Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4591-BR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$42 MILLION TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR A NORTHEAST RURAL DEVELOPMENT PROJECT IN THE STATE OF ALAGOAS June 1, 1987 This document has a restricted distribution and may be used by recipients only In the performance of tbeir oicial duties. Its eontents msy not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit Cruzado (Cz$) US$1.00 X Cz$ 14.20 1/ uS$1.00 Cz$ 31.00 2/ C($1.00 - US$0.0323 2| FISCAL. YEARS Government of Brazil January 1 to December 31 Noriheast Rural Development Program April 1 to March 31 Proj ctr April 1 to March 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS >$rDP = Northeast Rural Development Program OEPA-A. G State Foundation for Agricultural Planning of the State of Alagoas 1/ Exchange rate at time of appraisal (December 1986). 2/ Exchange rate as of May 20, 1987. FOR OMCIAL USE ONLY BRAZIL NORTHEAST RURAL DEVELOPMENT PROGRAM NORTHEAST RURAL DEVELOPMENT PROJECT - ALAGOAS LOAN AND PROJECT SUMMARY Borrower: Federative Republic of Brazil Beneficiary: The State Foundation for Agricultural Planning (CEPA-AL) linked to the Secretariat of Agriculture of the State of Alagoas Amount: US$42.0 million equivalent Terms: Repayable in 15 years on a fixed amortization schedule, including 3 years of grace, at the Bank's variable interest rate On-Lending Terms: Not applicable Financing Plan: Government US$ 44.4 milli e IBRD US$ 42.0 mill ion TOTAL US$ 86.4 million Economic Rate of Return: 14Z Staff Appraisal Report: No. 6668-BR o This dcument has a restricted distribution and mao be usoed by recipients onrl in theau of their official duties. Its contents may not otherwise be discloesd without World Bank auth MEMORANDIUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR A NORTHEAST RURAL DEVELOPMENT PROJECT IN THE STATE OF ALAGOAS 1. The following report on a proposed rural development loan to the Federative Republic of Brazil for US$42.0 million equivalent is submitted for approval. The proposed loan would be repayable in 15 years on a fixed amortization schedule, including 3 years of grace, at the Bank's standard variable interest rate. It would help finance Brazil's Northeast Rural Development Program (NRDP) for the State of Alagoas. 2. Background. Agriculture in Brazil has traditionally been the main source of exports and employment, though a relatively small contribztor to GDP. In 1985, agriculture accounted for 13% of GDP, 30% of the economically active population and 31% of total exports. Throughout the 1970s, there was rapid expansion in Brazil's agriculture (5% per annum); during the recession in the early 1980s, output and investment stagnated and then recovered in 1984 and 1985. The performance of the sector in the 1970s masked sharply disparate rates of growth among regions, farm types and individual crops. The Northeast of Brazil covers 18% of the country's total area and has been the nation's foremost problem region since the late 1800s. In 1985, the Northeast had a population of 39 million, or about 29% of the country's total, growing at 2.3% per annum. Half the population lives in the rural areas and over 50% of the work force is engaged in agriculture. Drought and uncertain rainfall, highly skewed land distribution, illiteracy, endemic diseases, and limited urban employment opportunities have resulted in high levels of poverty and underemployment, particularly in rural areas. Despite the constraints, Northeast agriculture continues to play an important role in the national economy. The Northeast contributes about one-fifth of the total value of Brazilian crop production; many regionally produced commodities (cotton, sisal, cassava and sugar) represent significant shares of national production. 3. In 1982, the Government requested Bank assistance in preparing a new regionwide rural development program, the Northeast Rural Development Program (NRDP). This initiative was stimulated by the recognition that previous rural programs had achieved limited results in alleviating poverty and increasing agricultural production. The NRDP, simpler in design than previous efforts supported by the Bank, focuses on eliminating key constraints on small farmer development, such as land tenure insecurity, drought vulnerability, and limited access to credit and use of modern technology. The program is complemented by the Northeast Region Land Tenure Improvement Project (Loan 2593-BR) which finances cadastral activities in all ten Northeast states. It will be further complemented by a series of sector projects in education, health, water supply and sanitation. Regional program guidelines have established (a) unified and streamlined funding and administrative procedures, and (b) mechanisms for increased beneficiary participation and improved institutional performance. 4. Project Obiectives. The proposed project would: (a) increase agricultural prduc-tivity and production; (b) generate income and employment opportunities for the low-income rural families; (c) promote water resource development and technology generation and diffusion to decrease small farmers' vulnerability to recurring droughts; (d) increase community participation in all phases of the development process; and (e) strengthen the State of Alagoas' capacity to provide efficient agricultural services to small farmers. 5. Project Description. The proposed project would include: construction of about 160 simple rural water supply systems; agricultural research and basic seed production; extension services to about 32,400 small farmers; investment credit for about 10,000 farms including 1,480 irrigated farms; marketing support services for private traders and small farmers; funding for community subprojects; project administration and training. There are no environmental issues associated with the project, and improved land use and soil and water conservation would have a favorable environmental impact. Overall, some 40,000 low-income rural families in 49 municipalities of the State of Alagoas would benefit from the project. Simultaneously, in all of these municipalities, land cadastral and regularization activities would be carried out under the regional Land Tenure Improvement Project (Loan 2593-BR). 6. The project, to be carried out over eight years, provides funds for civil works; equipment and furniture; rural investment credit; a development fund for community subprojects; training; and related administrative and operating costs on a declining basis. The total cost of the project is estimated at US$86.4 million equivalent, with a foreign exchange component. of US$9.2 million (10%). Retroactive financing of about US$2.0 million would be provided for project expenditures (other than agricultural credit) incurred after appraisal, but prior to loan signing. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Brazil are given in Schedule C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 6668-BR, dated May 26, 1987, is also attached. 7. Rationale for Bank Involvement. The Bank's lending strategy in Brazil aims to promote and assist structural reform; to develop and maintain essential infrastructure; to increase the productivity and improve the living conditions of the rural and urban poor; and to protect the environment and the local populations affected by the exeeution of investment projects. The Government of Brazil attaches high priority to decreasing regional disparities. Incomes in Northeast rural areas are less than 35% of the national average. The NRDP, of which the proposed project is a part, forms a central part of the Government's investment strategy to narrow the gap between the Northeast region and the rest of the country and to alleviate rural poverty. Bank financing in support of the Program has already been approved for six state projects, one of which includes regional coordination activities, and the Regional Land Tenure Improvement Project. 8. Agreed Actions. During negotiations, the Government agreed on the following: - 3 - (a) as conditions of loan effectiveness: (i) satisfactory staffing of CEPA-AL; (Mi) creation of a State Rural Development Council, chaired by the Governor; and (b) as other covenants (i) availability of at least 36,600 ha by March 31, 1989 and an additional 30,700 ha by March i990 for redistribution to project beneficiaries; and (ii) satisfactory cost recovery provision for public domestic water supply. 9. Justification. Economic benefits under the proposed project are expected from increases in agricultural production as a result of: (i) increased productivity, through better cultivation practices; (ii) crop diversification; and (iii) expansion of the cropped area through irrigation and increased use of animal traction. At full development, about 80% of the yearly incremental marketable production would come from subsistence crops, tobacco and fruit, and 20% from livestock products; the internal rate of return is estimated at 14%. Improved domestic water supply, community activities and family wood lots would also provide substantial benefits to the rural populatiot, especially women. Expanded agricultural activities would create jobs equivalent to some 8,200 man-years annually. Finally, improved farming practices and soil and water conservation would have a beneficial impact on the environment. 10. Risks. Possible risks include: (a) insecure land tenure; (b) possible inefficient delivery of project services, (c) lack of sufficient interinstitutional cooperation; (d) recurring droughts and cotton pest otutbreaks; and (e) delays and shortfalls in counterpart funding and credit. The project has been designed so as to minimize these risks. Progress will be closely followed up by Bank staff through review of the annual operating plans and improved supervision, monitoring and evaluation. Impleentation of the Northeast Region Land Tenure Improvement Project (Loan 2593-BR) and of the Government's agrarian reform would increase land tenure security. Streamlined administrative procedures, measures for institutional strengthening and technical assistance for selected agencies would improve efficiency and project coordination. Crop diversification and intensified technology generation and diffusion would make farmers less vulnerable to drought and pest outbreaks. The Government adopted new measures in 1986 to ensure the timely availability of counterpart funds and credit. In addition, the regional scope of the Northeast Program and tl-e support the Program enjoys among government and new local leaders should help secure adequate funding and satisfactory implementation of the project. 11. Recommendation: I am satisfied that the proposed loan would comply with the articles of agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable Attachments Washington, D.C. June 1, 1987 Schedule A Estimated Costs a/ Local Foreign Total ----USS milllon---- A. Water Resource Development 1.2 0.3 1.5 B. Agricultural Research and Basic Seed Production 4.2 0.5 4.7 C. Agricultural Extension 19.7 0.6 20.3 D. Rural Investment Credit 29.2 5.2 34.4 E. Marketing Services 0.3 - 0.3 F. Support to Small Rural Communities 10.6 1.5 12.1 G. ProjeLt Administration and Training 8.2 0.7 8.9 Total Baseline Costs 73.4 8.8 82.2 Physical Contingencies 0.7 0.2 0.9 Price Contingencies 3.1 0.2 3.3 Total Project Costs 77.2 9.2 86.4 a/ Including US$1.9 million of taxes and duties. Financing Plan Local Foreign Total ------US$ million- - Government 44.4 - 44.4 IBRD 32.8 9.2 42.0 TOTAL 77.2 9.2 86.4 ,, .._ schedule B Procurement Procurement Method Total Category LC utnher Nl.. Cost (US million) -- Civil Works 1.9 (1.1) - - 1.9 (1.1) Equipment and Materials 0.7 (0.3) - - 0.7 (0.3) Studies and Training 1.9 (0.8) - 1.9 (0.8) Rural Invostment Credit - 34.4 (17.2) 34.4 (17.2) Community Subprojects - 9.6 (6.7) 9.6 (6.7) Salaries and'Allowances - 30.3 (13.8) 30.3 (13.8) Other Operating Expenses 7.6 (2.1) 7.6 (2.1) Total 2.6 (1.4) 1.9 (0.8) 81.9 (39.8) 86.4 (42.0) Note: Figures In parentheses are the respective amounts financed by the Bank. Disbursements Component Amount X of Expenditures (net of taxes) (US$ million) Water Resource Development 0.9 70X Agricultural Research 1.8 501 declining to 30X in later years Rural Extension 8.2 502 declining to 302 In later years Credit 15.5 501 Marketing 0.1 501 Support to Small Communities 7.7 70S Administration 2.9 501 declining to 301 in later years Training 0.7 501 declining to 302 in later years Unallocated 4.2 - Total 42.0 501 Estimated Bank Disbursements: Bank Fiscal Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 ~~~~~-U------------S$ Millllni Annual 3.4 3.3 5.9 6.3 7.1 6.8 4.2 3.4 1.6 Cumulative 3.4 6.7 12.6 18.9 26.0 32.8 37.0 40.4 42.0 a/ Including initial deposit of US$2.0 million into the Special Account. Schedule C BRAZIL NORTHEAST RURAL DEVELOPMENT PROGRAM NORTHEAST RURAL DEVELOPMENT PROJECT - ALAGOAS Timetable of Key Project Processing Events (a) Time taken to prepare: 3 years (b) Prepared by: Government with FAO/CP and Bank Assistance (c) Fist Bank mission; February 1986 (d) Appraisal mission departure: December 198. (e) Negotiations: April 27 to May 13, 1987 (f) Planned Date of Effectiveness: November 1987 (g) List of relevant PCRs and PPARS: Combined PCR for Loans 1195-BR and 1714-BR (Report No. 6776 dated May 20, 1987). Schedule D Page 1 of 3 THE STATUS OF BANK GROUP OPERATIONS IN BRAZIL A. SUMlR STATENNT OF LOANS (As of March 31, 1987) Amount less Uridis- Loan# Year Borrower Purpose Cancellations bursed (USS Milllons) Nirety four loans fully disbursed 4,776.2 1537 1978 Brazil Raral Development 16.0 3.1 1538 1978 ELETROBRAS Power 127.4 2.3 1720 1979 Brazil Urban Developmnt 70.0 4.8 1721 1979 (OPEL POWr 86.7 - 1721-5 1979 COPEL POer 22.3 7.8 1728 1979 Brazil Ebral Development 31.4 4.9 1729 1979 Brazil Irrigation 28.0 0.1 1839 1980 Brazil Utban Transport 134.0 1.1 1850 1980 Banco Nacional da HabitAcao Water Supply 139.0 7.8 1867 1980 Brazil F4ucation 32.0 6.1 1877 1980 State of Mass Gerais lBwal Dr.elourant 33.0 10.0 1895 1981 ELET905UL PoWer 85.4 15.5 1924 1981 Brazil Rural Development 56.0 9.5 1939 1981 ELETROBRAS Power 54.0 30.7 1965 1981 EBTU Urban Transport 90.0 1.7 1970 1981 Banco Nacional da Habitacao Water Supply 180.0 56.6 1989 1981 Brazil Alcohol Development 235.7 2.9 2015 1981 Brazil Agriculture 29.0 11.1 2016 1981 Brazil Agriculture 60.0 0.5 2060 1982 Brazil Agriculture 67.0 21.9 2061 1982 Brazil Health 13.0 3.0 2062 1982 Brazil Highways 240.0 48.4 2116 1982 Brazil Agriculture 26.4 9.2 2138 1982 ELETROBRAS Power 182.7 126.6 2163 1982 Brazil Agriculture 26.4 12.3 2170 1982 Brazil Ukban Develeert 123.9 84.9 2177 1982 Brazil Rural Develorent 42.7 21.1 2196 1983 CVRD Iron Ore 304.5 50.3 2224 1983 Brazil Feeder Roads 154.0 65.5 2249 1983 Banco Naclonal da Rabitacao Water Supply 302.3 91.0 2268 1983 Brazil Agro-Irdustries 400.0 261.7 2269 1983 Brazil Rural Development 67.8 56.6 2343 1984 Brazil Urban Developmrent 52.7 30.2 2347 1984 Brazil Export Development 352.0 0.6 2348 1984 Brazil Agriculture 303.0 0.5 2353 1934 Brazil Agriculture 65.2 54.7 Schedule D Page 2 of 3 A. SUMOWY STATZEZr? OF LANS (Continued) (M- of t;rch 31, 1987) Amount less Uodis- Loar 0 you Borromw rPur Cancellattons btured - ____ - ~~~~~~~~~(ulf Mtllirons) -~ 1729-1 1984 Brazil Agriculture 7.7 7.0 2060-1 1984 Brazil 4riculture 22.8 22.7 2364 1984 Eletrobras Power 250.6 210.4 2365 1984 Eletrobras Power 222.8 49.1 2366 1984 Brazil Education 20.0 12.5 2412 1984 Brazil Educatlon 40.0 30.3 2446 1984 Brazil Federal Vigtways 210.0 90.9 2447 1984 State of Seo Paulo Health 55.5 36.1 2448 1984 Brazil Health Studies 2.0 1.7 2486 1985 Brazil Dvelopmnt &acilcg 300.0 164.8 2489 1985 Braxil Educatlon 72.0 60.9 2523 1985 Brazil Rural DMvelopmant 61.3 53.5 2524 1985 Brasil bral Davelopnt 61.4 53*2 2532 1985 Braxil Rwal WS5S Pllot 16.3 14.7 256^ 1985 Brazil Rllwa"y 200.0 178.0 2564 1985 iletrobras Pmw Tranamlaalon 400.0 384.7 2565 1985 Eletrobras Pomr Distributlon 312.0 296.7 2593 1985 Brazil land Trure 100.0 86.8 2623 1986 State of Santa Catarina Urban Dvlopsont 24.5 22*8 2645 1986 razil Urban Reconstruction 100.0 87.0 2679 1986 Brazil Agriculture 155.0 139.6 2680 1986 Brazil Irrigation Eng. 48.0 43.9 2681/1 1986 Brazil Urban Dvelopmnt 55.0 55.0 26997T 1986 Brazil Health 59.5 59.5 2718 1986 Braxil Rural Developsnt 92.0 88*1 2719/1 1986 Brasil IrrIgation 57.0 57.0 2721 1986 Brazil Public Sector 29.0 26.7 2727 1986 Brazil Credit & Mwrketirg Reform 500.0 200.0 2761/i 1987 Brazil Rural Development 171.0 171.0 276297 1987 Brazil Rural Developmt 78.0 78.0 27637 1987 Brazil Rural Development 122.0 122.0 Total 12,855.10/2 Of which has besn repaid to the Bank 2,686.94 Total now outstanding 10,168.16 Amount sold 45.8 Of which has been repaid 45.8 0.00 Total now held by Bank 10,168.16 Total urdisbursed 4,019.60 /1 Not yet effective. 72- No MDA credits have been made to Brazil. 71 Not yet signed. 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Municipal Boundaries .- State Boundaries o c / |u \S ~~~~~~~~Leopoldino * National Capital LiM 9W Intemational Boundades o to Ponto O Cul~~Qminante. to Gronhur fo M dos Mklres S~~~~~ Luls. S.~~~~~~~. kt kno da SOO C r C8aree . ntni ~~~~~~~~~~~~~~~t\ -~~~~~~ ~~~~~~~~~~~~~~~ R A Z I Atalaia ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~sci ie 'v%, - 1 x d05 0M v d9 oM4 ~~~~~~~~~~~~~ Barad SO 3g 9 7 L > } 1 4,0 io.,o0 igel N cL& ;< 9 w& a . \ ~~~~~B RAZI L ARGENnNA ~ ~ LAGAS 36W ~ ~ ~ ~ ~ ~~~~~- '"'\ -&VA 1987 -- =