPTION OF THE PROPOSED LOAN 8. Borrower: Spain Amount: The equivalent in various currencies of US$12.7 million Purpose: To promote agricultural research through financing the establishment of six research centers and the provision of related ser- vices Amortization: In 20 years, including a 5-year period of grace, through semi-annual installments beginning September 15, 1976 and ending March 15, 1991. Interest rate: 7-1/4 percent Commitment charge: 3/4 of 1 percent Estimated Eco- nomic Return on the Project: 15-30 percent PART III - THE PROJECT 9. A report entitled "Spain - Agricultural Research Project" (PA-714a) is attached. 10. Although agriculture still retains more importance in the economy of Spain than in most other European countries, its contribu- tion to GDP declined from 23 percent in 1960 to 14 percent in 1969. Similarly, agricultural exports, once the mainstay of Spanish export trade, have been reduced from well over 50 percent to about 30 percent of total exports in 1960-69. However, agriculture still employs about one third of total manpower. Yields and productivity per worker are low and crop patterns have not adapted to changing consumption habits resulting from higher standards of living. In the 1960's, the growth in agricultural output averaged 3.5 percent per year, lagging far behind an overall economic growth rate of 7.5 percent. As a result, imports of food products increased steeply, generating a chronic deficit in agricultural trade which reached about US$300 million in 1969. However, the application of appropriate technology would permit Spain to utilize its substantial agricultural potential to replace major imports on an economic basis. 11. Up to now, much needed modernization in agricultural methods and equipment has been hampered by lack of technological information. Improvement in this field requires reorganization of research. Annual national expenditure for agricultural research in Spain is low in comparison to more advanced countries. Applied research is fragmented between too many organizations, operating in an uncoordinated way under different sponsors, and inadequate in terms of research programs and training of research workers. Basic research, however, is gener- ally of much higher standards. Under the project, adaptive applied research, designed to meet the specific needs and conditions of Spanish agriculture and livestock production, would be emphasized. 12. The proposed project aims at raising the standards of agri- cultural research through the restructuring of the key official research organization, INIA (Instituto Nacional de Investigaciones Agronomicas), and reorienting its research activity on a commodity-oriented basis. To cope with the extreme shortage of competent agricultural research talent in Spain, the project was developed along two major lines: a) "mission oriented" research to handle key agricultural problems, and b) upgrading of local research staff through a fellowship training program and on-the-job training with research specialists recruited abroad. 13. The project would establish within INIA six national research centers, each specialized in one agricultural commodity or a group of related agricultural commodities of national significance, as opposed to the previous practice of multipurpose research centers which each pro- vided a complete coverage of the agricultural research field. Alto- gether, the commodities covered represent 85 percent of total agri- cultural output and 70 percent of agricultural exports and imports. Each center would carry out research programs designed to meet prior- ities laid down in the national development plan. 14. To ensure the success of the new approach to agricultural research, the technical assistance included in the project provides for the recruitment of about 20 research specialists of international standard for service within the project on a long-term contract basis, - 6 - for about 30 short-term specialist consultants and about 200 training fellowships abroad. The research specialists would be assigned to the various centers to assist in developing research programs, train local personnel and advise on the fellowship program. A national research coordinator, of high international repute, would be appointed to assist INIA management in the formulation of research policies and programs. The project also provides for cooperation with other government agen- cies conducting basic research and for liaison with extension ser- vices. The Government is in discussion with the International Research Institute (IRI), an experienced research organization, which would employ the research personnel required under terms of reference and contract conditions acceptable to the Bank. These discussions are well advanced, and the proposed loan would be signed after the contract with this organization has been concluded. 15. Total project cost is estimated at US$28.2 million, in- cluding US$2.2 million for the purchase of land. The proposed loan would finance the foreign exchange cost of the project estimated at US$12.7 million, i.e. 45 percent of the total cost. About 45 percent of the loan (US$5.7 million) would help finance the capital cost of the centers and another 40 percent (US$5 million) would cover the cost of technical assistance. The remainder has been allowed for contingencies. In addition to the local currency cost of the project, equivalent to US$15.5 million, the borrower would have to bear the annual operating expenses of the research organization which are estimated at about US$7 million equivalent at full development after five years. 16. The economic rate of return is difficult to quantify for this kind of project, but has been estimated in the range of 15 per- cent to 30 percent. 17. All contracts for the erection of buildings and the supply of furnishings, services and utilities would be awarded under inter- national competitive bidding. Since international competitive bidding would not be appropriate for scientific equipment, this will be pro- cured on specification of the center directors and research coordi- nators. The Loan Agreement contains provisions for bulk purchase of research equipment to make procurement more efficient whenever this is practicable. Because of limited numbers, it would also be im- practicable to group procurement of farm and transport equipment for international competitive bidding. It will,therefore, be obtained under standard government procurement procedures from domestic and locally established foreign firms. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 18. The draft Loan Agreement between Spain and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. 19. It should be noted that Sections 8.01(a) and 8.01(b) of the draft Loan Agreement prescribe the following conditions of effec- tiveness: a) appointment by INIA of a senior agricultural scientist of international repute, approved by the Bank, to serve as National Research Coordinator at INIA headquarters, and b) necessary action by INIA to acquire the additional land required to establish the National Research Centers at Zaragoza, Cordoba, Valencia, and La Corunia in areas and locations satisfactory to the Bank. Other provisions of the draft Loan Agreement generally conform to the standard pattern of Bank loans. PART V - THE ECONOMY 20. A report "Current Economic Position and Prospects of Spain" (ENA-172) was distributed to the Executive Directors on November 7, 1969. The report of a Bank mission which visited Spain in November- December 1970 is expected to be distributed to the Executive Directcrs shortly. The following summarizes the major findings of the mission. A basic data sheet is annexed. 21. The 1959-60 stabilization program and economic policies in the 1960's brought about a gradual relaxation of government controls over Spain's internal and external economic relations. The economy was opened to foreign goods, technology and capital, while the private sector was encouraged to increase output and investment. Sustained by the inflow of foreign technology and capital and by rising foreign exchange earnings from tourism and from remittances of Spanish workers employed abroad, total output grew by 7.5 percent per year in real terms during 1961-70. Because of the low net population growth (less than 1 percent p.a.), GIMP per head, expressed in current dollars, rose from US$374 in 1960 to almost US$850 in 1970. 22. Growth in the 1960's was mainly in industry and the service sectors. Industrial production increased on the average by 10 percent per year in 1960-69, while services expanded by 7 percent annually. There was large-scale migration of labor from the land to employment in urban areas in Spain and to other European countries. Despite this rural exodus, open unemployment in the non-agricultural sector is at a very low level, currently less than 2 percent of the active popula- tion. Regional inequalities in income distribution are still consid- erable. Income per head in the highest income regions (Madrid, Barcelona, Basques) is probably about 2.5 times that of the lowest income regions (Inner Galicia, Extremadura and Western Andalucia). 23. Economic growth was rather uneven in the second half of the 1960's, mainly because of stop-go policies in the monetary and fiscal fields. After a period of sustained expansion following the 1967 devaluation, restrictive measures were introduced in 1969 to cope with the rising balance of payments deficit. Growth slowed down while the balance of payments improved. In January 1971 monetary policies were relaxed somewhat by lowering the central bank discount rate and easing credit. There is, however, a danger that inflationary pressures may again become too strong. Consumer price increases accelerated from 3.5 percent in 1969 to 6.8 percent in 1970, due to a relaxation of price controls and the elimination of subsidies introduced with the 1967 devaluation of the peseta, as well as rising wage rates. 24. Investment in education and in research has to be increased considerably to meet the needs of future economic growth and to reduce Spain's heavy reliance on foreign technology. Also, structural weak- nesses persist in manufacturing and agriculture. The preferential trade agreement with the EEC, which went into effect in October 1970, makes it all the more necessary that such weaknesses be removed. While Spain has been relatively successful in mobilizing resources, it continues to have a major problem in their allocation and administra- tion. This is why institutional improvements at the sector level and proper fiscal and financial policies are important. 25. Because of the need to increase the allocation of resources to education and other social fields and of structural reforms in key economic sectors, the growth of the Spanish economy during the next five years may be somewhat lower than in the 19601s. 26. Spain's balance of payments has been marked since 1965 by high commodity trade deficits averaging US$1.8 billion a year, largely covered by income from services and transfers, mainly tourism and remittances by workers abroad. Deficits on current account averaged US$0.4 billion. However, the need for imports is likely to remain high in the future while earnings from tourism and workers' remittances are not expected to continue to increase at the high rates of the 1960's. It is therefore important to promote commodity exports, particularly of manufactures. 27. The net inflow of long-term capital averaged US$365 million per annum during 1965-70. The major part of external capital has been private; given continuing confidence in the private sector, this should continue. During 1965-70 long-term borrowing by the Government averaged some US$30 million a year. However, the need for capital from official sources can be expected to increase, because of the envisaged higher outlays on social infrastructure (mainly in education) and structural reforms in various sectors. 28. Spain is creditworthy for substantial amounts of additional lending on conventional terms. The debt servicing record is good and debt service is moderate. Total external public debt outstanding at the end of 1969 was US$1,454 million, of which US$400 million was undisbursed. In 1970, some US$140 million of external public debt was newly comzmitted against repayments of US$92 million in the same year. Service on outstanding debt as of the end of 1969, including service on the undisbursed portion, would amount to US$276 million in 1971 or equal about 5.6 percent of total foreign exchange receipts in 1970. Debt service as projected remains moderate, approximately 5 percent in 1976. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 29. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PLIT VII - RECOIOENDATION 30. I recommend that the Executive Directors approve the proposed Loan. Robert S. McNamara President Attachment May 3, 1971 ANNEX SPAIN - BASIC DATA Area 5o4,750 sq. km. Population 1/ (1970 mid-year estimate) 33.3 million Net emigration 1960-69 615 thousand Estimated rate of growth 0.9 percent p.a. (after emigration) Growth of gross national product 1956-60 3.2 percent p.a. 1961-65 8.6 percent p.a. 1966-69 6.4 percent p.a. Per capita GNP 1969 us $ 804 Industrial origin of gross domestic product 1960 1965 1969 Agriculture, forestry, fisheries 23.7% 18.0% 15.0% Mining 1.8% 1.3% 100% Manufacturing, public utilities, construction 33.4% 34.9% 34k4% Services 41.1% 45.8% 49.6% Public sector finances /(Ptas. billion) i962 1967 1969 3/ Current revenue 199.2 369.8 471.2 Current expenditure 143.6 280,3 365.5 Investment expenditure 31.4 52.2 59.1 Capital transfers paid (net) 16.4 19.5 33.9 Financial surplus 7.8 17.8 12.7 Balance of payments (US $ million) 1960 1965 1969 Trade balance 48 -1,759 -1,871 Travel and tourism (net) 246 1,027 1,195 Workers' and other private transfers 66 358 551 Balance on current account 394 - 485 - 428 Long-term capital inflow (net) 60 309 503 Foreign exchange reserves 1960 1965 1970 End of period, net 541 1,409 1,730 Import equivalence in months 9s0 5.6 4.4 Bank position as of March 31, 1971: Total outstanding: US $210.2 million of which undisbursed: US $ 58.o million External public debt (Dec. 31, 1969) Total debt outstanding: US $1,454 million Net of undisbursed: US $1,054 million Debt service ratio 1971: 5.6 percent of foreign exchange receipts in 1970 Exchange rate: US 81 = Ptas. 70, Ptas. 1 million = US $14,286 1/ Peninsular Spain, Balearic and Canary Islands 2/ Comprises central Government, local authorities, autonomous agencies (excluding marketing agencies), and the social security system 3/ Preliminary Anril 28. 1971