OFFICIAL USE ONLY IDA/R2007-0252/1 October 11, 2007 Streamlined Procedure For meeting of Board: Tuesday, October 30, 2007 FROM: Vice President and Corporate Secretary Bolivia - Bolivia Land for Agricultural Development Project Project Appraisal Document Attached is the Project Appraisal Document regarding a proposed credit to the Republic of Bolivia for a Bolivia Land for Agricultural Development Project (IDA/R2007-0252). This project will be taken up at a meeting of the Executive Directors on Tuesday, October 30, 2007 under the Streamlined Procedure. Distribution: Executive Directors and Alternates President Bank Group Senior Management Vice Presidents, Bank, IFC and MIGA Directors and Department Heads, Bank, IFC and MIGA This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization. Document of The World Bank FOROFFICIALUSEONLY ReportNo: 41071-BO PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDCREDIT INTHEAMOUNT OF SDR 9.8 MILLION (US$15MILLIONEQUIVALENT) TO THE REPUBLICOF BOLIVIA FORA LAND FORAGRICULTURAL DEVELOPMENTPROJECT September27,2007 SustainableDevelopment Bolivia,Ecuador, Peru, VenezuelaCountryManagementUnit Latin America and the CaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwisebe disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective July 20, 2007) Currency Unit = Boliviano (BOB) 7.87BOB = US$1 US$ = SDR1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS BPRSP Bolivia Poverty Reduction StrategyPaper BDP Banco de Desarrollo Productivo (Productive DevelopmentBank) CAD ConsejoAgrario Departamental (DepartmentalRural Council) CAS Country Assistance Strategy CSCB Confederacidn Sindical de Colonizadores de Bolivia (Labor Confederationof Bolivian Colonizers) CODAL Consejode Desarrollo Agrario Local (Local Rural Development Council) CIDOB Confederaci6n de Pueblos Indigenas de Bolivia (Confederation of IndigenousPeoples of Bolivia) CSUTB Confederacidn Sindical Unica de Trabajadores Campesinosde Bolivia (Unique Labor Confederationof Rural Workers of Bolivia) FMR Financial Management Report GOB Governmentof Bolivia IF1 Institucidn Financiera Intermediaria (Institution for Financial Intermediation) INRA Instituto Nacional de Reforma Agraria (National Land Reform Institute) IPDP IndigenousPeoples Development Plan MDRAMA Ministerio de Desarrollo Rural, Agriculturay Medio Ambiente (Ministry of Rural Development, Agriculture and Environment) MFE Microfinance Enterprise NAFIBO Nacional Financiera Boliviana S.A.M. PA ProducersAssociation PCU Project Coordinating Unit PIP Project InvestmentPlan PNAT Proyecto Nacional de Administracidn de Tierras (National Land Administration Project) PPF Project PreparationFacility SIL Specific Investment Loan SOE Statement of Expenditures TOR Terms of Referente Vice President: PamelaCox Country ManagedDirector: Carlos FelipeJaramillo Sector Manager: EthelSennhauser Task Team Leader: Malcolm D. Childress FOR OFFICIAL USE ONLY BOLIVIA Land for AgriculturalDevelopmentProject . CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE .................................................................. 1 1. Country and sector issues.................................................................................................... 1 2 . Rationale for Bank involvement.......................................................................................... 3 3. Higherlevel objectives to which the project contributes.................................................... 3 B. PROJECT DESCRIPTION . . .................................................................................................. 4 1. Lendinginstrument.............................................................................................................. 4 2 . Project development objective and key indicators............................................................. -4 3. Project components.............................................................................................................. 5 4. Lessons learned andreflected inthe project design............................................................ 6 5. Alternatives considered and reasons for rejection.............................................................. -7 C. IMPLEMENTATION ........................................................................................................... 7 1. Partnership arrangements.................................................................................................... 7 2. Institutional and implementation arrangements.................................................................. 8 3 . Monitoring and evaluation of outcomeshesults and the landaccess question.................... 9 4. Sustainability....................................................................................................................... 9 5 . Critical risks and possible controversial aspects............................................................... 10 6 . Credit conditions and covenants:....................................................................................... 13 * . D APPRAISAL SUMMARY . .................................................................................................. 13 1. Economic and financial analyses....................................................................................... 13 2. Technical. .......................................................................................................................... 14 3 . Fiduciary............................................................................................................................ 15 4. Social ................................................................................................................................. 16 5. Environment ...................................................................................................................... 16 6 . Safeguard policies.............................................................................................................. 17 7. Policy Exceptions and Readiness ...................................................................................... 17 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. Annex 1: Countryand Sector or ProgramBackground .......................................................... 18 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies ..................23 Annex 3: ResultsFrameworkandMonitoring ......................................................................... 24 Annex 4: DetailedProjectDescription ...................................................................................... 27 Annex 5: ProjectCosts................................................................................................................ 44 Annex 6: ImplementationArrangements .................................................................................. 45 Annex 7: FinancialManagementandDisbursement ............................................................... 50 Annex 8: ProcurementArrangements ...................................................................................... 61 Annex 10: SafeguardPolicyIssues ............................................................................................. 77 Annex 11 ExecutiveSummaryof Social ImpactStudy . .......................................................... 82 Annex 12 SocialAssessment ConsultationMatrix . ................................................................ 103 Annex 13: ProjectPreparationand Supervision .................................................................... 132 Annex 14: Documentsinthe ProjectFile ................................................................................ 133 Annex 15: Statementof Loans and Credits ............................................................................. 134 Annex 16: Countryat a Glance ................................................................................................ 136 Annex 17: Map No IBRD33374 . .............................................................................................. 138 BOLIVIA BOLIVIA LAND FORAGRICULTURAL DEVELOPMENTPROJECT. PROJECTAPPRAISALDOCUMENT LATINAMERICA AND CARIBBEAN LCSAR Date: September 27, 2007 Team Leader: MalcolmD.Childress Country Director: Carlos FelipeJaramillo Sectors: General agriculture, fishing and forestry Sector Managermirector: EthelSennhauserLaura sector (75%);Sub-national government Tuck administration(25%) Themes: Other ruraldevelopment (P);Indigenous peoples (S) ProjectID: PO87925 Environmentalscreeningcategory: Partial Assessment LendingInstrument: Specific Investment Loan Safeguardscreening category: Limited impact [ 3 Loan [XI Credit [ 3 Grant [ 3ProjectFinancingData Guarantee [ ] Other: Loan For Loans/Credits/Others: Total Bank financing (US$m.): 15.00 ProDosedterms: Standardwith 35 vears maturitv Source Local Foreign Total BORROWEIURECIPIENT 0.63 0.00 0.63 INTERNATIONAL DEVELOPMENT 15.00 0.00 15.00 ASSOCIATION Total: 15.63 0.00 15.63 Doesthe projectdepart from the CAS in content or other significantrespects?Ref. PADA.3 [ ]Yes [XINO ~~ ~ ~~. Does the projectrequireany exceptions from Bankpolicies? Ref. PAD D.7 [ ]Yes [XINO Havethese beenapprovedby Bank management? [ ]Yes [IN0 I s approval for any policy exceptionsought from the Board? [ ]Yes [XINO Doesthe projectincludeany criticalrisksrated"substantial" or "high"? Re$ PAD C.5 [ X ]Yes [ ] No Doesthe projectmeetthe Regionalcriteriafor readiness for implementation?Ref. PAD D.7 [XIYes [ ]No Project development objective Ref. PAD B.2, TechnicalAnnex 3 The development objectiveofthe proposedprojectis to establisha decentralizedbeneficiary-drivenland distributionmechanismthat allowsorganized landless or poor farmers to acquire suitable agricultural lands and implement investmentsubprojects whichputs them on a sustainable, higher-income, livelihood path. Project description[one-sentence summary of each component] Ref. PAD B.3.a, TechnicalAnnex 4 The projecthas three components.The first component consistsof a revolvingline of credit to finance landpurchases. ProductiveAssociations will be responsible for repayment ofthe land acquisitionloans andthe acquiredlands will serve as collateral(US$5. 2 million approximately).The secondcomponent is for the provisionof matchinggrants for infrastructureand productiveinvestments onthe purchasedlands (US$8.5 millionapproximately).The thirdcomponent coversprojectmanagement,technicalassistance, and monitoringand evaluation(approximatelyUS$2.0 million). Whichsafeguardpoliciesare triggered, ifany? Ref. PAD0.6, TechnicalAnnex 10 EnvironmentalAssessment (OP/BP/GP 4.01) NaturalHabitats (OP/BP4.04) IndigenousPeoples(OD 4.20, beingrevisedas OP 4.10) Forests(OP/BP 4.36) Significant, non-standardconditions,ifany, for: Ref. PAD C.7 Boardpresentation: None Loadcrediteffectiveness: There are two effectivenessconditions: (a) the establishment ofthe accountingand financialmanagementsystemfor the projectsatisfactory to the Association; (b) the administrationagreement betweenthe Government andBDP(Productive Development Bank). Covenantsapplicable to project implementation: (a) adoption of the OperationalManualno later thanthree months after effectiveness; (b) appointment of independentauditors no later thanthree months after effectiveness. A. STRATEGICCONTEXTAND RATIONALE 1. Country and sector issues. 1. The administration of President Evo Morales, elected in December 2005 with a clear majority of votes and representing groups that have been excluded for centuries allied under the Movimiento a1Socialismo (Movement to Socialism, MAS), provides Bolivia with an opportunity to build a more inclusive society. The new government faces numerous, serious development challenges. The history of ethnic exclusion and control by a small elite has left Bolivia with a deeply fractured society afflicted by one of the highest levels of poverty and inequality in Latin America. Despite some improvements, social indicators inhealth, education, and access to basic services like water and sanitation continue to be low. Private investment and economic growth pickedup in the 1 9 9 0 ~but have fallen again as a result of the socio-political unrest of the last ~ few years and the current uncertain outlook pending the definition of the new government's approachinkey sectors. 2. Although poverty inBolivia transcends rural-urban divides, it remains particularly severe inrural area. In2002, about 84 percent of rural inhabitants (2.7 million) were income-poor and 67 percent (1.8 million) lived in extreme poverty. These groups have benefited little from the exploitation of natural resources in the past (silver, tin, oil and natural gas). Furthermore, the implementation of the 1996 agrarian reform law has not lived up to expectations for addressing inequality in access to land, thus keeping the issue among the priorities for policy attention. Land distribution and access to productive resources are viewed as playing a key role in addressing inequality in Bolivia's still largely rural economy. The issue is an important plank in the program of the MAS government. InNovember 2006, Congress passed Law No. 3545, (Ley de Reconduccidn Comunitaria de la Reforma Agraria-Law of the Community-Based Redirection of the Agrarian Refom) modifying the 1996 agrarian reform law in an effort to streamline its implementation and to facilitate a public acquisition process of underutilized land. The Land for Agricultural Development project i s a complementary effort to the mechanisms established by the agrarian reform law which will provide access to land and productive resources through market transactions. Similarly, the Government is launching a pilot mechanism (through the Bank-supported Rural Alliances Project) to support market opportunities for small-scale indigenous andpeasantproducers. a. Sector-related Interim Strategy goal supported by the project: 3. This project supports the Interim Strategy Note goal of fostering jobs through growth in rural areas. If successful, the project will directly addresses one of the greatest sources of popular discontent and political instability inBolivia's recent history and demonstrate a pathway for increasedproductivity and employment inareas of high landlessness. b. Sector issuesto be addressed by the Project and strategic choices: 4. Bolivia faces two mainchallenges related to land tenure: (i) to productive land for Access traditionally excluded groups and (ii) landadministration. To improve land access to lands, up to now Government has beenrelying on the traditional mechanisms of allocating public land, either for free (dotacidn) or for a fee (adjudicacidn), and through planned settlements (asentamientos 1 hurnanos) on lands identified during the land title regularization (saneamiento) process, particularly on those lands reverted back to the public domain because they were illegally acquired or are not currently fulfilling an "economic and social" purpose. However, these programs have tended to be bureaucratic and slow, and have yielded fewer results than expected. After more than ten year o f implementation, the saneamiento process yielded 15,694 titles and certificates for 7.1 million hectares (6.6 percent o f the total land area subject to regularization), more thanhalf o f which were issued in2004-2005. INRA has identified only 30,000 hectares o f public lands suitable for distribution, and much o f it is located in remote, high-cost areas. Furthermore, the lack o f progress in reverting ill-acquired lands and the virtually stagnant settlement policy (five settlements in 8 years) has led to increased frustration by indigenous and peasant groups. The new law 3545 is expected to address some o f these issues, but its implementation will require a significant lead time and its provisions will not address the needs o f all the landless and landpoor groups, particularly the need for land access in locations near to existing settlements and public infrastructure, and the need to gain access to land and productive resources as an integrated package. Land access mechanisms which are demand-driven and work through the land market thus have an important place among a menu o f policies oriented to improving land access. 5. The Government's intention is to carry out a set o f activities to improve the access to productive land for landless and land-poor rural populations utilizing a variety o f mechanisms including: (i) the distribution ofpublic landsunder communal tenure and management, including land revertedto state ownership based on illegality or non-compliance with the economic-social function, (ii) the expansion of indigenous lands under communal tenure through the modality o f the TCO (Tierras Comunitarias de Origen-Community Lands o f Origin), (iii) allocation o f the public forest for community management and (iv) piloting o f a market-based approach for facilitating transfers o f private land and improving productivity and market linkages, through the Land for Agricultural Development Project. Thus, the project will support the government's objectives o f reducing asset inequality, improving income-generating opportunities for the rural poor, and expediting land redistribution. Moreover, this project complements and builds upon Bank and other donor support to landissues, such as the National LandAdministration Project (PNAT, PO06197, closed June 2006) which focused on the title regularization, institutional capacity building, conflict resolution, and identification o f public lands for resettlement and thus provided indirect support for land distribution. 6. The project will address the inter-related issues of land access and land productivity which are constraints for broadly-based, poverty-reducing growth in the rural sector. The first issue i s the unequal distribution o f land and the underutilization o f land which i s a by-product o f the distributional pattern. While the eastern region o f the country has been experiencing rapid growth from soybeans, livestock, and other commodities, most o f these gains have been narrowly distributed. Significant areas o f good agricultural land in the private domain are underutilized, as owners have preferred to expand the agricultural frontier rather than make productive investments on the land, or to hold some parcels o f land speculatively or to use as collateral for other investments. The project relies on a mechanism o f long-term loans for land acquisition accompanied by intensive technical assistance and matching grants for infrastructure and productive investments which inturnwill increase landproductivity and raise beneficiaries' incomes. 2 2. Rationale for Bank involvement. 7. The Bank is uniquely positioned to support Bolivia in launching a participatory, decentralized complementary mechanism for land access and productive investments by poor rural inhabitants, and area which has traditionally been viewed as complicated and risky and which other donors have never operated. The project has the potential to generated significant direct impact while also generating learning and demonstration effects about approaches to the land access problem. Through policy dialogue the Bank has retained a strong role as a reform catalyst, especially in politically sensitive and complex areas like decentralization. The Bank's commitment to land policy reform, land redistribution in favor o f the poor, and the INRA Law has been steadfast, dating back to 1992 with technical assistance and policy dialogue, in 1993 with support for the suspension o f arbitrary land grants and creation o f the Intervencidn process, and since 1997 for implementation o f the INRA law through the Land Administration Project (PNAT). In particular, for the past decade the Bank has been encouraging the Government to adopt more aggressive land redistribution measures, such as reverting ill-acquired lands through saneamiento for subsequent distribution to poor landless farmers and tighter enforcement o f land taxation, but results on this front were disappointing as cumbersome mechanisms, loopholes and inconsistent political commitment to the goal o f land access limited the impact o f the program for land distribution. The Bank has also been instrumental in mobilizing support from other donors, such as the Nordic Fund which co-financed PNAT. In parallel, other donors have financed saneamiento activities in various regions o f the country, all of which depend on institutional capacity o f INRA supported by PNAT. 8. The proposed project directly responds to the Government's specific requests, first received by the Bank in August 2002, then ratified by the Mesa administration in January 2004 and reiterated by the M A S government in 2006 for launching a complementary mechanism for rural land access as a pilot. The Government has requested that the efforts be concentrated inthe Department o f Santa Cruz, where resolution to land conflicts i s o f the highest priority. In particular, the Government i s targeting indigenous and peasant groups as project beneficiaries. The project is limitedinscope to three municipalities inorder to focus the activity and use it as a learning process which will generate lessons for the larger land access, land policy and rural development issues which Bolivia faces. 3. Higher level objectives to which the project contributes. 9. The project contributes to the higher level goal o f rural poverty reduction in Bolivia. This goal will be accomplished by intermediate steps of 1) Improved access to land; 2) Implementation o f productive investment subprojects to help consolidate the newly acquired farms; and 3) Generation o f an income stream from increased value o f agricultural production sufficient to pay for land and increase living standards. These results are contingent on critical assumptions about exogenous factors such as weather and global markets, and macroeconomic and political stability. They are also contingent on endogenous factors such as the timely delivery o f funds to the beneficiary associations, the quality o f technical assistance and the cohesiveness o f the associations. 3 B. PROJECTDESCRIPTION 1. Lendinginstrument. 10. Government has requested support for this project through a Specific Investment Loan (SIL). The project i s a targeted investment operation with a clearly defined geographical focus which demands the kind o f operational flexibility which would not be possible through a general budgetary support instrument, for example. The project i s a pilot in nature, but given its size and complexity, the expected results could not be achieved through a smaller instrument (e.g., a LIL). 2. Projectdevelopmentobjectiveand key indicators. 11. The development objective o f the proposed project i s to establish a decentralized beneficiary-driven land access mechanism that allows organized landless or poor farmers to acquire suitable agricultural lands and implement investment subprojects which enable beneficiaries to enter into a sustainable, higher-income, livelihood path, in so doing generating knowledge about land access and land-related productive investments which contributes to addressing the issues nationally (see Table 1, Project Logical Framework). Table 1. ProjectLogicalFramework Narrative Summary Key Performance Monitoring and Critical Assumptions Indicators Evaluation Sector-relatedCAS Goal: Establishment of Comparison of project Data from projectbaseline RuralPoverty Alleviation decentralized, beneficiary- participants with non- and periodic surveys driven land access participants using baseline compatible with other mechanism; 50% increase and at least two periodic national or regional in family incomes of surveys LSMS-typedata participating families, compared with control groups and pre-project levels Project Development Objective: 120 farms selected and Project impact evaluation Financial and social acquired by productive undertaken by MDRAMA sustainability of land and To establish a beneficiary- associations (PA) via new with baseline assessment productiveinvestments driven and decentralized mechanism and follow-up study of land access mechanism witWwithout project Adequate development of that allows organized Local level decision- populations focusing on implementation capacity landlessor poor farmers to making and monitoring (a) beneficiary selection by productiveassociations acquire suitable entities established and and targeting and (b) agricultural lands and hnctioning in 3 selected income and production Maintenance o f implement investment municipalities effects macroeconomic stability, subprojects which enables for land to reflect real them to enter onto a Monitoring system to Annual project reviews value and not be used as a sustainable, higher- assess the net economic and supervisionreports speculativeasset 4 income, livelihoodpath, in benefits I o f increasedI so doing generating agricultural production Timely and efficient flow knowledge about land established of funds to associations access and land-related productive investments which contributes to addressing the issues nationally. outputs: I Establishment of family 2,200 beneficiary families Local level entities report Effective targeting o f farms of lands purchased select, acquire and settle to PCU monitoring and project funding to poor by beneficiaryassociations their own farms reporting beneficiaries Implementation of eligible Number and types of Final independent Financial success and investmentson new farms infrastructure and evaluation commissioned viability ofsubprojects productive investment by MDRAMA Systematic evaluation subprojects (no targets or focusedexpansionoptions distributionset) 12. It is estimated that the proposed project would benefit 2,200 poor rural families, which represents roughly 20 percent o f the total number o f families nationwide which have existing requests for land allocations with the Government. Other programs are already planning to address a significant portion o f the remaining requests, but latent demand i s likely to continue to grow in the foreseeable future while the future availability o f public lands apt for agriculture remains unknown and contingent on the operation o f the saneamiento process and the allocation o f public forest areas. The proposed project will introduce an innovative mechanism whose basic concept and operational modalities have been shown to be effective in Brazil, Honduras and Mexico. In Bolivia it will be targeted to a part of the country where conditions are most conducive to success-the eastern lowlands, which i s host to large tracts o f productive but underutilized land and the existence o f many large parcels for sale by financial institutions and private owners. These conditions are not generalized throughout the country, however, and this project will not reach the poorest municipalities o f Bolivia which are found in the Andean region. Rather, the project targets a mostly indigenous beneficiary group o f extremely poor people in one o f Bolivia's most productive regions. Thus, the Government i s pursuing a land policy strategy o f multiple approaches to meet differentiated needs according to region and type o f land tenure. 13. There i s recognition within Government and civil society that resettlement programs on the remaining public lands will not be available soon enough or in sufficient quantity to satisfy all the varied and locally differentiated requirements for land access. Therefore, the proposed approach, which relies on direct beneficiary participation and decentralized decision-making, has the potential to deliver good quality land to certain segments o f the poor faster and at less cost thanthe existingtraditional mechanisms ofpublic landdistribution. Government will continue to rely on other mechanisms to address the needs o f those sectors not targeted by the project. 3. Project components 14. The project has three components. The first component consists o f the financing o f land purchases and potentially long-term leases inthe future through a line o f credit managed by the 5 Productive Development Bank and executed by local financial institutions. Productive Associations of project beneficiaries will be responsible for repayment of the land acquisition loans andthe acquired lands will serve as collateral (US$ 5.2 million approximately). The second component is for the provision of matching grants for infrastructure and productive investments on the acquired lands (US$ 8.5 million approximately). The third component covers project management, technical assistance, and monitoring and evaluation (US$ 2.0 million approximately). Government has requested that Bank funds be used for land acquisition under the first component. Under the Bank's new expenditure eligibility policy (OP/BP 6.0), approved by the Board inApril 2004, Bank Loan funds may be usedfor land acquisition. The ESSD/Legal Land Acquisition Committee established under the new policy has reviewed this project and endorsedthe project's proposal on January 6,2005. Table 2. SummaryProjectDescription IComponent ]Indicative 1 % of Total IBank- 1% of Bank- I Costs (US%M) financing financing 1. Land Acquisition 5.22 33.0 5.22 100.0 2. Productive Investments, 8.46 53.5 7.83 92.6 Technical Assistance 3. Project Management, M&E 1.95 12.3 1.95 100.0 Total Project Cost 15.63 100% 15.0 96% 4. Lessons learnedand reflectedin the project design. 15. The project concept and implementation modalities build on the positive and negative lessons learned from three similar projects in Brazil, Honduras, and Guatemala. A summary of these i s presentedinTable 3. Table 3. Lessons Learned Lessons learned Project design Beneficiaries should identify, negotiate for and Financing is made available to a Productive Association to acquire land themselves. Assumption o f a loan serves purchase land. The joint-liability loan is secured by a to (i)screen out uncommitted beneficiaries and (ii)mortgage on the farm. A local committee and the project force the group to make sound investment decisions. PCU evaluate the land price and investment plan. ~ Because land acquisition cannot be financed solely Each project has a matching grant component for from agricultural profits (so-called "fundamental productive investments and technical assistance. financing problem o f the poor"), infrastructure and Investment subprojects are carefully reviewed by a local productive investments need to be grant fmanced to committee and the project PCU to ensure their economic generate an income stream sufficient to pay for the viability. land (credit) and augment livelihoods. Grace period for loan repayment will be 2 or 3 years. Local level oversight o f beneficiary eligibility, A municipal level Council for Local Agrarian Development viability o f productive projects, and reasonablenessof with local government and civil society representatives will land price is the most important level o f supervision. review beneficiary eligibility, productive projects and land price and make recommendations on eachproposal. 6 Do not centralize and direct the land purchase fund. Land identification and negotiation is demand-driven and Makeit a demand-drivenmechanism. decentralized. To ensure beneficiaries have a powerful incentive to Productive Associations are offered a single "benefit bargain land prices down, keep land purchase and amount" to cover landacquisition(through a loan), TA and productive investments closely linked, and linked investments (grants). Thus, every dollar saved from land directly with technical assistance. Keep debt / equity acquisition results in (i)lower indebtedness and (ii)more ratios low (aim for at least 1:2) fhds for investments. Also, investment funds begin to disburse immediately uponsettlement. 5. Alternativesconsideredand reasons for rejection. 16. Alternative 1: Management of the program by INRA. Putting the project under the management of INRA, was rejected because o f its poor track-record with past settlement programs, the risk o f over-centralizing the process, and the risk o f adding more complexity to the institution's workload. Furthermore, while INRA has a mandate in land reform, it has no expertise insupporting farmers with commercial linkages and productive subprojects. 17. Alternative 2: Privatejnancing by banks. Involvement o f private bank financing (as i s the case in Honduras, for example) was actively sought by the project team because it would reduce moral hazard risks and potentially leverage a significant expansion o f the project scope. However, no private financial institution in the region was willing to participate, because providing long-term loans to low-income groups i s currently considered overly risky and unprofitable (high transaction costs). Thus, to address this systematic market failure, the proposed project will create a specific credit line for land acquisition purposes, with funds channeled through the Productive Development Bank and cooperating local financial institutions. 18. Alternative 3: Multiple regions. The team considered the option o f operating in both the eastern lowlands and one highlandregion. This alternative was also dropped, because launching an innovative and complex operation like this one will require initially substantial resources for implementation and monitoring, so restricting activities to one region increases chances o f success. Ifsuccessful, an expansion to other regions would be considered ina second phase. 19. Alternative 4: Make the project a component of a rural investment project. The alternative o f making the project a component o f a more varied rural investment program was also explored. This alternative was not chosen because the specificity o f land purchase and the planning o f productive investments and assistance call for a dedicated technical and administrative apparatus. C. IMPLEMENTATION 1. Partnershiparrangements. 20. The development of pro-poor initiatives requires involving the representatives of the poor at the outset and throughout implementation. Project preparation worked closely with the main federations o f rural workers and indigenous peoples in the project zone to publicize the project, 7 organize potential beneficiaries and seek feedback on project implementation. These includethe Confederacidn Sindical Unica de Trabajadores Campesinos de Bolivia (CSUTB), the Confederacidn Sindical de Colonizadores de Bolivia (CSCB), the Confederacidn de Pueblos Indigenas de Bolivia (CIDOB) and the Asociacidn de Pueblos Guarani (APG). Project preparation included municipal governments which agreed to participate in the Project through the Councils for Local Agrarian Development (CODAL). Local review of productive projects and checks on landprice andbeneficiary eligibility will beperformed by the CODAL, comprised of local government and representatives of the above-mentioned organizations, other civil society organizations and representatives of the PCU. 2. Institutionaland implementationarrangements. 21. Implementation Period. Five years, starting inJanuary, 2008, 22. Implementation Arrangements. The project is demand-driven. Beneficiaries will obtain information about the project from regional organizations and local governments, organize Beneficiary Associations (BA) of up to 30 eligible families, identify productive farmland and negotiate its purchase with the owner. The BA will submit a land acquisition proposal, along with a preliminary investment plan, to a Project Coordination Unit (PCU) established by the Ministry of RuralDevelopment, Agriculture and the Environment (MDRAMA), under the Vice- Ministry of Lands, inthe city of Santa Cruz. The PCU will review the proposal to ensure basic compliance with the project's guidelines and procedures (detailed in the Operational Manual), including a field visit to the farm and beneficiaries. The PCU will then submit the proposal to a local level decision-making body, the Council for Local Agrarian Development (CODAL), comprised of municipal officials and representatives of civil society in each participating municipality (Charagua, Mineros, and Pailon). This body will verify the eligibility and prioritizationcriteria (of beneficiaries, lands, and investment subprojects); review the legal status of the farm to be acquired; verify that the proposed price is consistent with local market conditions; and verify other technical, environmental and social project requirements(detailed in the Operational Manual). 23. Landacquisition will be financed through a fund created by MDRAMA and operated by the Productive Development Bank (Banco de Desarrollo Productivo, BDP), through one or more intermediary financial institutions (IFIs) operating in the project area. The IFIs will process the loan and enter into a mortgage loan agreement with the Beneficiary Association and then pay the seller of the farm. Repayments will be sent from the IF1back to BDP's fund. 24. Once the land acquisition proposal is approved, Beneficiary Associations will become eligible to receive funding, on a matching-grant basis, for infrastructure and productive investment subprojects and technical assistance to settle on the farm and improve its productivity. Detailed investment subproject plans will be reviewed by the PCU and the CODAL. Once approved, the Beneficiary Association will sign a subproject implementation agreement with the PCU. The first tranche of the agreed implementation workplan will then be disbursed by the PCU (on behalf of MDRAMA) for disbursement into the Beneficiary Association's account at an eligible IFI. 8 25. The existing Department Agrarian Commission (CAD) in Santa Cruz, composed o f the Prefecture, INRA, private sector, and peasant and indigenous groups, will have the responsibility for sharing information and coordinating project activities with other related programs in the project areas and for reviewing the project's annual workplan prepared by the PCU. 26. A targeted communications strategy will be implemented in the project areas, using various media, including informational meetings, simple language pamphlets, etc. to publicize the project's aims and implementation modalities to potential beneficiaries. These will be revisedto reflect actual experiences after the first year o f the project. External communications will also be addressed by MDRAMA inthe form o fproject reports. 27. The PCU will have overall project management and implementation responsibility. The PCU will manage the project's fiscal account to cover its operational costs. It will also authorize disbursements for matching grants into BA accounts, prepare the documentation for disbursement requests from the Special Account into the BDP fund (for the land acquisition credit fund), and prepare the required documentationfor MDRAMA's withdrawal applications to the Bank. 3. Monitoringand evaluationof outcomes/resultsand the landaccess question. 28. Responsibility for monitoring and evaluation will rest with the PCU which will create a unit dedicated to monitoring, evaluation and policy studies. Relevant instruments will include progress reports with process, results and outcome indicators, a combination o f ex ante and ex post monitoring, independent impact evaluations and user surveys. A longitudinal impact evaluation based on household surveys and a quasi-experimental design i s foreseen. Participation o f civil society organizations will be sought at all stages. A series o f studies aimed at understanding the nature o f the land access issues and models o f small-holder agricultural on a national level will be undertaken which will assist the project to improve its procedures. Monitoring and evaluation results will feed back into Project decision-making to improve performance, and will serve as the basis for discussions o f the Advisory Committees. 29. Specifically, the system on monitoring indicators will cover: (a) Project management, includingevaluation o f the efficiency o f service delivery and beneficiary satisfaction; (b) social and economic impact, by measuring changes in the following indicators o f beneficiary welfare, and market mobilization: (i)number o f poor beneficiaries receiving land; (ii)percentage o f female heads o f household among poor beneficiaries; (iii) impact o f land purchase on poverty reduction, interms o f increased household incomes, (iv) default rates on formal credit grantedto poor beneficiaries. 4. Sustainability. 30. The GOB i s fully committed to the proposed project, and explicitly requestedthe Bank to include the project in the Interim Strategy Note. The Cabinet has approved a Supreme Decree declaring the strategic importance o f the project and establishing its implementationmodalities. 9 3 1. The sustainability of the project hinges critically on establishing productive, financially viable productive subprojects on each piece of land to be purchased, keeping costs down, and ensuring repayment of loans. Project beneficiaries will work closely with pre-qualified technical assistance providers to choose productive activities which are agro-ecologically and economically viable and profitable inthe current marketcontext. The plans for these subprojects will be reviewed at the local level and by the project's PCU. Costs will be kept down by negotiating with financial intermediaries for the lowest cost possible of administration, giving beneficiaries incentives to negotiate the lowest possible land prices, and using appropriate technologies. Repayment of loans will be aided by incentives to beneficiaries and financial institutions for good repaymentperformance, and by innovative sanctions within groups for non- repayment. Studies carried out during project preparation demonstrate that productive subprojects can be identified which make sense in current market context and which are affordable under the financing parameterswhich the project can support inareas such as sesame, sugar cane, and livestock. 5, Critical risks and possible controversialaspects. a. Critical Risks 32. The project entails substantial risks, both for project success and for the reputation of the Bank. The risk of inaction, however, (e.g., "why did the Bank not do more to help the Government address land inequality?") i s also substantial, given the importance of land issues in Bolivia's overall poverty reduction efforts, ongoing social tension in the region, and the Bank's record o f assistance in this area. For these reasons the risks must be considered in light of the overall landissue inBolivia. 33. Risk that theproject fails to adequately address thefull set of land issues in Bolivia. Land issues in Bolivia have many dimensions. The project will address only one dimension of this complex issue, namely, access to land already in the private domain for the benefit of poor, mostly indigenous rural inhabitants inthe eastern lowlands. This is only one specific segment of the overall land problem. The lack of land tenure clarity and security is another major set of issues which are being addressed by the Instituto Nacional de Reforma Agraria (INRA). Land access through distribution of public lands was supposed to be a by-product of INRA's saneamiento process, but very few such lands have been identified. The land which have been identifiedinthis way to date are mostly remote and unsuitable for agricultural production. The Government is now beginning new efforts to streamline the saneamiento process and identify larger quantities of land which could be acquired by the state for distribution, based on the provisions of Law 3545, but these initiatives have not yet entered implementation. It has also pledged to redouble efforts involving existing public lands, but most of these are in forests and will require development of additional management plans to make them viable for distribution. The project thus occupies a specific, limited role within an overall menu of land policy interventions being undertaken by government to address the full set of land issues in the country. 34. Risk of encouraging land invasions. Land invasions in eastern Bolivia have essentially ceased since the MAS government took office. The expectation of a robust public land 10 distribution program provides a clear alternative to invasions. The project therefore, runs little risk o f encouraging invasions. The project will not carry out transactions on lands which have been invaded. 35. Risk that project beneficiaries will not be able to repay land acquisition loans. The risk o f non-repayment can be separated into an ex-ante problem o f adverse selection o f beneficiaries, and an ex-post problem o f moral hazard in repayment incentives. The first part o f the problem will be addressed through stringent eligibility screening and selection o f (i)beneficiaries, (ii) lands suitable for acquisition and (iii)investment subprojects. Consultations and background studies including a social assessment suggest that demand will be strong, even with these stringent criteria. This project is not directly aimed at the "poorest o f the poor," although secondary employment opportunities generated by this project may benefit them as well. Rather, the project i s focused on ''poor but potentially highly productive smallholder farmers" who are capable o f greatly increasing their productivity with the kind o f access to resources and technology provided by the project. Eligibility rules will screen out participants who have unpaid loans elsewhere. Rules will require a demonstration o f a viable, productive project with sufficient projected cash flow to pay for the land debt and generate additional household income. These projects will be presented by organized groups o f producers and reviewed by both a local committee and the project PCU. To address the ex-post issues (moral hazard), the project will invest heavily intechnical assistance accompanying beneficiary groups (for at least 2 years). The terms o f the loan itself and the inclusion o f a grant scheme to make productive investments also will aid repayment. The credits will be administered as commercial operations (avoiding the association o f government credit schemes with non-repayment), and other borrowing by beneficiaries will depend on good repayment records. Furthermore, as commercial farming in Santa Cruz demands establishment o f commercial relationships, beneficiaries will find it unwise not to pay their mortgages for fear o f loss o f some o f these commercial relations. Finally, peer pressure from joint liability within groups will spur repayment. While nothing can prevent the risks o f exogenous shocks such as persistent climactic problems or natural disasters, these are sectoral risks which are not unique to the project and which underscore the need to create initial conditions with favorable debt to equity ratios. 36. Risk ofpoliticization of theproject and risk ofproject favoring the wealthy. There is also a risk o f operational paralysis due to politicization o f decision makingprocess, either at the local or Department level, or corruption o f the project mechanismsto favor the politically connected, the wealthy or the powerful inthe local context. While this risk is real inthe highly politicized local context, the project is designed to prevent it from happening. The project will have its own legal status and budget and be operated by a semi-autonomous PCU. The land purchase funds will be passed through a trust fund arrangement with an autonomous second-tier financial agency. Beneficiaries themselves will initiate project proposals and, therefore, the risk o f overt politicization o f the project at the local level i s minimized. Mutual monitoring by different sets o f stakeholders will be used to create transparency and accountability. This will be provided at three different levels o f checks and balances, 1) by a local committee o f representatives o f civil society and municipal officials which will vet each proposed project for eligibility, land price reasonableness and the feasibility o f the productive project; 2) The PCU will review all proposed projects recommended by the local commission, to ensure consistency with project's criteria and procedures; 3) A department level agrarian commission (with 50% Government and 50% civil society representation) will review the whole process. 11 37. Risk that demand is too little or too great. There is also a risk that limited effective demand may yield too few results inthe short-term, thus reducing the potential political benefits of the project. This risk i s real; the project concept and implementing unit are new, and the beneficiary population is large but relatively unorganized. Close monitoring should identify bottlenecks early on and make amendments to Operational Manual quickly. Credibility early on i s critical. Project preparation has already identified nearly thirty groups which intendto present proposals, however, so there is confidence that from this universe of initial demand good initial projects canbe developed. 38. Conversely, there is also a risk that successful results may in the medium term lead to massive demand from various regions, thus exerting unsustainable fiscal pressures to replicate the project elsewhere. This is the kind of risk which Brazil has faced and it resulted in an expanded program. But, Bolivia's (and the Bank's support) financial options are more limited than Brazil's, so if results are encouraging, increased support from other donors will be needed. There are strong indications that other donors, particularly bi-laterals would welcome the opportunity to partner with a successful project. 39. Bank's reputation riskfor involvement in the land sector. There is also a risk that by the very involvement of the Bank inthe land sector, the Bank's reputation could be damaged if the sector becomes conflictive because of aggressive public land acquisition, politicization of the land question within the regional issue, changes inthe underlying property law framework inthe Constitutional Assembly or localized actions. This risk is mitigated by the nature of the project which will not work with properties which are not held in clean, private title and the project will not engage in activities related to public acquisitions (reversion or expropriation). The Development Credit Agreement will specify, as in many Bank operations, that the policy environment for carrying out the project must be satisfactory to the Bank and that disbursements may be halted ifthe policy environment is unsatisfactory. 40. Risk that Financial Management Arrangements don 't work well. Given the past history of poorly performing projects in Bolivia, combined with the fact that under this project innovative financial mechanisms are being introduced, the project is exposed to the possibility that certain financial transactions (particularly those related to community subprojects) may be manipulated. Therefore, particular attention will be paid to initial financial audits and overall financial supervision. 41. Giventhese potential issues, the risksmust be consideredsubstantial (Risk Rating- S). b. Controversial Aspects: 42. Attack by proponents of traditional land reform. A project of this nature, inevitably will have some critics, particularly on ideological grounds, and indeed there i s a global critique of land purchaseprograms by proponents of traditional approaches. To mitigate this, during project preparation the key factor is a participatory, transparent approach which clarifies the potential benefits and builds constituencies for the project inrural areas which the team has been working on. Consultations will continue to be held with the widest possible range of rural stakeholders including various local rural workers and indigenous organizations, which have expressed great 12 interest and support. Once implementation begins, the beneficiaries and results on the ground will be the greatest defense against ideological attacks. 43. Heightened regional animosity. Another aspect o f the project's political and reputational risks concerns the current climate of increased polarization between eastern ("camba") and western ("colla") political and land-right claims. The project has a clear regional concentration inthe east where there is both a high demand for agricultural land and a large potential supply. Given this concentration, some groups may oppose it strictly due to regional animosities, independent o f its poverty-reduction, or indigenous-concentrationmerits. Extremist groups may claim the Bank i s supporting the less-poor indigenous groups in the Eastern part o f the country. This argument has some merit. But, other Bank programs are supporting Western poor indigenous groups. The project i s not intended for or viable among the poorest o f the poor in Western regions o f the country, but rather to address pressing needs which are solvable through this type o f project in the East and demonstrate a viable model which could be subsequently replicated elsewhere. 6. Credit conditions and covenants: 44. The BDP Administration Agreement will have to be signed for the project to become effective. The only covenant associated with the project i s that the accounting and financial management arrangements be established and found satisfactory to the Bank by date o f effectiveness. D. APPRAISAL SUMMARY 1. Economic and financial analyses. 45. Because the project i s demand-driven, it is not known ex-ante which specific investment subprojects will be financed, and thus a precise economic and financial analysis for the project as a whole cannot be made. The estimated economic returns and financial flows are based on stylized investment sub-projects for each o f the proposed municipalities. These illustrative farm models all show positive Net Present Values, positive cash flows over the repayment horizons, and Internal Rates o f Return (IRRs) o f between o f 12 percent and 25 percent. With plausible assumptions about the number and distribution o f these stylized models by municipality, this gives an aggregate NPV o f all investment subprojects o f $17.65 million and an IRR o f 16% (see Annex 9 for details). 46. The Supreme Decree for the project establishes a floor for the interest rate charged to beneficiaries (not less than the cost to Government from assuming the Bank credit). With an interest rate to the beneficiaries o f 8%, a repayment horizon o f 15 years, a grace period o f 3 years, administrative costs o f 5.5% (to establish a guarantee fund, and cover BDP and the financial intermediary costs), and a repayment rate o f 85%, it i s estimated that the revolving Line o f Credit created at BDP would gradually grow to a maximum o f $3.9 million over a thirty-year period, after which it would gradually decline. This projection could change (negatively) if repayment rates are lower than 85% or (positively) if they are higher and additional funds are deposited inthe fund. 13 47. The project's land purchase fund is a targeted, directed line o f credit which i s partly subsidized by the government. In the project context a directed credit o f this type i s justified because it substitutes for a missing market in long-term financing for poor rural inhabitants. If viable, the project intends to gradually lead the way for private financial institutions to enter this market. The line o f credit has no effects of crowding out private financing because this is precisely a market into which private finance i s currently reluctant to enter. With loan rates to be set in accordance with the rate of the Bank-financed credit plus administrative costs and provision for a guarantee fund, the line o f credit i s subsidized by the Bolivian government to the extent that no additional risk premium i s being charged. Inother words, a subsidy equivalent to the risk premia which would be charged by a private financial institution is being made. Local financial service providers will be chosen based on their track record and their ability to provide services inthe project area. Bolivia has a good recent record of encouraging a culture o f credit re-payment and Bolivian law on mortgage foreclosure is quite strict. There are clear rules o f the game explained inthe Manual of Operations for the approval o f beneficiary organizations, each o f which must be a registered, legal entity. Inthis regard, the project complies with the Bank's Operational Policy 8.30 which sets out guidelines for lines o f credit (see Annex 4 and Addendum to Annex 4). 48. The project i s not expected to have a significant fiscal impact, either at the national or municipal level. With the new country financing parameters for Bolivia (approved in August, 2004), virtually all expenditures will be 100% financed by the Bank loan, with a negligible impact on counterpart funding requirements. Since all project beneficiaries are considered "small," under current Bolivian legislation, they are exempt from landtaxes. 49. The Supreme Decree for the project requires that participating municipalities contribute at least 20% o f the total cost o f beneficiary investment sub-projects, primarily through infrastructure investments. 2. Technical. 50. The project features a simple design which is based on lessons learned, positive and negative, from experience elsewhere inthe region (Brazil, Honduras and Guatemala). Important lessons incorporated into the technical design include: 0 emphasis on small groups o f beneficiaries; 0 simple, locally-basedprocedures for sub-project approvals to encourage the sustainability o f investments; 0 local decision-making to increase the transparency and ownership o f the project while discouraging free-riding; tying o fthe amount o fthe loan for landacquisition to the amount o fmatching grants for investment purposes; direct control o f resources to build ownership and empower beneficiaries 5 1. These principles have been incorporated into the Operational Manual. 14 3. Fiduciary a. Procurement issues: 52. An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by the Bank on March 11,2005 and updated on April 19, 2007. Although, most o f the issues and risks identified during the initial procurement capacity assessment have been taken care of, during the update o f the evaluation a set o f key issues and risks concerning procurement for implementation o f the project remain to be fully addressed during implementation: (i) the large number o f expected subprojects, there i s the given risk that the PCU would not be able to ensure that the procurement done under the subprojects would be done in a transparent way; (ii) lack o f land tenure clarity and security would impair the purchase o f land; and (iii) PCU's lack o f experience on procurement processes under Bank's the norms and procedures. An Action Plan was agreed to address these issues, mitigate the risks and to improve the implementation capacity o f the Agency. b. Financial management issues: 53. A financial management assessmentwas originally performed inMarch, 2005. Inview of the changes that took place in government administration and other recently adopted policies, and legislation, the project implementation arrangements had to be updated; and therefore, an update o f the financial management assessment was performed in March, 2007. The updated assessment was performed in accordance with OP/BP 10.02 and the Manual "Financial Management Practices in World Bank - Financed Investment Operations". It included both the on-going situation of the PCU established within the Viceministry o f Land o f the Ministry o f Rural Development, Agriculture and Environment (MDRAMA) and the new conditions for the operation o f the land acquisition component, under the recently-created Productive Development Bank(here inafter BDP). 54. Project complexity, innovation and associated risks call for a very robust and adequate financial management system, able to provide the Bank, the Borrower and other interested stakeholders, with accurate and timely information regarding project resources, expenditures and activities. 55. Both inherent risk and control risk have been rated as high.Downgrading the control risk to modest will be possible if the adequacy o f proposed financial management arrangements, especially related to disbursement mechanisms, can be tested and strengthened through the Project Preparation Facility (PPF) pilot activities and if the PCU staff develop the required expertise to support project implementation. Other key issues to be evaluated under the PPF i s the proper and efficient operation o f the CODALs that will play a key role in the approval process, and the adequacy o f the disbursement mechanisms under different project components to timely propose any required adjustment. 56. Inrelation to BDP's involvement, from the financial management perspective the current conditions can be considered acceptable, as BDP has inherited from NAFIBO the expertise and 15 the financial technology in terms o f internal regulations, structure and procedures to operate the financial intermediation function. However, those conditions can not be really isolated from the whole legal, institutional and even political context, in which the BDP will have to operate in. Under such conditions, it will be critical that a subsidiary Administration Agreement be entered into between MDRAMA and BDP, and be submitted to the Bank before effectiveness for the Bank's review from the legal, institutional and operational perspective. Additionally, as NAFIBO completes its full juridical conversion to BDP, the signature of the agreement should be included as an effectiveness condition. Further to the compliance with such requirement, project team will have to closely oversee BDP's performance interms o f project implementation, both under the PPF and during project implementation, to timely identify any adverse situation that may prevent BDP from complying with the conditions and responsibilities set in Administration Agreement. 57. On the basis o f the progress reached so far and subject to the successful completion o fthe actions described above, that will be respectively followed up to negotiations, board presentation and project effectiveness, the financial management arrangements can be considered acceptable to the Bank, as long as they can be supported by the adequate legal framework. Finally, it i s extremely important to note that monitoring and supervision of the operation of these arrangements will be essential to guaranteethe adequacy o f the internal management system. 4. Social 58. A detailed social and cultural assessment (including a thorough consultationprocess) was carried out by the borrower as part o f project preparation (see Annexes 11and 12 for a summary o f this assessment andtable o f consultations). a. Benefits and Target Population: The Project will increase the quality o f life o f the families livingon the properties targeted by the decentralized formalization component. This will cover around 2,200 families. Beneficiaries will be mostly poor and very poor and approximately 75% will be indigenous. They are located indistricts where poverty indicators, as measured by the lack o f "basic services" (access to potable water, education and health) are bad, although they are not the very worst in Bolivia. Because the bulk o f potential beneficiaries are Indigenous Peoples, the project itself has been designed in compliance with O D 4.20 (Indigenous Peoples) and stands instead o f a separate IPDP. b. Key social issues relevant to the Project obiectives. and Proiect's social development outcomes. The project directly addresses the social issues o f landlessness and poverty in the region, as well as the exclusion from economic opportunity o f many indigenous peoples. The project aims to provide land access and services to groups in situ or near to the beneficiaries current location o f residence. In indigenous communities, the project aims to orient productive investmentsinsuch a way that the community at large derives substantial benefits. 5. Environment 59. In accordance with the Bank's Environmental Assessment Policy (OP 4.01) and this project's Category B classification, an Environmental Assessment (EA) report has been drafted 16 by the Borrower, with copies sent to the Infoshop in Washington and publicly available in the offices of the Ministry o f Sustainable Development in La Paz, Bolivia. The key environmental requirementsoutlined inthe EA report are reflected inthe Project's Operational Manual. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management(OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [I [X 1 Involuntary Resettlement (OP/BP 4.12) [XI [X 1 [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I Forests (OP/BP 4.36) [XI [I Safety of Dams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP/GP 7.60) [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI 7. Policy Exceptions and Readiness 60. The project complies with all applicable Bank policies, and no exceptions are sought. The Environmental Analysis and Social Assessment were disclosed in the country on April 6, 2005, and are available at IDA'SInfoshop. The Project will apply the new OP/BP 6.0 and the Bolivia Country Financing Parameters approvedon August 18,2004. 61. Readiness: A set of Supreme Decrees related to the project, establishing its implementation modalities will be piloted in three municipalities has been approved by Cabinet and signed into law. An agreement with BDP for establishing the Line of Credit has been reached. An Operational Manual is ready and agreed with the Bank. Local development councils to review proposalshave been established ineach of the three municipalities. 17 Annex 1: Country and Sector or ProgramBackground Bolivia:Landfor AgriculturalDevelopmentProject. Current Situation The administration o f President Evo Morales, elected inDecember 2005 with a clear majority o f votes and representing groups that have been excluded for centuries allied under the Movimiento a1 Socialismo, (Movement to Socialism, MAS), provides Bolivia with a mandate to build a more inclusive society. The new government faces numerous, serious development challenges. The history o f ethnic exclusion and control by a small elite has left Bolivia with a deeply fractured society afflicted by one o f the highest levels o f poverty and inequality in Latin America. Despite some improvements, social indicators inhealth, education, and access to basic services likewater and sanitation continue to be low. Private investment and economic growth picked up in the 1 9 9 0 ~but have fallen again as a result o f the socio-political unrest o f the last few years and the ~ current uncertain outlook pending the definition o f the new government's approach in key sectors. Although poverty inBolivia transcends rural-urban divides, it remains particularly severe inrural In2002 about 84 percent o frural inhabitants (2.7 million) were income-poor and 67 percent (1.8 million) lived in extreme poverty. These groups have benefited little from the exploitation o f natural resources inthe past (silver, tin, oil and natural gas). Furthermore, the implementation o f the 1996 agrarian reform law has not livedup to expectations for addressing inequality inaccess to land and keeping the issue among the priorities for policy attention. Land distribution and access to productive resources are viewed as playing a key role to play in addressing inequality in Bolivia's still largely rural economy. The issue is an important plank in the program of the MAS government. InOctober 2006 Congress passed a law modifying the 1996 agrarian reform law in an effort to streamline its execution and facilitate a public acquisition process o f underutilized land (the Ley de Reconduccion Comunitaria de la Reforma Agraria). The Land for Agricultural Development project i s a complementary effort to the mechanisms established by the agrarian reform law which will provide access to land through market transactions. Similarly, Government is launching a pilot mechanism (through the Bank-supported Rural Alliances Project) to support market opportunities to small indigenous and peasant producers. On the social side, one o f the priorities o f the MAS government's program i s to respond to impatience with the levels of inequality, which manifests particularly with respect to land distribution. The income distribution inBolivia i s severely skewed to the left (the distance o f the poor from the poverty line i s among the highest inthe region), particularly inrural areas, making it more difficult for growth to bring about immediate significant declines inpoverty. Moreover, income inequality increased over the 1990s and growth translated into even less poverty reduction than distribution-neutral growth. In a poor country like Bolivia, actions are needed to both sustain high levels o f economic growth and to aid the poor to benefit disproportionately from it. Indigenous groups feel that they have received little from the exploitation o f natural resources inthe past, either interms o f land, timber or minerals. General discontent has also fed by lack o f progress in income-related measures o f poverty. There has been progress in social 18 indicators, but it has been uneven and has not been perceived by disaffected groups as enough. This, combinedwith a low per capita GDP, contributes to the highpoverty levels ofthe country. Poverty and Land Access Poverty in Bolivia i s mostly rural, and rural incomes are mostly land based. Land-based agricultural development has a direct role inpoverty reduction inthis context. Though significant progress has been made over the last 20 years, high levels o f poverty and social exclusion remain. Rural poverty in Bolivia i s attributable to economic development patterns and patterns o f asset distribution that have excluded widely-dispersed groups. There are approximately 660,000 agricultural units in Bolivia, 87 percent o f which are small agricultural units supporting 2.7 million persons. These units occupy only 14 percent o f the arable land area, which i s indicative o f the magnitude o f smallholdings. Thirty-seven percent o f the small farmers are situated on the high plateau and occupy 6 percent o f the arable land area; 46 percent are located in the valleys and occupy 17 percent of the area; 17 percent are situated in the lowlands, occupying 77 percent o f the arable land. Studies have indicated that more than 85 percent o f rural household income i s generated by agricultural production, although this level i s probably underestimated owing to the seasonal nature o f remunerated activities o f the rural population. More than 80 percent o f the population i s engaged in farming, ranching, and in some cases, hunting and fishing. In 1999, monetary income o f rural households was less than US$280 per person per year. A significant share o f rural household income i s derived from the sale o f agricultural products, and another substantial share i s accounted for by the value o f home consumption, remunerated work, and, last, transfer income from the State, nongovernmental agencies, and other households. Many indigenous people, especially inthe lowlands, are living at a subsistence level, dependent on the production o f few basic commodities which provide their basic diet and which are augmented through hunting, fishing, and gathering activities. For these reasons, Bolivia's Poverty Reduction Strategy Paper (BPRSP) and the WB Interim Strategy Note recommend reorienting some public expenditure toward high-visibility programs that respond to underlying factors that led to social conflict, especially in sensitive geographical areas. Extreme poverty levels are highest in rural municipalities o f the high plateau [altiplano], particularly in the regions o f Northern Potosi, Chuquisaca, and L a Paz. Poverty levels are somewhat lower but still acute in the municipalities o f Bolivia's Eastern, Chaco, and Southern regions. These areas are highly unequal in terms of landholding and income. The lowlands in the east are occupied by ethnic groups which migrated to the lowlands as part o fthe colonization programs o f the 1960s and 1970s and their subsequent generations, by original indigenous peoples, such as the Guarani people, the Chiquitanos, the Moxeiios, and others dispersed all across Amazonia and Chaco. These populations are poorly integrated with infrastructure and access to markets and are characterized by high levels o f extreme poverty. That land i s a binding constraint for many households in the area i s clear from the rate o f illegal occupation o f forest and protected areas for small-scale agriculture. The area is also inhabited by a class o f ranchers and agro-industrialists who control a disproportionate quantity o f land resources. Agricultural income i s largely dependent on production conditions and the market value o f the products. In general, Bolivia has a severe problem o f low yields and productivity, in addition to landlessness and land scarcity for low-wealth households. Low yields are explained primarily by 19 the insufficient production infrastructure, low quality seeds and inputs, limited investment, and low productivity levels associated with an unskilled labor force. There has been no substantial increase in the yield indices for principal agricultural commodities in recent years. The small farming economy characterizing most rural areas has weak links with modernization, technological change, and profit distribution. The scant economic infrastructure is an obstacle to rapid change on the part of dispersed populations and makes larger scale investment unprofitable. Agrarian Reformand the Needfor ComplementaryMechanismsof LandAccess. Access to agricultural land is a long-standing historical problem in Bolivia. It was first addressed in 1953 with the country's widely-known Agrarian Reform. But the problems addressed by the reform have resurfaced as Bolivia's large rural sector has returned to a highly unequal distribution of land resources. Bolivia is a huge country, but areas of good arable land are limited. O f Bolivia's total of 110 million hectares, about half covered with forests and one third is semi-desert or arid. About 8 million hectares can be classified as potentially productive for agriculture includingpastures, but only about 2.2 million hectares of this area ever beenusedfor crop production. Inmost years the average area under cultivationis about 1.4 million hectares. The Bolivian Agrarian Reform Act of 1953 mostly affected properties in the altiplano and valleys. In Bolivia, against the background of serious social and political upheaval, an Agrarian Reform Act was passed in 1953 to be applied in the Andean areas which i s where most of the large latifundia estates were found and which has the most dense peasant population. As a result of this agrarian reform, the large estates were practically abolished and the lands broken up and distributed among the peasants and their communities. This agrarian reform distributed land massively in the Altiplano and highlands (about 600,000 farms covering some 25 to 30 million ha). Colonization programs over last five decades (but concentrated during 1958-1985) distributed between3 million and 5 million hectares of land innorthern Santa Cruz, the Chapare region of Cochabambaand the Alto Beni region to colonizers, most of which originated inhighland areas. Today, there are about 500,000 people inthese colonization areas. Some of these households are relatively well off, while others are very poor. Not all households wanting landreceived it. Inspite of the successes of the Agrarian Reform of 1953 and the colonization programs of the 1960s and 1 9 7 0 ~land concentration, and the lack of access to land for new generations of the ~ landless, returned in the eastern part o f the country during the 1960s-1990s. A new version of the large landholding systeminthe easternpart of the country came into place duringthe 1960s- 1990s. During this period the country's military dictatorships made large grants of lands, principally inthe eastern lowlands (Santa Cruz, Beni, Pando) as rewards for political loyalty and support. These land grants total around 30 million hectares. They have provided the land base for the expansion of the cattle sector to 5-6 million heads, and the booms in soy, wheat, sugar cane and rice in the Santa Cruz area, making it the richest area of Bolivia, but also the most unequal. The process of reconcentration provoked increasing popular outrage. Discontent with the land holding issues reached a crest in 1993-1994, and popular pressure forced the 20 governments to take a new approachto solving the landquestion. This process culminated inthe INRA Act (Law 1715). The INRA Act (Law 1715) came into force inOctober of 1996, and was designed to both solve the problems of insecure and unclear ownership of land, and to identify underutilized land for redistribution and transfer it to those eligible to be beneficiaries o f the Agrarian Reform. The National Agrarian Reform Institute(INRA) i s incharge of this process, and has made significant advances in the stage of land regularization in a limited number of areas in the country. As of early 2005 13% of the country had been fully regularized, while another 35% i s in process. Nevertheless, the regularization (saneamiento) process has advanced more systematically than the redistribution process which was originally intended to accompany mapping and regularization. The distribution process for indigenous lands (called TCOs for Tierras Comunitarias de Origen) has been the most far-reaching of the distribution efforts under Law 1715 to date with approximately 6 million hectares distributed, but much of this land is destined for forest reserve or is unproductive, and it cannot be sold or mortgaged. The law on the Community Reconduction of the Agrarian Reform of October 2006 is represents an attempt to address the implementation weaknesses ofthe 1996 law. Bolivia continues to face two main issues of land-related inequality. The first is the huge inter- regional difference betweenthe highland, western parts of the country and the lowland, eastern parts. According to the 1987 agricultural census about 22 percent of the rural population lives in the western highlands, with 14 percent of country's agricultural landholdings by area (1.6 million hectares). The western valleys are home to 60 percent of the landholders in the country but amount to only 10 percent of the agricultural land (1.1 million hectares). Incontrast, the eastern lowlands contain only 18 percent of landholders but account for 75 percent of the land used for production (8.5 million hectares). There is little more that can be done about these disparities in the short run, because the only solution is massive inter-regional migrationor further urbanlabor absorption. This west-to-east migration has already been happening for five decades, but is constrained ecologically by undeveloped forest land in the east, and economically by the difficulty that poor, landless households have in buying or renting land from existing large landowners, The second issue is intra-regional inequity in land distribution. In selected regions-chiefly in northern Santa Cruz, east of Rio Grande, along the Santa Cruz-Chapare corridor, and Southern Chaco regions--there are impoverished rural populations of recent migrants in northern Santa Cruz or enclave Guarani and Chiquitano groups inthe Chaco which live in areas where there i s plenty of underutilized land owned by large landowners. For example, there are over 108,000 hectares of agricultural land inforeclosure and awaiting sale by banks in Santa Cruz. Given the paucity of information it i s difficult to estimate the number of landless and near landless people living in the area. Data from the National Statistical Service, however, on population and poverty sheds some light on the potential magnitude of the issue. The projection of economically active population inthe rural parts o f the department of Santa Cruz betweenthe ages of 20 and 49 is estimated at 105,000 persons. Poverty figures for the department indicate that 38 percent of the population is below the poverty line. Therefore, it can safely be argued that at least 38 percent of the rural economically active population is poor, which would suggest a poor rural, economically active population of about 40,000 inthe department. Assuming that 21 each o f these i s a head o f households and that households contain 5 members, an estimated 8,000 rural households in the department could be considered poor. In a project designed to benefit 2,200 households, the relationship between the size o f the universe of potential beneficiaries and the potential beneficiary pool is quite highfor a pilot project ofthis nature. Inother words, local over-demand i s unlikely as long as the eligibility criteria are rigorously applied. Inthis way the project seeks to address the second problem of intra-regional inequalities and will likely benefit more than a quarter o f the poor rural households inthe department. If successfulthe roject can be expected to be expandedto other regions o f the country. Research done on agricultural landmarketsinthe area suggests that they are active and fluid, but highly segmented. Large landowners buy and sell among themselves. Information flows to poorer households about land are weak and landtaxes are poorly collected and enforced. Poorer households depend upon salaried labor or acquire land at the margins o f the law by encroaching into forest reserve areas. The significant number o f bank foreclosures, however, the wake o f over-expansion i s soy and other crops by large landholders, has resulted ina significant quantity o f good agricultural land becoming available to the market. This situation therefore represents a case for state intervention in the land market where a large group o f potential buyers (the landless and near landless) lack liquidity and technological know-how to acquire and operate lands which are falling out of production by their current owners. Supply and demand are strong butthe liquidity constraint is preventing mutually desirable transactions from occurring. Inother words, the market failure which the Project will address i s that latent demand for land cannot be converted into effective demand due to limited access to long-term financing by poor farmers. These considerations raise the question o f the affordability o f land values. As expected, land values in the region are closely correlated with the productive potential o f land, which i s itself largely a product o f rainfall and soil moisture, whether the land is free o f trees, and geographic location. This results in a striking dispersion in land values. In Mineros, the so-call Integrated Zone-land costs between $500 and $2000 per hectare for cleared landbecause of the access to water, the possibility to obtain two harvests per year, and the proximity to processors including sugar refineries. In Pailon, on the other hand, where land receives less rainfall, land values are about half the level o f Mineros ($350-$550 per hectare). In Charagua, which i s the dry Chaco forest ecosystem and i s remote from Santa Cruz land sales values are astonishingly low, costing from $10 to $50 per hectare. Because o f their aridity, the lands in Charagua require several hectares per head o f cattle. At these price levels productive projects can yield sufficient cash flow to both pay for land purchase on credit and generate a surplus o f the operator, provided that the poor family has sufficient infrastructure and knowledge. At these price levels the regional impact on poverty reduction can be significant (see Annex 9). If successful the approach piloted by the project could be replicatedinother regions. 22 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies BOLIVIA: Landfor AgriculturalDevelopmentProject. Project Name Financier Amount IPiDO Closingdate Sector Issue Ratings Participatory WB Closed Decentralization-Municipal Rural - 1 support Investment I Participatory I WB I US$77.3 I s 2006 Decentralization-Municipal Rural mill. support Investment I1 Indigenous WE3 US$4mill S 2005 Productivesupportto indigenous People groups Development Project Decentralized WE3 US$38,8 S 2007 Supportto productive Infrastructure mill. infrastructure, particularlyenergy for and communications Transformation Project NationalLand I WE3 US28 mill. IS 2005 Support to landregularization Administration I II I Project Rural BID 16 mill 2009 Support to rural enterprises Productive IICOSUDE- II I Support OECAS Make markets DFID 0.35 mill 2006 Pilot on rural alliances workforthe I I I poor PADER: I COSUDE- 10.25 2006 Promotepublic-privatealliances for Promotion for MACA milVyear localeconomic development Rural Economic Development Support to the Dutch 3 to 4 To be initiated Supportto all membersofthis quinoa Goverment million. in2005 for 4 productivechainto enhance productive years productionand markets chain 23 Annex 3: ResultsFrameworkandMonitoring BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject. ResultsFramework :s Framework Narrative Summary Key Performance Monitoring and Critical Assumptions Indicators Evaluation 50% increase infamily Comparisonof project Data from projectbaseline RuralPoverty Alleviation incomesofparticipating participants with non- andperiodic surveys families, comparedwith participants usingbaseline compatible with other controlgroups andpre- and at least two periodic national or regional projectlevels surveys LSMS-typedata Objective: 120farms selectedand Project impact evaluation Financialand social acquiredby productive undertakenby MDRAMA sustainability of landand To establisha beneficiary- associations(PA) via new with baselineassessment productiveinvestments driven and decentralized mechanism and follow-upstudy of landdistribution witWwithout project Adequate developmentof mechanismthat allows Local leveldecision- populationsfocusing on implementationcapacity organizedlandlessor poor makingandmonitoring (a) beneficiaryselection by productiveassociations farmersto acquiresuitable entities establishedand andtargeting and(b) agricultural landsand functioning in3 selected income andproduction Maintenanceof implementinvestment municipalities effects macroeconomic stability, subprojectswhich puts for landto reflect real themona sustainable, Monitoringsystemto Annual project reviews value andnot be usedas a higher-income,livelihood assess the net economic and supervisionreports speculativeasset path. benefitsof increased agriculturalproduction Timely andefficient flow established o f funds to associations outputs: Establishmentof family 2,200 beneficiaryfamilies Local levelentities report Effectivetargeting of farms of lands purchased select, acquireandsettle to PCU monitoringand project funding to poor by beneficiaryassociations their own farms reporting beneficiaries Implementationof eligible Numberandtypes of Finalindependent Financialsuccessand investmentson new farms infrastructureand evaluationcommissioned viability ofsubprojects productiveinvestment by MDRAMA Systematicevaluation subprojects(no targets or distribution set) 24 T- t i v) Ke p. 3 e CI 0 D v 5 t 3 m m I Ip I 3 0 I- 5 t D 8 > > m 0 5 t =: 3 m 0 > I o 3 3 C B B B B B Annex 4: DetailedProjectDescription BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject. The project has three, inter-woven components o f land purchase, community investment, and project administrationand monitoring. The three components are intendedto operate simultaneously to accomplish the project's objectives. These components are based on simple, "rules of the game" which provide incentives for beneficiaries to negotiate the bestprice possible for land purchase, to make sound investments and to be able to re-pay the landpurchase loans in a timely manner while improving household incomes. Inthe land acquisition and productive project, the beneficiary association is the leading actor which proposes, negotiates and finances the subproject with project assistance. For each beneficiary association, a maximum financing amount per family i s established in the Manual o f Operations. Up to certain limits, this maximum amount can be divided between landpurchase expendituresand productive investment expenditure. Inthis way, the lower the land price negotiated, the more funds are available to the beneficiary association for investments. The basic financing parameters established in the project design are depicted inthe following table: Table 1. BasicFinancingParameters Parameter Maximum overall financing available per family (for land acquisition and productive investmentcombined) Maximum percentage o f overall amount 60% permissible for landacquisition Maximum amount o f productive investment 10% financing for Technical Assistance I Minimumbeneficiary contribution inthe 20% value of productive investment subproject Land acquisition loan target interest rate to 6-8% beneficiaries I Maximum loan renavment Deriod I 15 vears I Loan repayment grace period 3 years 27 Component1. LandAcquisitionComponent(US$5.22 million) The central component o f the project is the financing o f land purchase by associations o f families o f low-income rural workers. This financing will be made inthe form o f long- term (15 year) loans to associations through a rotating fund established by the project. About 41 percent o f the project financing will go to this component. The fund will make loans to legally-constituted associations constitutedby 5-35 families per association. The loans will be made in the name o f the association and a mortgage on the land will serve as collateral. The specific parcel o f land to be bought will be a decision of the association, which will negotiate for it directly with the owner and the specific amount to be financed will correspond to the negotiated price. The association will be jointly responsible for the payment o f the loan. The loan will be administered by financial institutions with presence in the rural area as part o f a Land Fund established by the project and administered as a Trust Fund by NAFIBO S.A.M./BDP, government's second-tier financial institution. 2. ProductiveInvestmentsComponent(US$8.46 million) The second component o f the project is support for productive investmentson the land to generate an income stream sufficient for payment o f the land and improvement o f living standards. The component will finance production investment plans for projects such as sesame and garbanzo under small-scale irrigation (Pailon), sugar cane (Minero), soy beans (Pailon, Minero), and cattle (Charagua, Bajo koso). The component will finance these investments on a non-reimbursable basis, with a minimumo f twenty percent of the cost o f the investment sub-project provided by the association. The maximum amount per family to be financed will be less than $3,600. The component will operate on the basis o f authorized purchases o f goods and services which correspond directly to the investment plan prepared by the association with the project technicians and approved by both the CODAL and the PCU o fthe project. 3. ProjectManagement,MonitoringandEvaluationComponent((US$1.95 million) This component will carry out the coordination, administrationand financial management o f the project. It will be based in a project office established in Santa Cruz, with a staff o f technical personnel, and financial managers. It will also be responsible for project monitoring and evaluation. The following diagram presents the structure o f the PCU, 28 with the beneficiary groups located at the top o f the chart to emphasize their role in initiating and requesting project support. Given the severe fiscal constraints that Government faces in the near future, it will actively seek additional sources o f support for the project once the concept i s demonstrated to be viable. Table 1. SummaryProject Description lcomponent /Indicative 1% of Total 1% of Bank- ICosts (US%M)I lfinancing 1. Landpurchase 15.22 140 1100 2. Productive investments 8.46 53 89 4. Project Management, 1.95 7 100 Monitoring and Evaluation I I I ITotal Proiect Cost 115.63 I100% 196% It is expected that the project will benefit approximately 2,200 rural, low-income families, through land transfers that will total approximately 110,000 hectares, and will fulfill approximately 20 percent o f the total formal demands for land which have been filed with government. The project will operate exclusively in the department o f Santa Cruz, where both the demand for land, the potential supply i s there, and there are many opportunities o f successful productive projects. Project Area. There are 9 million hectares defined as apt for agricultural activities defined in the Land Use Plans for the Department o f Santa Cruz. It is estimated that 30-40% o f these agricultural lands are subutilized or unutilized (deforested, inpastures or overgrown with brush). Background studies indicate that approximately 200,000-250,000 hectares of these lands are currently available to the market with no need for any additional deforestation. The project itself i s expected to require approximately 110,000 hectares. The initial implementationo f the project will operate inthree zones inthe Department of Santa Cruz. These are Mineros, Pailon and Charagua. The project will locate facilitators in theses municipalities, will fully support the CODAL inthese municipalities, and will give priority to associations of potential beneficiaries who reside inthe municipality and 29 give priority to land purchasedwithin the municipality. Background studies show both strong demand from indigenous and campesino groups in these municipalities and a supply of land available to the market, including significant holdings under foreclosure by banks. 30 Annex 4A: ProjectDescriptionof FinancialSector IssuesandCompliancewith OP8.30. BOLIVIA: Landfor AgriculturalDevelopmentProject. The purpose o f this annex is to present the ways inwhich the project complies with OP 8.30, Financial Intermediation. This operational policy applies to the project, since a line o f credit and non-reimbursable grants are included in the design. This annex also reflects discussions with the Bank's Latin America Region financial sector staff and a formal review meeting that reached an agreement on changes that would lead to compliance (May 10,2007). The project seeks to use a financial lending mechanism as an instrument for targetedland redistribution activity which addresses a key constraint to poverty reduction. Project design takes fully into account the principle o f OP8.30 to ensure that there is no adverse impact on the private financial sector and that the underlying causes o f the market failure which the project seeks to address are dealt with as much as possible in an operation of this size and scope. Operational Policy 8.30 (OP 8.30) applies because there i s lending to households and businesses and an obligation to repay. According to OP 8.30, it does not matter what kind of financial intermediary is involved, or wether the financial assistance is provided in a line of credit or another reimbursable form. Based on discussions and the documentation o f the project, the key elements o f OP 8.30 that apply include the following: 1. Coordination with the IFC 2. Consideration o f the need for allocation o f directed credit 3. A review o f financial sector policies and trends 4. Interest rate regime and interest rates applied to financial transactions in the project 5. Non-interest rate subsidies and onlending terms (to financial institutions, to end borrowers) 6. Eligibility criteria for participating financial institutions and the second tier function 7. Fiscal Transparency 31 Coordinationwith IFC This project has coordinated with the IFC and it has been agreed that the Bank should take the lead, since sector policy reforms and a sovereign guarantee are involved. During discussions, the IFC staff expressed a concern that the relationship with the new National Productive Development Bank (BDP) could lead to heavy state involvement in the financial sector. However, the Bank team explained that national requirements for trust funds specify that NAFIBO and FODESIF are no longer options - and that their staff and systems have been absorbed into the BDP. It was agreed that the relationship with the BDPwould be limitedto trust fundadministration. Consideration of the needfor allocation of directed credit In terms of OP 8.30, there are three questions about the financial sector's present performance. First, what i s the justification (market failure) for the intervention? Second, what forces or practices are impeding the voluntary flow o f funds to the sector (in this case for land purchase and for investments in crops, animals, and land improvement)? Finally, what can be done under the project to address the impedingfactors? The Bolivian case is a compelling one. The Bolivian financial sector and the rural economy suffer from mutually reinforcing market failures-ultimately due to historical asset inequalities in the allocation o f prime farmland and weak connections between smaller scale producers and markets for outputs and technology-which have made it impossible for the rural poor to access the financial sector for capital for land acquisition inany form. Smaller-scale producers stuck inlow productivity farming systems without insurance pose high risks and high costs to lenders who in turn fail to provide capital at any feasible cost to these producers for major asset acquisition such as land. Many other would-be producers cannot access land for an agricultural livelihood and become trapped ina low-wage labor livelihood strategy. This set of mutually reinforcing marketfailures perpetuates asset inequality in landholding and represses productivity improvements for potential "poor but efficient," smallholders, leading to a cycle o f reproduction of poverty. Without intervention in both the productive side, to solve market failures in technology, production and distribution, and on the financial side, to make capital available for land acquisition, the dynamics cannot change to a virtuous circle o f increasing productivity, lowered risks, and ultimately to a more productive smallholder sector and a more inclusive land market. This i s the fundamental justification for the project. 32 Inthe project context a directed credit of this type isjustified because it substitutes for a missing market in long-tern financing for poor rural inhabitants. If viable, the project intends to gradually lead the way for private financial institutions to enter this market by creating the mechanisms for identifying and preparing low-income families to successfully pay for land acquisition. The model i s identical to that being used successfully in Brazil inthe Land-Based Poverty Alleviation project. The line o f credit has no effects o f crowding out private financing because this is precisely a market into which private finance i s currently reluctant to enter. The project will thus participate ina relatively small way infinancial markets, with about $5 million inthe land acquisition fund, essentially filling a gap inrural lending which has not been considered viable. The project will demonstrate the conditions under which land acquisition financing for the poor can work to accomplish land distribution goals which have been prioritized inthe political process. It i s possible that the project will undertake a pilot commercial approach to provide commercially priced access to credit for productive uses (animals, crops, and small scale land improvement) that would "crowd in" financial institutions (such as MFEs). There are large potential benefits: the vicious circle o f land asset exclusion, a classic poverty trap, only needs to be overcome once in each local instance to change the long- term dynamics o f the system. In a situation o f compounding, multiple market failures creating these new dynamics requires that each o f the market failures be addressed simultaneously, and indeed each i s addressed inthe project design. A review offinancial sector policies and trends While the project is not large enough to have a major impact on the financial sector, it does rely on financial institutions to provide services. In addition, the project would benefit from a risk-based position taken by the financial institutions inthe future, thereby raising the likelihood o f sustainability by putting land use loans on a commercial basis. (This is not to say that subsidies linkedto landpurchase would not be required inthe long term - see discussion on onlending terns below). The project i s involved with the financial sector through the use of a lending mechanism to channel funds provided by the Government (and the project specifically) for land purchase or lease. Grant financing for land acquisition was rejected in project design because o f the problem it could create in generating an overly broad self-selection o f beneficiaries and the incentive problems associated with free goods. The project thus 33 proposes to use financial sector institutions instrumentally, as agents to supply funds and collect loan repayments as agents o f the government, managing the funds as trust funds (off balance-sheet and with no credit risk to the financial institution). The project will not by itself lead to a competitive new line o f private financial sector business in smallholder land acquisition. This would be an unrealistic goal at this time as asset bases o f the poor interms o f savings, human capital and equipment and the absence o f insurance coupled with poor access to productive technology and market chains are the fundamental problems which the project seeks to address. However, the project will demonstrate a politically feasible and socially beneficial approach to government- imposed land redistribution. This approach will do no harm to the financial sector, and could reinforce the rural credit culture. By demonstrating the viability o f the smallholder clients, particularly for crop, animal husbandry and land improvement, the project could help financial institutions to expand coverage to include potentially profitable rural clients inthe future. Inaddition, the project would improve the profitability and lower the riskiness o f investments in smallholder activities by improving technology transfer and market access. It is reasonable to expect that the project will help solve the multiple market-failures surrounding the land market finance failure, particularly in the provision o f technology and linkages to output markets for key groups o f landless or landpoor. The intention is to effect asset redistribution in the locality which changes the income pathway o f the landless and land poor and therefore does not have to be repeated continuously. The relationship with the financial sector is therefore instrumental and program-specific, not systemic. The Bolivian financial sector, without outside intervention, i s neither interested or able to provide lending for land acquisition by poor households inrural areas. A review o f a few salient facts about the financial sector helps to understand why this is so. In the first place, the Bolivian financial sector i s small and weakly capitalized, the exact opposite o f what would be necessary to beginto extend into new and risky lines o f business like rural land acquisition by poor borrowers. The Bolivian banking system i s small compared with other Latin American countries, a reflection o f the size and poverty of the Bolivian economy. Inthe past few years, the banking sector, has suffered a number o f blows that caused capital flight, an increase inthe levels o f credit defaults and a persistent shrinkage inthe level of outstanding loans. The crisis greatly weakened the business sector and the economy in general, significantly affecting the solvency and size o f the financial system, especially o f banks. In December 1998, the banking sector had $4.2bn in loans and 34 $3.5bn inbank deposits. Inthe first week o f June 2005, those figures were $2.5bn (-40%) and $2.6bn (-26%) respectively. Since 1998, more than $1 billion in bank deposits have been withdrawn, while credit defaults have increased nearly 250%, from 6.5% to 16.3%. Between 1998 and 2005 bank portfolios diminished by 40 percent, while those o f other financial entities increased by 27 percent. Foreign banks held on to their high share inthe sector (50 percent) thanks to a consolidation in the early 1990s. Nonetheless, their portfolios also diminished due to the difficult economic situation, which, in turn, discouraged foreign investment. Since mid 2002, the system has experienced several runs on deposits, accompanied by capital flight. Runs on deposits have been closely linked to political and social instability. Though some entities have been affected more than others, the mass withdrawals have generally affected the entire system and therefore have not led to bank closures on account o f a lack o f liquidity. Neither have they created a systemic problem, due to the system's high and growing liquidity and to the authorities' sound need-based management. Nonetheless, bank deposits stabilize at a lower level with each such episode. As of June 2004, the amount o f deposits inthe banking systemwas 75 percent of the December 2001 level and represented 80 percent for the financial system. InJune 2004, the downwardtrend inbank deposits startedto reverse, althoughthe system continued to experience occasional runs on deposits (inmid 2005 with the resignation o f President Mesa). The total portfolio also started to recover in 2005. Despite the recent increase in bank deposits, as o f September 2005, bank deposits were still 12 percent below their 2001 levels. Recovery o f deposits inthe non-banking sector started sooner, in June 2002, above all in regulated micro-finance enterprises (MFEs), which received a significant portion o f the banking system's deposits (resulting in a reduction o f their funding costs). This led to an increase in the size and quality of the MFEs' portfolios despite the crisis. The persistence o f a high default rate and the non-performing loan portfolio i s a fundamental weakness o f the financial system. In general, the rise in the non-performing loan portfolio was due to decreased profitability o f local companies owing to the economic recession o f 1999-2002. This effect was particularly relevant in the banking sector due to its high exposure to the corporate sector, and even greater for those banks that granted higher-risk loans during the economic upswing o f the early 1990s. At the same time, improved regulation and supervision o f financial entities allowed for greater recognition o f the portfolio in default. In September 2005, the default rate had fallen considerably but continued to be high (15 percent for banking entities and 6 percent for 35 non-bank entities). On the other hand, regulated MFEs continue to have the system's best quality portfolios. The MFEs' portfolio at risk (a measure equivalent to the default rate) i s less than 3 percent, one-quarter of 2001 levels and half as much as during the crisis. Portfolio rescheduling made it possible to temporarily defer bad debts, but their default rate has been increasing as their terms mature. The coverage of provisions diminished, increasing capital at risk. The FERE portfolio restructuring program started in 2000 and reached its high point between 2002 and 2003 (in December 2002, 32 percent of bank portfolios and 6 percent of MFE portfolios were rescheduled). In August 2005, the high and still growing rate of rescheduledportfolio default reached27 percent for the banking sector and 6 percent for the MFEs. On the other hand, provision coverage levels on bank portfolios in default dropped to 73 percent in September 2005 (from 84 percent in December 2004). This reflects an increaseinthe default rate of the rescheduledportfolio (from 19to 26 percent inthe same period) which negatively offset the May 2005 increase inprovisions resulting from a strengthening of the prudent rules of the Superintendency of Banks and Financial Entities of Bolivia (Superintendencia de Buncos y Entidades Financieras-SBEF). At the same time, capital at risk rose from 15 percent inDecember 2004 to 23 percent in September 2005, though with marked improvements for some banks.The estimated solvency of the system, measuredby the Coeficiente de Adecuacidn Patrirnonial-CAP, which is the Bolivian equivalent of the Capital Adequacy Ratio (CAR-a solvency index), held steady at 14.5 percent as of September 2005 (one percentage point less than in December 2004). Nonetheless, the system's "CAP" and, in particular, that of certain banks, would be less if the provisions pending under the new rules were borne in mind as well as those for the rescheduledportfolio not yet deemed to be indefault. Liquidity has continued to grow since 1998 taking into account the withdrawal of deposits and the shortage of profitable businesses. In September 2005, liquidity was 30 percent of total assets, 41 percent of total deposits, and 75.5 percent of short term deposits (demand deposits, savings accounts, and deposits with a term of less than one year). On the other hand, the degree of coverage of the deposits without affecting the legal reserve position was 32 percent. An important part of this liquidity is invested in government bonds and in short-term deposits and investments abroad. In addition, financial entities have maintained important surpluses in cash in the Banco Central de Bolivia (BCB), above the required legal reserve (even after the recent increase of the legal reserve requirement, see Section 111). In December 2004 this amounted to a 58 percent surplus in foreign currency and a 321 percent surplus innational currency (BCB, December 2004). Nonetheless, the high concentration of the system's deposits (greater 36 than in 2002) is still worrisome. As of November 2005, 518 accounts representing less than 1 percent o fthe total number of accounts) represented more than26.3 percent o fthe volume o f deposits. Inthis situation Bolivian companies find that lack of access to credit notably limits their growth. This observation i s consistent with the fact that credit provided by the financial sector to the private sector has not succeeded inrecovering its pre-crisis level (33 percent o f GDP), given the slow recovery o f the business sector. The problem i s even greater for SMEs, since banks have tended to concentrate their credit in large (or medium-to-large) companies, while the MFEs target microenterprises (though they have recently also started to serve medium-sized companies). For banks, the culture o f credit i s based on granting loans against real property guarantees, through overdrafts or trade loans, which limits credit for smaller-sized companies with little access to such collateral. Other alternatives to bank trade loans, such as factoring, financial leasing, or securitization, have not been fully exploited to date, but could facilitate credit access in the Bolivian context, above all for SMEs. With respect to the number o f branches, the non-bank entities (regulated MFEs) have the most coverage and the greatest increase since 1998, even inrural areas. Inthe banking sector, Banco Union (BUN) and Banco de Credit0 (a Peruvian bank) have the most branches (44 and 43, respectively) with participation in the rural zones (20 and 16 respectively), but still number less thanthe MFEs. MFEs grant the most micro-credit, covering more customers than the bankingsector as a whole. NGOs grant loans to 200,000 microenterprises (1.5 times the total number o f customers of the banking sector). RegulatedMFEs grant an even greater volume o f loans to microenterprise (250,000), though this figure has gone down since the crisis. In response to the crisis and intense competition, regulated MFEs have gradually shifted their target to larger businesses, and they have also reduced the interest rate they charge. Small loans (less than US$500) have gradually diminished as a percentage o f total loans provided by the regulated MFEs, amounting to 5.6 percent in June 2005. This i s partly due to small borrowers gradually taking on larger commitments, in accordance with the MFEpractice of grantinglarger loans eachtime the customer pays. Interest rate regime and interest rates applied toJinancia1transactions in theproject The rural expansion o f regulated MFEs has been limited by: (i)the subsidized rates offered by the Fund for the Development o f the Financial System and Support to the 37 Productive Sector (Fondo de Desarrollo del Sistema Financier0 y de Apoyo a1 Sector Productivo-FONDESIF); and (ii)increased difficulty in loan collections due to debt forgiveness proposals in the recent past. Although the MFEs (mostly NGOs) devote 60 percent o f their portfolio to the rural sector, the average balance o f US$572 i s not sufficient to satisfy the medium-term needs o f export-oriented farmers. Private Financial Funds (PFF), despite being predominantly urban, have helped improve farmers' access to credit by offering them products adapted to their production cycles, in addition to credit for other rural activities. Distortions introduced by public sector programs targeting this area and social unrest in recent years have affected regulated financial entities' ability to extend credit services in rural areas, while also restraining the growth o f non-regulated MFEs. FONDESIF's lower interest rates and its relatively lax conditions for grantingcredit have also limited the development o f non-regulated MFEs. FONDESIF's disbursement criteria lack transparency and are exposed to political influences. This might discourage better financial performance and a truly corporate governance o f the NGOs, which depend on subsidized funds administered by FONDESIF. It has also provoked a low leverage rate ( 1 . 6 ~insufficient to significantly increase their credit) and a greater exposure to ~ exchange risks and volatility. As well, road blocks and other social unrest have lessened the interest in investing in the rural sector, since such conflicts raise the price o f loan collections and increase the volatility o f rural businesses (especially o f smaller ones). For the project, the interest rate to the end borrower has been calculated on the basis of two components: (i)second tier intermediation through BDP and (ii)commercially oriented local level financial intermediation costs. For the intermediation o f financial resources, the project will establish a trust fund for the land acquisition component through BDP (which has absorbed NAFIBO). The cost o f operating the fund i s estimated to be between 0.7% and 2.0% o f the volume o f funds disbursed. The exact amount i s still subject to negotiation with BDP. With respect to the first-tier institution (IFIs), the entity or entities will be selected on the basis o f the BDP's internal policies in accordance with Bank rules, through direct invitation. The BDPwill enter into a service contract with the IFIswho will be responsible for the following activities: 0 Elaborate loan contracts for land acquisition by the beneficiary groups. 0 Carry out the land transaction formalities with the Property Registry 0 Disbursefunds for landacquisition. 0 Manage loan repayment and management o f guarantees including potential 38 foreclosures 0 Report monthly on the loan portfolio The selection o f beneficiaries and the conditions in the loan agreements will be established by the project with the beneficiary group according to the Operational Manual o f the Project. For the above services the first-tier IFIs will charge 1%-2% with an additional administrative charge o f 0.4% for repayment transactions including foreclosure, charged to the project budget and recovered from loan repayments. The following three steps need to be taken for the financial intermediation to be feasible: The groups must plan the activities and disbursements o f the support resources for the production and the Project must carry out a strict follow up on the proper application o f the investment plan to ensure that it is technically, environmentally, socially, and financially feasible; that a guarantee fund be created to mitigate the risks implied by every credit operation (equivalent to 2.5% o f the amount on-lent); and finally, the continuity o f the Credit Component through a rotating fund must be ensured so that continuous follow up can be carried out on the credit operations and investment plans. Non-interest rate subsidies and onlending terms (to financial institutions, to end borrowers) It is important inthis context to distinguishbetween the distortions introduced by public sector programs targeting this area (which have affected regulated financial entities' ability to extend credit services in rural areas, while also restraining the growth o f non- regulated MFEs) and the market failures inthe landmarket and financial services for land acquisition. Distortions have entered in credits for production and equipment, but lending for the land market has never existed from either public institutions or the non- regulated MFEs. The distortion in the financial sector which exists vis-a-vis the rural land market i s the size-bias in lending for rural land purchase to large, highly capitalized borrowers. Neither banks nor MFEs have entered into lending with low-income producers out o f a perception o f high costs in selecting borrowers and preparing and servicing loans and o f high risks o f repayment given the low initial capitalization and technological gaps on the part o f producers. In the literature this issue is called the "fundamental financing problem o f the poor." The project i s designed explicitly to address it. This problem is overcome by subsidizing productive investments on the acquired land through a matching grant accompanying the land acquisition loan and making the loan 39 payment as affordable as possible to the households acquiring the land. It may be asked in this regard why grants for the entire land acquisition would not be preferable to lending, but the project, following best practice from Brazil proposes a loan because the lending approach is expected to filter out rent-seeking beneficiaries, creates incentives to improve productivity and creates the possibility for a rotating fund which broadens the scope o f impact. Selection o f beneficiaries and preparation o f productive projects will be handled on a demand -driven basis, with organized groups in the project area utilizing assistance from the Project Coordinating Unit to prepare proposals for land acquisition and viable productive projects which will be vetted by the PCU and a local development council. Inthis way viable projects will be pre-selected to the extent possible, lowering repayment risks. With loan rates to be set in accordance with the rate o f the Bank-financed credit plus administrative costs and provision for a guarantee fund, the line o f credit i s subsidized by the Bolivian government to the extent that no additional risk premiumis being charged. In other words, a subsidy equivalent to the risk premia which would be charged by a private financial institution i s being made. This mechanism i s not meant to be a direct subsidy on the interest rate - instead, it amounts to setting a price for a product and marketthat does not exist (long term financing o f landpurchase). The lending for land acquisition i s implicitly subsidized because the government i s paying for the risk premia associated which would otherwise be required by the private financial institutions to make the lending operation profitable over the long-term. If the comparison i s made between interest rates o f 7% which the project foresees and market rates of 14% for similarly guaranteed loans, a 50% subsidy i s implied. It should be noted, however, that this i s a highly speculative analysis because the private financial institutions are not currently engaged in this kind o f lending to low-income borrowers. Inflation(estimated to be 4.3% for the twelve months endingJune 30,2007) and potential currency devaluation will gradually reduce the purchasing power o f the funds as they are repaid inlocal currency. Therefore the fund will gradually decline inits capitalization. To avoid decapitalization, the project will consider a pilot operation for crop, animal husbandry and small scale land improvement, in which the MFEs and other participating eligible financial institutions use their liquidity to finance loans to producer groups. MFEs are under competitive pressure to expand beyond urban markets and several are actively seeking new rural clients (such as producer groups). Therefore, the MFEs could be interested in a commercial approach to rural financing that would build on initial project efforts. 40 Such clients may be attractive to MFEs. Field visits found that, despite the fact that the group o f families that were visited has a high level o f poverty, they have different credit experiences. Some groups o f medium-sized producers inPailon have even had successful credit experiences with export companies and non-regulated entities. In Minero the Guaranis have a credit system to purchase plots o f land at the initiative o f the Captaincy, with good results inthe recovery. Finally, in Charagua Norte beneficiaries also have had credit experiences with group cattle-raising activities. Eligibility criteriafor participatingfinancial institutions, and the second tierfunction Local financial service providers will be chosen based on their track record and their ability to provide services inthe project area. Although not taking the credit risk on their balance sheets, the local financial institutions have incentives to actively monitor the loan repayments and work out problematic loans because their regulatory rating takes into account the quantity o f loans in arrears, because they have a financial incentive to continue to operate the project and because Bolivian law requires foreclosure and auction o f mortgages in arrears. Bolivia has a good recent record o f encouraging a culture o f credit re-payment and Bolivian law on mortgage foreclosure i s quite strict. There are clear rules o f the game explained in the Operational Manual for the approval o f beneficiary organizations, each o f which must be a registered, legal entity. Inthis regard the project complies with the Bank's Operational Policy 8.30 which sets out guidelines for lines o f credit. The Land for Agricultural Development Project is legally obligated under Bolivian law by its nature as a public-private transfer mechanism to channel its financial activity for land acquisition through BDP. The proper selection of the institutional channel through which the credit funds will flow has both legal restrictions and implications for the interest rate for the final beneficiary. Legally, Supreme Decree No. 25338 of 1999 establishes that all resources for "micro-credits" that come from the State and those that originate from loans or donations from international cooperation agencies must be channeled through the second level entities called FONDESIF and NAFIBO (Article 2). As o f January 1, 2007 with the emission of Supreme Decree 28999, the Bolivian government created the Productive Development Bank (Banco de Desarrollo Productivo, BDP) which essentially absorbs the entire operation o f NAFIBO. FONDESIF i s prevented by the same decree from undertaking any operation which is similar or parallel to BDP. BDP has so far maintained the same operational standards as NAFIBO, but concerns have been expressed that its new Board may be politicized and that the 41 institution may relax repayment standards for political reasons. Channeling funds for land acquisition through BDP would require a 1 percent administrative cost on the portfolio that i s placed. It requires an Administrative Agreement with the Project for its operation. The operation o f the trust fund for the line o f credit for landpurchase must be channeled through BDP, given recent changes innational laws. According to the data and extensive consultations carried out with representatives o f these institutions it was decided that the project's credit resources will be administered by a Cooperative or an NGO. The entities that are present in the Project's area o f influence are: (i)Cooperatives including L a Merced and San Gabriel, (ii)Financial NGOs including FONDECO, FADES-TRAPETROL and (iii)PFF PRODEM. Consultations with all ofthe above indicated that LaMerced, San Gabriel, and FADESare all interested incarrying out the lending activities. The project will select a financial entity by means of a Public Bid to receive expressions o f interest. Inthe event o f a pilot operation for crop, animal and small scale land improvement activities on a commercial basis, additional MFEsand other financial services providers could express interest inthe future. These three financial institutions are very similar, providing a range o f lending to businesses and individuals in the Santa Cruz area including annual production credits to agricultural operations. They are relatively small, with loan portfolios o f between 10 and 20 million dollars and capital between 2 and 5 million dollars. Their total lending activity is about 50 million dollars. Interest rates on their commercial loan products range from 12% to 26% depending on the source o f the finance, the amount o f the specific loan and the type o f collateral offered. Flow o f funds models have been built with feasible rates both at the financialentity's level and that of the different productivemodels. Inthe project's financial background study it is shown that, taking into account all the aspects, from channeling the funds, to the sustainability o f the financial entity and the feasibility of the projects to be implemented, an interest rate o f 7 % to the final beneficiaries is foreseen. The recommended loan term is 15 years and, dependingupon the line o f business, up to 3 years o f grace can be included; it is also possible to even have one period where capital or interest i s not paid (the term o f the loan i s similar to housing finance). These terms permit repayment periods o f as little as 10 years, but the flows are quite tight which, in variations o f income and/or production costs, could cause problems in repaying the debt. On the other hand, very long terms, such as 20 years, provide comfortable flows, but sacrifice a faster return on the resources to be able to benefit more families. The 42 economic and financial evaluations o f the cash flows, both at the national level and on the group level in general, are positive. There are indicators such as the NPV and the IRR that recommend the implementation o f the Project, except for some care that must be taken, such as the case o f the Charagua cattle modules. The Project's NPV is 17.6 million dollars and the IRRi s 16 YO. Because o f the riskiness o f the beneficiary population, the project intends to create a Fund for Risk Compensation which will be managed in an independent sub-account under regulations established by the Project Coordinating Unit (PCU). The PCU will authorize disbursements from this account on the basis o f technical issues such as floods or catastrophic crop failure. Both beneficiaries and lenders have basic incentives to ensure repayment o f the loans based on the use o f the land as collateral. Beneficiaries expect to receive full, private, transferable title to the land in the case o f purchase and long-term use in the case the project also develops a leasing option. Inthe event o f foreclosure this will be forfeited. The concern has been raisedthat it may be difficult to foreclose on a state-sponsored land reform project, but this i s considered unlikely. The IFIs have no choice in the matter legally and are required to carry out foreclosure. What i s likely i s that other local groups could take over the areas o f groups in arrears. Demand i s expected to be strong by beneficiaries because o f the possibility o f acquiring land in full ownership. Land distributed from public sources, in contrast, is non-transferable and only permittedto be heldincommunity title. Fiscal Transparency The project will be registered inthe national budget as an externally-financed land access program corresponding to the Ministry o f Rural Development, Agriculture and Environment (MDRAMA). The project concept i s fully transparent, having been approved by the Cabinet o f the current government with a Supreme Decree. The loan itself is handled by the Vice-Ministry o f Public Investment and External Financing within the Ministry of Development Planning. The loan is conceived as a Specific Investment Loan and is made under IDA terms. There is therefore a high degree o f fiscal transparency. 43 Annex 5: ProjectCosts BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject. Local Foreign Total ProjectCost By Componentand/or Activity us us us %million $million $million Component 1. Land Purchase 4.86 0.00 4.86 Component 2. Productive Investments 7.86 0.00 7.86 Component 3. Administration 1.75 0.00 1.75 Total Baseline Cost 14.47 0.00 14.47 Physical Contingencies 0.00 0.00 0.00 Price contingencies 1.16 0.00 1.16 Total ProjectCosts' 15.63 0.00 15.63 'Identifiable taxes and duties are US$ 0.3m, and the total project cost, net of taxes, is US$15.33m. Therefore, the share of project cost net of taxes is 98%. Beneficiary contributions are estimated at $0.63m. 44 Annex 6: ImplementationArrangements BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject. The implementation of the project will be the responsibility of the Ministry of Sustainable Development, through its Vice-ministry of Lands. A Supreme Decree creates the legal basis for the project to act as a legal entity and gives the MDRAMA the authority to create the financing mechanisms for the project as well as the Project Coordinating Unit (PCU). The project PCU will implement the project on a day-to-day basis from an office established in Santa Cruz. The PCU will operate autonomously on the basis of the loan agreement, the project Operating Manual, the Financial Management Manual and the Procurement Manual preparedfor the project. The PCU will report to the Vice-ministry of Lands and each of its annual workplans will be subject to approval by the Vice- ministry. Inaddition the Departmental Commission for Rural Development will review and approve the annual workplans of the PCU. To operate the Land Purchase Component, an agreement to create a line of credit between MDRAMA and BDP will be made. BDP will, in turn, create trust fund agreements with one or more financial institutions with operation presence inthe project areas to make and administer the loans, subject to supervision by BDP. BD will manage these funds as a trust fund, supervising the first-tier financial institutions, holding the repaid funds for new lending and assuringthe integrity of the fund. Funds for the productive investment sub-projects which are non-reimbursable, will be transferred directly to the beneficiary associations accounts by the Project Coordination Unit. Beneficiary associations will be created at the initiative of beneficiaries themselves, based on general information about the project, and detailed procedures which will be explained intraining sessions andthrough manualsto interested groups. The following diagram illustrates the flow of funds and the institutional arrangements betweenthe public and financial agenciesimplementing the project. 45 Diagram 1. Flow ofFunds. World Bank (Credit Agreement with Ministry of Finance) CentralBank Special Account BDP Admin. Of Land Fund (Trust Fund Contract with MDRAMA) Coordinating Unit Prepare Loan and Investment Packagewith Beneficiary Association Local Financial Institution:Mortgage registered; funds transferredto seller; Investments Land to Beneficiary (Non-reimburseable Associations matchinggrants) (Agreement) Transferredto Beneficiary Association Beneficiary Association Accounts for Investments and Loans 46 A set o f institutional agreements have been developed to regulate these arrangements. A subsidiary agreement between the Ministry o f Finance and MDRAMA will be established to give MDRAMAthe ability to manage funds. MDRAMA and BDP inturn have entered into a agreement for the management o f the land purchase funds as a trust fund. MDRAMA is the trustee and BDP is the manager o f the trust. This arrangement assures provides a mechanism for the supervision and management o f the loans as they are repaid. The agreement makes BDP responsible for managing the trust, reporting on it, and for selecting and monitoring the first-tier financial institutions which will make loans to beneficiary associations using the trust fund. BDP will enter into agreements with the selected local financial intermediaries for making the loans to beneficiary organizations. Beneficiary organizations will enter into one agreement with the PCU for the association's financing plan (credit and matching-grant). Standard credit contracts will be made between the first-tier financial institutions and the beneficiary associations for the land acquisition loans. The first-tier financial institutions will assist the beneficiary association in the mortgage and land sale transaction. Agreements will be made between the PCU and the participating municipal governments to stipulate the nature o f the support for the project by the municipal government and clarify the roles which the PCUwill play. Inthis institutional structure, the two bodies which carry out the screening and approval process for land acquisition and investments are the Project Coordination Unit and the CODAL. The PCU will assist beneficiary associations to prepare proposals for land acquisition and productive projects for submission to the CODAL. Based on the proposal submitted according to standard formats the CODAL will evaluate the eligibility o f the beneficiaries, the eligibility o f the land, the terms o f the sales contract and the viability o f the proposal. If it finds these acceptable, the CODAL will issue a recommendation that the project be funded. This recommendation will trigger the PCU to finalize the financing plan with the beneficiary organization and permit the beneficiary organization andthe financial intermediary to finalize a credit contract for the landpurchase. Fundswill be transferred directly from the Special Account to BDP and from BDP to the first-tier financial institution to pay for the land acquisition. The beneficiary association will pay back the first-tier financial institution over time (maximum o f 15 years), andthe first-tier financial institution will hold a mortgage for the land until it i s fully paid. At the same time as the land purchase i s realized, funds will be released in tranches to the beneficiary association's bank account for expenditures for productive investments up to $10,000 invalue. Larger investment sub-project expenditures will be paid for directly by the PCU on behalf of the beneficiary association. Beneficiary associations will be 47 responsible for applying appropriate procurement practices and for prompt expenditure reporting and will receive training in each step of the cycle from the representatives of the PCU, Local-level Institutional Arrangements. The implementation of the project will be managed ina decentralized manner, through a PCU, and through Memoranda of Understanding with the municipal governments of Mineros, Pail6n and Charagua. The project i s executed on a demand-driven basis by the beneficiaries-the indigenous and campesino agricultural workers who have no land or insufficient land to satisfy the basic needs of their families, and their local organizations. The beneficiaries will execute the project through the organization of producers' associations which will present proposals for the financing of landpurchase andthe realization of productive investments on the landwhichthey intendto acquire. The project will strengthen(or, insome cases establish) a local decision-making body in each municipality through a Local Rural Development Council (Consejo de Desarrollo Agrario Local-CODAL) in which each proposal will be reviewed to approve: 1) the eligibility of the beneficiaries; 2) the eligibility of the agricultural property to be acquired; 3) the financial proposal for acquiring the property, and a first draft of the Community Investment Work Plan (Plan de Trabajo Productivo Comunitario-PTPC), in which is defined, with support from the PCU, the basic lines of implementation of productive activities on the land to be purchased. The CODAL will also assess the environmental soundness of the proposal. The CODAL constitutes the first institutionwhich makes decisions inthe implementation of the Project, as it makes the initial approval of proposals. In each municipality, the PCU i s the organ of coordination and follow-up for the implementation of the project, will assure that all of the procedural requirements are followed in the submission of the proposal to the CODAL, as well as verifying in situ all of the technical, social, environmental, legal and financial information. The PCU is also responsible for assuring that the beneficiary association implementsthe plannedproject. The CODAL is comprised of State representatives from the Department (Department of Natural Resources), municipal officials, and organized civil society, essentially from the 48 rural labor confederations which are expected to sponsor the local groups. Inthis way the municipalities and the rural labor confederations are directly co-implementers o f the project with the MDRAMAthrough their membership inthe CODAL. At the Departmental level a Consultative Committee for Rural Development will be formed to accompany the project. It will be consulted periodically to provide feedback on the annual workplans, project and the project's implementation. The Consultative Committee will make recommendations for improving workplans and for orienting the project for maximum effectiveness (for example, by providing information about lands available). The Consultative Committee will be created by, and is a subsidiary of, the Departmental Agrarian Council. The project i s demand-driven and beneficiary-led. Beneficiaries will be the main actors in organizing and canying out the project. The PCU will strongly support the beneficiaries to play this role. Inthis sense he project will guarantee for all, particularly women and young people: Support for understanding and filling in all documentation related to land purchase and productive investment. 0 Assistance with elaborating, negotiating and executing formal contracts and agreements. Assistance inthe planningand deliberations o fthe local level associations. 0 Assistance to ensure that each proposal i s taking into account the environmental norms associated with the project. 49 Annex 7: FinancialManagementandDisbursement BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject A financial managementassessment was originally performed inMarch, 2005. Inview of the changes that took place in government administration and other recently adopted policies, and legislation, the project implementation arrangementshad to be updated; and therefore, an update of the financial management assessment was performed in March, 2007. The updated assessment was performed in accordance with OPBP 10.02 and the Manual "Financial Management Practices in World Bank - Financed Investment Operations". It included both the on-going situation of the PCU established within the Viceministry of Land of the Ministry of Rural Development, Agriculture and Environment (MDRAMA) and the new conditions for the operation of the land acquisition component, under the newly created Productive Development Bank (here in after BDP). ExecutiveSummary and OverallConclusion Project complexity, innovation and associated risks, call for a very robust and adequate financial management system, able to provide the Bank, the Borrower and other interested stakeholders, with accurate and timely information regarding project resources, expenditures and activities. Both, inherent risk and control risk have been rated as HIGH. Downgrading the control risk to modest would actually be possible if the adequacy of proposed financial management arrangements, especially related to disbursement mechanisms can be tested and strengthened with the PPF pilot and if the PCU staff develop the required expertise, to support project implementation. Other key issues to be evaluated under the PPF is the proper and efficient operation of the CODALs that will play a key role in the approval process, and the adequacy of the disbursement mechanisms under different project components to timely proposed any requiredadjustment. Inrelation to BDP's involvement, from the financial managementperspective the current conditions can be considered acceptable, as BDP has inherited from NAFIBO the expertise and the financial technology in terms of internal regulations, structure and procedures to operate the financial intermediation function. However, those conditions can not be really isolated from the whole legal, institutional and even political context, in 50 which the BDP will have to operate in. Under such conditions, it will be critical that a draft subsidiary Administration Agreement to be entered into between MDRAMA and BDP be submitted to the Bank before negotiations for Bank's review from the legal, institutional and operational perspective. Additionally, as NAFIBO completes its full juridical conversion to BDP, the signature o f the agreement should be included as an effectiveness condition. Further to the compliance with such requirement, project team will have to closely oversee BDP's performance interms o f project implementation, both underthe PPF and duringproject implementation, to timely identify any adverse situation that may prevent BDP from complying with the conditions and responsibilities set in Administration Agreement. On the basis o f the progress reached so far and subject to the successful completion o f the actions described above, that will be respectively followed up to negotiations, board presentation and project effectiveness, the financial management arrangements can be considered acceptable to the Bank, as long as they can be supported by the adequate legal framework. Besides, it i s extremely important to note that monitoring and supervision o f the operation of such arrangements, as expected, will be essential to guarantee the adequacy o f the internal management system. Summaryof FinancialManagementAssessment 1. RiskAssessment andmitigation Risk Risk Risk Mitigating Measure Incorporated Condition of Residual into Project Design Negotiations, Board or Rating Effectiveness (Y/N) Bolivia's country PFM risk M Project would be implemented by a ring- Adjusted Operational rating is substantial'. Main fenced PCU, which staff would be financed Manual duly approved weaknesses identified are out of credit proceeds and which should and adopted by related to the uneven follow specific Bank's selection procedures. MDRAMA before project application of the legal Additionally, specific processes and implementation. framework, particularly with procedures have been defined in an '2004 CFAA 51 regard to financial reporting Operational Manual, providing for adequate Effectiveness(Y) and the internal control internal controls, and segregationof duties. environment. The situation within MDRAMA is not Specific legal framework (Supreme Decree) really different, and it might setting for the enabling legislation for even become worse in view project implementation will be required. of the highstaffturn-over that took place during the last vear. Severe salary reductions in the Bolivian public sector M Selection of project staff will follow Bank Project staff should be have seriously affected the selection procedures. Additionally, PCU's selected and contracted ability to attract and maintain salaries will be financed by credit proceeds, before project highly qualified and although the same government salary implementation begins. professionals. structure will be used, having an external To the extent possible, source of financing may at least reduce the selection of key fiduciary possibility of staffturn-over. staff should be subject to Bank's prior review. As part of the capacity building effort for strengthening the whole portfolio, project staff will receive specific training on Bank's policies and procedures. Entity level Various institutional issues, including the change of M Project Operational Manual that sets for Operational Manual Minister within the f r s t year clear processes and procedures needs to be approved by MDRAMA of administration, have approvedratified and adopted through the before effectiveness. affected MDRAMA's corresponding Ministerial Resolution to be capacity to efficiently define issued by MDRAMA, by ratifying their Effectiveness(Y) policies, strategies and timely agreement with the proposedarrangements. make decisions, causing in some cases delays inprojects' The Subsidiary Administration Agreement Draft agreement reviewed organizational and to be entered into between MDRAMA and by the Bank before operational tasks to be taken BDP will be reviewed by the Bank from the negotiations. to complete the legal, institutional and operational Negotiations (Y) transformation of NAFIBO perspective. Agreement signed. into a Development Bank, Effectiveness(Y) including the definition of the Operation Manual criteria to work with non- adjusted to reflect the regulatedIFIs procedures agreed for the operation of the CAT component with the involvement ofthe BDP. 52 IEffectiveness (Y) Project level Project designs calls for the The Operational Manual presents an initial Operation Manual participation of several S attempt to define roles and responsibilities adjusted and revised external organizations such as for all external organizations involved inthe before project local committees (CCODAs, project. However those roles need to be effectiveness. CODALs), which in some refined and further reviewed form the cases may include the technical point of view. Effectiveness (Y) participation of civil society During the PPF pilot, the participation of organizations, that are not those organizations needs to be carefully clearly defined. evaluated to propose any required adjustment. Project design includes Specific simplified procedures have been Operational Manual decentralization of funds M designedby the PCUfor the implementation ratified by MDRAMA flows, and interaction with of the sub-projects, mainly in terms of low-capacity groups. planning, disbursing (funds flow) and Effectiveness (Y) financial reporting for each component. Those arrangements are beingf reflected in the OperationalManual Low capacity in rural The project design includes some producerkommunity groups M mechanisms to build capacity, including the Operational Manual to manage funds. provision of technical assistance by project ratified by MDRAMA staff inthe field. Simplified procedures, documents and Effectiveness (Y) reporting requirementsare beingdefined. Close supervision during the PPF pilot will also help to identify any required adjustments. CONTROLRISK Budgeting Project staff will be trained and carefully Accounting M evaluated during PPF pilot, to ensure they F M processes and Internal control develop the required expertise to operate the procedures will be fm arrangements as expected. reviewed during PPF pilot and adjusted as Funds Flow may be delayed needed before project if arrangements within the The funds flow arrangements have been effectiveness. BDP or IFIs do not operate as M simplified to the extent possible and they expected. will be tested during the PPF pilot to evaluate any bottlenecks that need to be overcome, mainly in relation to the authorization and approvalprocesses. The core content of the financial reports has The system should be Financial Reporting M been agreed and the ring-fenced system will installed and adjusted to allow the DreDarationofthe renorts. the project needs before 53 Negotiations Adequate reporting requirements will need Agreement signed before to be reflected in the agreement to be project effectiveness enteredbetweenMDRAMA and BDP. Effectiveness (Y) Auditing M An audit firm will be selectedwithin the six Audit TORS will be months after effectiveness in order to prepared and agreed with require interim visits, including field visits the Bank six moths after to beneficiaries to mainly review the implementationbegins. adequacy and operation of the internal control system. 2. Implementingentity The overall project implementation will rest with the Project Coordinating Unit (PCU) established by the Ministry of Rural Development, Agriculture and Environment (MDRAMA) under its Viceminister of Land. The PCU will start operation with the support of the Project Preparation Facility approved by the Bank, and just declared effective. As described in section C.2. of this PAD, the operation of the land acquisition component will require that the MDRAMA enters into a Subsidiary Administration Agreement with the Productive Development Bank (BDP), that is being established by the BolivianGovernment onthe basisof former NAFIBO (second- tier bank). Organizationand staff The PCU will be established in the city of Santa Cruz and it will be led by a Project Coordinator, supported from the fiduciary side by a Financial Management Specialist and a Procurement Specialist. In order to facilitate coordination with the central level, a Finance and Administrative Liaisonwill be establishedwithin the Viceministry, to ensure timely coordination with the Ministry's General Administrative Office, and other requirements, as needed. The core financial management tasks will also be supported by an accountant, an fm assistant and project facilitators in the field. Given the importance of having highly qualified and experienced staff to ensure adequate operation of the financial management system and in order to guarantee some level of stability, all key project staff will be financed with credit proceeds, although following the government's current salary structure. With the effectiveness of the PPF, project staff has recently been selected. Therefore, it will be important that a strong capacity building effort be conducted to make sure staff are adequately prepared and trained to support the implementation of the PPF pilot. 54 Giventhe decentralized scheme o f the project, it will be critical that the operation of the agreed structure and mainly the coordination with the central level be carefully followed and evaluated withinthe first year, inorder to propose any required adjustment. 3. ProgrammingandBudgeting Programming and budget preparation will actually follow local regulations issued by the Ministryof Finance. The following issues will needto be addressed inorder to allow an adequate budgetary control: 1)timely preparation o f programming, budget and procurement plans, establishing a clear relation among them; 2) proper recording o f the approved budget in the financial management system, not only following Government required classification (Partidas por objeto del gasto), but also a classification by project component and cost category; 3) timely recording o f commitments, and payments as needed,to allow an adequate budgetmonitoring and also provide accurate information on project commitments for programming purposes. 4. AccountingPoliciesandProcedures During the assessment, it was agreed that project transactions will be recognized following the cash basis o f accounting, and it will initially use the Chart o f Accounts issued by the General Accountant's Office. With the support o f the ring-fenced system, the Government's Chart of Accounts will be complemented with a more functional classification in terms o f project components, sub-components and cost categories, as needed. Specific policies and accountingprocedures have been defined inthe Operational manual for the recording and control o f disbursements made to different sub-projects and the control andrecording of counterpart contributions. Inaccordance with local regulations, project execution will also be recorded in SIGMA (Government's integrated financial management system) following the adjustment entry mechanism. This modality basically obeys to the decentralized scheme o f the project. However, it has also been agreed that once the appropriate arrangements are made for the use o f SIGMA in Santa Cruz, project transactions will be recorded on a real-time basis, following the same arrangements defined for other WB financed projects. 5. Informationmanagementsystems Given certain limitations SIGMA may have to provide all necessary information to the PCU needs, and the issues around the operation o f the Single Treasury Account (CUT) 55 described in section 9 below, it has been decided that project transactions would be recorded in a ring-fenced system. Such system, also used by other WB and IDB projects actually integrates a budgetary, accounting, procurement and a subproject module, allows keeping records both in local currency and US dollars, classified by component and cost category as necessary, recording o f cash and in-kind contributions, preparation o f withdrawal applications and IFRs. Following the effectiveness o f the PPF, the PCU needs to complete the installment o f the system and ensure the necessary training for recently hired project staff for the operation andproper use o f the system. 6. Procedures and internal control. The PCU has prepared an Operational Manual that includes specific processes and procedures for the operation o f the CIC and C A T components, especially relating to disbursement mechanisms, counterpart contributions and financial management arrangements to be followed by the community/producer organizations, in terms o f record keeping, reporting requirements, and internal controls. However, the procedures set will needto be refined and/or adjusted as neededonce other project related documents such as the agreement with the BDP for the CAT component are defined. Further to the specific FM functions, it i s critical that responsibilities, processes and procedures defined for the review and approval o f beneficiaries, land purchase proposals and sub-project plans are clearly defined, especially given the participation o f external organizations such as the CCODAs, CODALs, etc. The adequacy and efficiency o f those procedures need to be carefully and continuing evaluated both under the PPF and during project implementation. 7. Financial reporting The ring-fenced financial management system also allows the automatic preparation of quarterly IFRs (at least procurement and financial reports). The design and content o f the reports, have already been agreed, and they include: a) Sources and uses o f project resources and a statement o f investment by project component reporting the current quarter and the accumulated operations against ongoing plans; b) An output monitoring section that: (i)describes physical progress in the implementation o f the project, both cumulative and for the period covered by the report; and (ii)explains variances between the actual and previously forecast implementation targets; and ,c) a procurement section setting forth the status o f procurement under the project and expenditures under contracts financed out o f the proceeds o fthe loan, as o f the end o f the period covered by the report. 56 The PCU will be responsible for the issuance o f IFRs for the project as a whole, including the CAT component, and they will therefore requirethat BDP reports quarterly on the disbursements processed through the different IFIs. IFRs will be submitted to the Bank within the 45 days after the end o f each calendar quarter. The reporting arrangement should be reflected in the agreement to be entered into between the MDRAMAand BDP. Financial reporting atproducer/community organizations level Simplified record keeping and accounting arrangements at the community level have been defined in the Operational Manual. With such instruments, Producer/community organizations will be required to prepare simplified financial reports, which design and minimum content (sources and uses of funds and cash balance) have been agreed. A model o f the report would become part o f the financing agreement and organization members in charge o f financial management tasks will receive specific training for the preparationo fthe reports, 8. Audit arrangements In accordance with Bank policy, annual audit reports on project financial statements, including management letter should be submitted to the Bank, within six months o f the end o f Borrower's fiscal year (December 31). The audit should be conducted by an independent audit firm acceptable to the Bank, and under terms of reference approved by the World Bank. The scope of the audit would include the review, on a sample basis, of internal control and supporting documents at beneficiaries' level, taking into consideration project specific circumstances, features and responding, as appropriate, to identified risks. Audit cost would be financed out o f credit proceeds and selection would follow standard Bank procedures. 9, Flow of funds anddisbursementarrangements Considering the results o f the assessment, the following disbursement methods may be used to withdraw funds from the credit: (a) replenishment, (b) advance, and c) direct payments. Under the Advance Method and to facilitate implementation, a Special Account (SA) in US dollars will be opened and maintained inthe Central Bank o f Bolivia inthe name of the project and it will be managed by the PCU. To process payments, the PCU will be 57 able to withdraw the required amount to a local currency bank account (fiscal account) from where payments to consultants/providers and transfers to the beneficiaries' bank accounts would be made2. Funds deposited into the SA as advances, will follow the Bank's disbursement policies and procedures, as described in the financing agreement and Disbursement Letter. The ceiling for advances to be made into the SA would be US$ 1.0 million, estimated to be sufficient for project execution for a period o f at least 4 months. It is expected that eligible expenditures paid out o f the SA be reported on a monthly basis. Supporting documentation for documenting project expenditures under advances and reimbursement method will be: statement of expenditures (SOEs) and records for all expenditures above the thresholds3. Beneficiaries ' bank accounts. Each producer organization/ community will open and maintain a local currency bank account (saving account), exclusively opened to deposit their counterpart contribution, when it corresponds, and to receive credit proceeds for the implementation o f the community investments sub-project, under the CIC component. These accounts will be opened in the Intermediary Financial Institutions that will be selected by BDP following a criteria approved for similar operations. Therefore these institutionswill need to follow andcomply with certain criteria to be established by BDP, for managing credit proceeds. Disbursement arrangements under CATcomponent Disbursements for the land purchase component would be channeled through Intermediary Financial Institutions (IFIs) operating in each project area that would enter into mortgage loan agreements with legally established producer/community organizations. Under current local regulations4 public funds addressedto support credit to the productive sector have to be chanelled through the recently created Productive Development Bank (BDP), a second-tier bank that together with MDRAMA and Taking into account that the IntermediaryFinancialInstitutionswhere beneficiaries'accounts will be kept are not yet part of the bankingnetwork used for the operation o f the Single Treasury Account (CUT), the project can notuse the country's payment mechanism. The thresholds definedfor procurement prior review are as follows: (a) contracts for goods costingmore than US$ 50,000 equivalent per contract; (b) contracts for works costing more than US$250,000 equivalent per contract; (c) contracts for individual consultants costingmore than US$ 20,000 equivalent per contract; (d) contracts for consultingfirms under contracts costingmore than $ 35,000 equivalent per contract. Supreme Decree NO28999 dated January 1,2007 58 following specific regulations, would participate in the selection o f the IFIs that will be finally in charge o f channeling those public funds to targeted project beneficiaries once a thorough technical, legal and financial analysis i s performed by the PCU's technical team andthe CODAL as per the procedures defined by inthe Operational Manual. However, credit proceeds would only be transferred to BDP and to the IFIs on the basis o f the disbursements programmed by each IFI, reflecting the operations (credits) approved by and which are ready to be disbursed. Therefore, no funds would be stocked inBDP or the IFIs. The exact mechanisms to be followed for disbursement o f credit proceeds under this component are being detailed in the Operational Manual and will be reflected in the corresponding agreements to be entered into between the different participating parties. Disbursements under the Productive Investment component Disbursements under this component would be managed by the PCU. Two disbursement methods have been adopted, a) a lump-sum basis, where disbursementswill be made in one or several tranches on the basis o f physical progress reports, duly authorized and approved by the corresponding technical staff as a result o f in-site inspection; and b) disbursements based on actual expenditures for certain type of sub-projects. A combination o f both methods may also be considered incertain cases. Specific procedures for different funds flow arrangements to ultimate beneficiaries are defined in the Operational Manual, and will be reflected in the corresponding financing agreements. Inall cases, the PCU will exercise its fiduciary and oversight role through its technical and field staff. I Expenditurecategory Allocationof CreditProceeds IAmount (in US$ million) I Financingpercentage 1) Land Credit Facility 4.66 100 2) InvestmentSubnroiects Investment Subprojects 7.07 100 3) Goods works, consultants, and operating costs for Component 3 1.65 100 4) PPF 1S O 100 5) Unallocated 0.12 TOTAL 15.00 59 Financialmanagementsupervision duringimplementation Considering the results of the assessments, and the identified associated risks, it will be critical that inaddition to routine desk review of IFRsand audited financial statements, at least during the first year, financial management supervision includes in-site visits to the Santa Cruz Office. In-site visits would be focused on ensuring that financial management arrangements are operating as expected and that the PCU is able to maintain adequate internal control arrangements. Supervision should also helpto identify the need for further adjustments to the Operational Manualandor other coordination procedures. Readiness for implementation Although significant progress has beenmade since project preparation started, the recent changes related to the operation of the land acquisition component with the involvement of the recently created BDP, makes it necessary that Bank's project team carefully reviews the draft Agreement between MDRAMA and BDP, to make sure that legal, institutional and operational arrangements are being adequately addressed. Additionally, the legal framework for project implementation needs to be updatedto ensure consistency with other related regulations. 60 Annex 8: Procurement Arrangements A) General Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurementunder IBRDLoans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 20044, and the provisionsstipulated in the LegalAgreement. The general description of variousitems underdifferentexpenditurecategory is describedbelow.For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as requiredto reflectthe actual project implementationneedsand improvements in institutionalcapacity. Procurement of Works: Works procured under this project, would include very small contracts for infrastructure upon demand of the conformed family groups. They will be procuredby communities using shopping procedures and standard documents acceptable to and agreed with the Bank and will be part of Project Operational Manual. Details of the above-mentionedmethodsfor procurementwill be found in Chapter 10of said Manual. Procurement of Goods: Goods procured under this project would include vehicles, computers, office equipment and furniture for the Project Coordination Unit (PCU) and differenttype of goods (seeds, tools, etc.) upon demand-drivensubprojects for the conformed groups of families. The procurement will be done using Bank's SBD for all ICB and National SDB agreed with and satisfactory to the Bank. Procurement of goods using Shopping methods and procurement of goods carried out by communities will use standard documents acceptable to and agreed with the Bank and will be part of Project Operational Manual. Details of the above-mentioned methods for procurement will be found in Chapter 9 of saidManual. Selection of Consultants: Contracts for employment of firms will include services for environment impact, land demand and land market, promotion and dissemination of the projectand projectfinancialandprocurement audits. Contracts for employment of individuals will include hiring of the Technical Unit staff and technical assistance for the conformed groups of families. Short lists of consultants for services estimated to cost less than $100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 27.7 of the Consultant Guidelines. 61 OperationalCosts: Expenseson account of Projectmanagementand monitoring, including office supplies; utilities; office rent, communicationexpenses, includingtelephone, Internet and fax services; maintenance of vehicles; office equipment and computer operation and maintenance; project supervision costs (travel, subsistence, per diem); and Project staff salaries will be financed as operating costs and procured usingprice comparison procedures, whenever possible, usingstandarddocuments acceptableto the Bank. Others: The Project will finance demand-driven subprojects submitted by conformed group of families and approvedby the Project CoordinatingUnit (PCU) usingmatchinggrants and credit mechanisms. It is foreseen that the families would receive financing of up to $6,000 per family (depending on the zone they reside), out of which, it is estimatedthat 40% of the total amount will be used for land purchasing and the remaining 60% to improve the productivity capacity. Land will be purchased by the beneficiary families following direct contract procedures.For this, the families will organize BeneficiaryAssociations (BA) of up to 30 families which will identify productive a farm and negotiate its purchase with the owner. The procedures to be followed for the purchase of land are detailed in the Project Operational Manual(PMO). Procurement of goods, works and technical assistance, financed through grants given to eligiblegroups of families, will be carriedout directlyby the said beneficiarygroups using, in most cases, Community Participationin Procurement procedures for goods and works, and Individual Consultants selection procedures for technical assistance services. The procurementprocedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procuredwill be part of Chapter 6 ofthe PMO. B) Assessment ofthe agency's capacity to implementprocurement Procurement activities will be carried out by the Project CoordinatingUnit (PCU) based in SantaCruz underthe Vice ministryofLand(VML) within Ministryof RuralDevelopment. An assessment of the capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by the Bank on March 11, 2005 and updated on April 19, 2007. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for procurement Officer and the Ministry's relevant central unit for administration and finance. Although, most o f the issues and risks identified during the initial procurement capacity assessment have been taken care of, during the update o f such evaluation some key issues and risks concerning procurement for implementation o f the project 62 remain, these are: (i) the large number of expected subprojects, there i s the risk given that the PCU would not be able to ensure that the procurement done under the subprojects would be done in a transparent way; (ii) of land tenure clarity and lack security would impair the purchase of land; and (iii) PCU's lack of experience on the procurement processesunder Bank's norms andprocedures.. Component 1 (CAT) of the Project (Land Acquisition) will be implemented by the "Productive Development Bank (Banco de Desarrollo Productivo, PDP", operated through intermediary financial institutions (IFIs) operating in the area.The PDP was established by Supreme Decree No. 28999 of January 1, 2007, such establishment took place on the basis of the former "Nacional Financiera Boliviana S.A.M. (NAFIBO S.A.M.). The mentioned Supreme Decree also establishedthat FONDESIF's programs be gradually absorbedby BDP. FONDESIF was initially the entity supposedto execute the CAT component, at the time of project design. Therefore, PDP constitutes the only authorized entity to operate the CAT Component. Since the BDP is not exactly an implementing entity, but basically an operator for the financial intermediation; therefore, and no procurement activities are expected to be carried out by the entity, there was no need to carry out a Procurement Capacity Assessment. However, in case of any procurement activity would occur, it is agreed that procurement commercial practices acceptableto the Bank will be used. Based on the above, the overall risk level of the assessment is HIGH. Below i s an Action Plan designedto mitigate the risks and to improve the implementation capacity of the Agency. 63 Action By whom By when Bank to review and comment To hire an experienced(senior-level) VML Signature Draft ofTORSand procurement specialist under TOR acceptable Expressionsof Interest for the Bank bv negotiations Y To design/ includeinthe monitoringsystema Signature Draft ofthe design, procurement module to monitorthe type o f reports, by procurementplanandthe workflow of the negotiations processandto produce reports (for ex-post reviews, audits). Informationabout the use of this system shouldbe inthe POM. The definition of a planfor a periodic PCU Negotiations Draft ofthe POM supervision by the PCUofthe procurement processes carried out by the subprojects, includingamodel for the supervisionreports. A procedure for filing and managing procurement records within the PCU and subprojects and its location. To preparethe ProcurementPlan(General and PCU Appraisal Plan for the first 12/18 months) Preparestandardbidding documents for PCU Negotiations Documentsas part of Shoppingand selection of consultants. the draft POM Standard format for bid evaluation. TORSfor the PUstaff, selection ofprocurementAudits and Consultants for the supervision ofworks. Include inAnnex 3 ofthe Credit Agreement: Bank Negotiations Final Text (i) SpecialProvisionsagreedforBolivia; the (ii)arequirementfortheuseofstandard bidding documents agreedinadvance with the Bank ,(iii)all projectprocurement will be made following BankGuidelines and agreed procedures Submit to the Bank ProcurementAudit reports PCU Six months Report carriedout by IndependentAuditor after completions each year Special Provisions A. In addition to and without limitation on any other provision set forth in this Schedule or the Procurement Guidelines, the following rules shall govern all procurement of goods and works under NCB: 64 1. A merit point system shall not be usedinthe pre-qualification of bids. 2. The award of goods and works contracts shall be based exclusively on price and, whenever appropriate, shall also take into account factors similar to those referred to in paragraph2.5 1 of the Guidelines, provided, however, that the bid evaluation shall always be based on factors that can be quantified objectively, and the procedure for such quantification shall be disclosed inthe invitationto bid. 3. The Borrower shall open all bids at the stipulated time and place in accordance with a procedure satisfactoryto the Bank 4. The Borrower shall use a single envelope procedure. 5. Whenever there is a discrepancy between the amounts in figures and in words of a bid, the amounts inwords shall govern. 6. Except as the Bank shall otherwise agree, the bidding process shall not be declared void if only three (3) bids or less have been submitted unless such bids have been determinednot to be responsive. 7. Any standards and technical specifications (quoted in the bidding documents) that are at least substantially equivalent to the national standards and technical specifications shall be acceptable. 8. Foreign bidders shall be allowed to participate. 9. Foreign bidders shall not be required to legalize any documentationrelated to their bids with Bolivian authorities as a prerequisitefor bidding. 10. No margin ofpreference shall be grantedfor any particular category of bidders. 11. The auction procedure (PujaAbierta) shall not be used. 12. Inthe event that a bidder whose bid was evaluated as the bid with the lowest evaluated price withdraws its bid, the contract may be awardedto the second lowest responsive evaluatedbid. 13. Foreign bidders shall not, as a condition for submitting bids, be required to enter into ajoint venture agreement with localbidders. 14. No other procurement rules or regulations of the Borrower's agencies or of any state-owned entity shall apply without the prior review and consent ofthe Association. B. In addition to and without limitation on any other provisions set forth in this Schedule or the Consultant Guidelines, the following rules shall govern all procurement of consultant services referred to inthis Schedule: 1. As a condition for participating in the selection process, foreign consultants shall not be required to enter into ajoint venture agreement with local consultants, unless the conditions stated inparagraph1.12 ofthe Consultant Guidelines are met. 2. As a condition for participating in the selection process, foreign consultants shall not be required to legalize their proposals or any documentation related to such proposals with Bolivian authorities. 3. Foreign consultants shall not be required to be registeredinthe Borrower's National Registry of Consultants (Registro Nacional de Consultoria). C) ProcurementPlan The Borrower, before Negotiations, should submit an updated version o f the procurement plan for project implementation, which will provide the basis for the procurement methods. 65 Above-mentioned Procurement Plan will be available at the Bolivia CO, in the project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementationneeds and improvementsin institutional capacity. (D)Frequencyof ProcurementSupervision In addition to the prior review supervisionto be carried out from Bank offices, the capacity assessment of the PCU has recommended yearly supervision missions to visit the field to carry out post review of procurementactions. The post review ratio is one in 5 contracts for procurement of goods and works and selection of consultants for employment of firms and individuals. 66 Attachment 1 Details o fthe Procurement Arrangements involving internationalcompetition. 1. Goods, Works andNon-ConsultingServices. (a) List of contract Packagesthat will be procured following ICB and Direct Contracting. 1 2 3 4 5 6 7 8 9 Ref. Contract Estimated Procurement P-Q Domestic Review Expected No. Description Cost Method Preference By Bank Bid Comments PriorFost I I Opening Date I NONE (b) All contracts estimated to cost above $250,000 per contract for procurement of works and $50,000 per contract for procurement of goods and non-consulting services, regardless of the procurement method used, as well as all Direct Contracting, will be subject to prior review by the Bank. 2. Consulting Services (a) List of consulting assignmentswith short-list of internationalfirms. 1 2 3 4 5 6 7 Ref. Descriptionof Estimated Selection Review Expected No. Assignment cost Method By Bank Proposals Comments (PriorPost) Submission Date NONE (b) Consulting services estimated to cost above $35,000 per contract and Single Source selection of consultants (firms); and assignments estimated to cost above $20,000 per contract and single source selection of individual consultants will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than $100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions o f paragraph 2.7 of the Consultant Guidelines. 67 Annex 9: Economicand FinancialAnalysis BOLIVIA: Landfor AgriculturalDevelopmentProject. The project's economic analysis is based on illustrative models o f typical productive projects which will be implemented. These illustrative models show both financial and economic viability for the project. All the models show positive cash flows after initial investment periods, Net Present Values and Internal Rates of Return (IRR) equal or greater than 10%. Financial analysis shows that the initial returns in each of the model are generally negative inthe first year, which i s the primary reason for institutinga grace period on the loan repayment betweenone and three years.. Each scenario was calculated using minimal, medium and optimal assumptions about costs, output prices and yields. The results presented are all based on the minimal scenarios, that is, the most pessimistic scenarios with respect to these parameters, with one exception which i s explained below. The models are based on 15 year land purchase repayment periods with annual interest rates o f 8%. In the models a one-year grace period i s assumed. The cattle models require a three-year grace period. Group size is assumed to be twenty families. Foregone family labor income in other activities i s not considered because the assumption i s made that the agricultural project will be managed by two-three individuals receiving wages. Model 1.Sugar Cane in Mineros Municipality. The model assumes 80 hectares of land at a purchase price of $1,000 per hectare producingsugar cane which must be re-planted every five years and a discount rate o f 10 percent. The land purchase price i s included as a cost in year zero, and the residual value o f the land i s included as an equity credit in year fifteen. The initial scenario for this model is the following. Land purchase price: $80,000 (loan at 8% per annum). Establishment of sugar cane, operating capital and TA: $63,350 (10% beneficiary contribution; 90% non-reimburseable). Total initial outlay: $143,350. 68 Table 1. Cash flows and indicators of return for sugar cane in Mineros. (US Dollars). Net cash Discounted Cash Period Net cash flow flow Flow I 0 1-143.350,OO I I -143.350.00 I 1 40.450,OO 2.022,50 36,772.73 2 34.530,OO 1.440,79 28,537.19 I 3 27.587,14 1.093,64 20,726.63 4 I 21.384,29 I 783,50 I 14,605.75 I I 1 29.872,86 Il.X)Y-):;i 1 23.670.00 10.038.39 1 ::I 39.101,43 I 1.669,36 I 32.158.57 1.322.21 9.3 15.19 - 1 14 25.955,71 1.012,07 6.834,95 15 72.492,86 3.338,93 17.354,21 NPV 74.331.41 IRR 18,30% Source: Project background study on productive models. . The table demonstratesthat the project has a positive Net Present Value of $74,331 and an Internal Rate of Return of 18.3 percent, making it is a viable investment which can increase beneficiary income substantially while paying off the land purchase. Cash flows for the group are positive except during the years when cane must be replanted, which means that part of the net cash flow will have to be saved and deployed for replanting every fifth year as is standardpractice insugar production. The second model considers 80 hectares of agricultural land in the Municipality of Minero with two crops per year, one of soy and one of corn. It assumes twenty families in the association. In this model the initial scenario is the following. Land price: $80,000 (loan at 8% per annum). Working capital, infrastructure and TA: $28,460 (10% beneficiary contribution, 90% non-reimburseable). Total initial outlay: $108,460. 69 Table 2. Cash flows and economic indicatorsfor Soy-Corn Model in Mineros (US$) Discounted Cash Period Net cash flow Net cash flow (Group) (per family) Flow (Group) I 0 I -108,460 I I -108.460 I 1 4 1 27,594 I 1,094 I 18,847 I I 8 I 29,422 1 1,185 I 13,725 I I 12 31,251 13 I 31.708 1.299 9.84 99957 I 14 32,165 1,322 8,470 15 112,622 5,345 26,961 NPV 128,915 IRR 25.47% The model demonstrates that the project i s economically and financially viable, with positive cash flows in every year, substantial net income increases for the individual beneficiaries. The Net Present Value o f the project in the model i s $128,915 and the Internal Rate o f Returnis 25.5 percent. Model 3. Sesame and garbanzoproduction in Pailon. The third model presents a scenario o f mixed sesame in the summer and legume (e.g. garbanzos) with complementary irrigation during winter assuming 60 hectares o f cultivated land and twenty families in the association. The table presents this medium- intensity scenario. The minimal scenario of one crop per year is not recommendable. In this scenario the initial conditions are the following. Landprice: $80,000 (loan at 8% per annum). Irrigation system, operating capital and TA: $112,195 (10% beneficiary contribution, 90% non-reimburseable). 70 Table 3. Cashflows and economic indicatorsfor modelof sesame-garbanzoen Pailon Net cash Net cash Discounted Period now now Cash Flow (Group) (per family) I 0 I -192.1951 I 4 I 25.0241 962 I I 26'852i 1.03 27.310 1.075 10 1.10: 1 :3 I 1.141 29.138 1.17: ~ 14 29.595 1.19f 15 110.052 5.21( NPV 25.632 IRR 12% The table shows that the net cash flows to beneficiaries are positive ineach year, and that the project is has a positive Net Present Value of $25,632 and an Internal Rate of Return of 12 percent. Model 4. Cattleproject in the Municipality of Charagua. Inthe Municipality of Charaguathe productive options are relatively reduced, given the dry climate. Background studies confirmed that corn, yuca and beans are cultivated only for self-consumption. Cattle production in a highly extensive yet managed system, however, i s widely practiced inthe dry Chaco ecosystem. This model is based on 4000 hectares of extensive range, with an initial herd of 360 heads, and an association of 20 71 families. The initial conditions for this model are the following. Land price: $80,000 (loan at 8% per annum.); Cattle purchase, infrastructure and TA: $56,700 (10% beneficiary contribution, 90% non-reimbursable). Total initial outlay: $136,000. Table 4. Cashflows andeconomic indicatorsfor modelof extensive cattle Productionin Charagua. Net cash Discounted Cash Period Net cash flow flow Flow 1 (per family) (Group) 0 I(136.700,00)1 I -136.700,001 I 4 I 6.667,OO I I 4,553,651 I 8 I 19.806,75 I 657,001 9,239,991 I 10.4 The model o f extensive cattle raising does not have positive cash flows until the fourth year. By introducing milk production, which is considered under the medium scenario, it i s possible for the project to generate immediate positive cash flows. The model demonstrates a Net Present Value which i s positive but small and an IRR o f 10 percent, butwhich couldbe improved significantly ifthe conservative parameters usedare relaxed (Le., calving rates o f 50 percent initially going to 65 percent). Nevertheless, the cattle project also maintains and increases the asset value o f the cattle, which arrives at approximately $10,000 per family over the horizon o f the project. The same models were calculated with higher interest rates for the land purchase, for example 15 percent. In these simulations net cash flows, while positive, became small 72 and economically unattractive. The analysis indicates that rates greater than 10% per year on the loan principle for land purchase make the project economically unattractive for the beneficiary. A projection o f the economic returns on the overall project can be obtained by replacing the nominal prices with shadow prices and making assumptions about the number o f subprojects to be carried out, and assuming a distribution o f the subprojects among the different productive models. In this projection it is assumed that a total of 120 subprojects will be carried out, distributed with forty percent inMineros, forty percent in Pailon and twenty percent in Charagua. This projection is shown in Table 5. Summing up over all the subprojects, the overall project shows a net present value of $17.65 million and a internal rate o f returno f 16 percent. Table 5. Projection of Overall Project Returns (US Dollars). 1 1 Year IModel 1:Cane Model 2: Model 3: Corn Sesame-Beans Model 4: Cattle Overall Project 0 -328,735 I -271.150 I -951,275 I -710,775 I -2,203,072 1 -758,466 -601,748 -1,685,534 -1,660,388 -4,814,557 2 -459,077 -55,896 -1,435,875 -1,877,745 4,108,978 I 3 370,976 753,162 500,811 -144,598 1,290,249 4 I 298,421 I 755,214 I 756,769 I 195,778 I 1,749,586 I 1 8 I 330,861 I 670,998 I 672,379 I 475,094 I 1,921,351 1 73 The loans made for landacquisitionwill be made from a rotating fundwhich will be capitalized by the Bank loan. This fund i s expected to continue to operate after the life of the project and thus function as a long-term financing mechanism for landpurchase. Table 6 presents an illustrative model o f the flows into and out o f the landpurchase fund. The table demonstrates that the rotating fund will generate sufficient flows to continue to fund significant landpurchases over a thirty-year planninghorizon. 74 Annex 10: Safeguard Policy Issues BOLIVIA: Bolivia Land for Agricultural Development Project. In accordance with the Bank's Environmental Assessment Policy (OP 4.01) and this project's Category B classification, an Environmental Assessment (EA) report has been drafted by the Borrower, with copies sent to the InfoShop inWashington and publicly available inthe offices o f the Ministry o f Sustainable Development in L a Paz, Bolivia. The key environmental requirements outlined inthe EA report are reflected inthe project's Operational Manual. Natural Habitats and Forests. The project's three pilot municipalities (Mineros, Pailon, and Charagua) all have considerable areas o f native (primary and secondary) forests, with localized wetlands and other natural habitats. Mineros i s now about 40 percent forested; the balance i s cropland, pastures, and young second growth. Pailon i s still nearly 30 percent forested, with more than 30 percent in cultivation or deforested pasture, and the balance as second growth. Charagua i s roughly 75 percent covered by dry Chaco forest and related natural habitats. The project can, and--if implemented as planned--will be carried out without significant deforestation or other natural habitat loss. Inthe case o f Mineros and Pailon, there i s an ample supply o f land which has previously been deforested (though not in anticipation o f this project) to meet the expected, project-facilitated demand for agricultural land by organized beneficiaries. InPailon, up to 30,000 hectares (ha) could be acquired for agricultural development under this project; this compares with over 700,000 ha o f land which i s under crops, pasture, or second growth. In Mineros, some 10,500 ha could be acquired under the program, compared to more than 300,000 ha which have already been deforested. Land market study data collected during project preparation indicates that many o f the lands being offered for sale contain extensive deforested areas, so that additional deforestation would not be needed by program beneficiaries to carry out their planned agricultural or animal husbandry activities. Moreover, mechanized deforestation i s now quite expensive (US$250-450/ha) relative to land prices (roughly US$SOO/ha in Pailon and US$1000/ha in Mineros), so there i s presently strong economic incentive for program beneficiaries to carry out their agricultural activities on previously deforested lands. Inthe special case of Charagua, the principal production system on project-assisted lands will be extensive cattle ranching, usingthe locally-adapted, environmentally friendly ramoneo system in which the cattle browse on the Chaco forest vegetation, with no land clearing for pasture required. Essentially the only deforestation expected on project-assisted lands would be the relatively small patches (2-3 ha per family) o f subsistence crops, which supplement the cash income earned from cattle. Since the project might benefit up to 500 families in Charagua, the cumulative total could be as highas 1,500 hectares. However, inpractice, it is likely to be lower because much o f the land chosen for subsistence agriculture will already have been cleared by the previous landowner. In any event, these agricultural clearings would be dispersed as small islands o f cultivation in a Chaco forest-dominated landscape; there would thus be no significant loss o f Chaco forest or associated natural habitats. The lands to be acquired in Charagua (from local, non-indigenous cattle ranchers who wish to sell) will be incorporated within the Isoso TCO (Indigenous Territory). Hunting (for subsistence, rather than for local markets) is an 77 important part of the traditional livelihoods of the Icoceno Guarani indigenous people who would be acquiring lands in Charaguaunder this project. Unlikethe case inMineros and Pailon, no colonist migrants from outside the area would be eligible to receive lands in Charagua; this requirementwill be made explicit inthe MO. The overall intensity ofthis subsistence hunting is not expected to change under the project, since the beneficiaries would be local indigenous people who already hunt. Human population densities in the Isoso TCO would remain fairly low, such that subsistence hunting is expected to remain at generally sustainable levels. Overall, the project's interventions in Charagua are expected to be environmentally benign, conserving most of the existing natural forest cover and compatible with biodiversity conservation. Critical Natural Habitats and Critical Forests (as defined in OP 4.04 and 4.36, respectively) are not known from Pailon. InMineros, the only known such areas are the Chore and Guarayos Forest Reserves, which are excluded from project eligibility. In Charagua, the project area includes the Isoso TCO, which i s adjacent to the Kaa-Iya Gran Chaco National Park. The Isoso TCO also contains several areas of high conservation value, namely the Nande Yari wetland and the Arenales de Guanacos (vegetated sand dunes). The lands to be acquired under the project would not be withinthese critical natural habitat areas. The project is likely to be beneficial from a forest conservation standpoint, by reducing the existing pressures by small farmers to colonize forested and protected areas. The project is expectedto address a significant 15-30 percent of the existing demand for agricultural land inthe Department of Santa Cruz. In Mineros and Pailon, the project's beneficiary farmers will make use of previously deforested lands of high agricultural potential, without needing to clear additional forested land. InCharagua, project beneficiaries are expected to use environmentally friendly production systems that sustainably utilize the existing Chaco forest, with minimal land clearing for subsistence crops. Moreover, the project's eligibility criteria for beneficiary farmers disqualify persons who knowingly settled within protected areas or Forest Reserves. Although this requirement might not always be feasible to enforce during project administration, it will nonetheless send an important signal to land-seeking farmers that they can-and should--obtain agricultural lands legally, without invading protected areas. Pest Management. Pest management issues are most prevalent in Mineros and Pailon, with commercial crops such as soy, sesame, rice, sugar cane, and cotton; they are much less significant in Charagua, where the dominant production system is cattle ranching within the natural Chaco forest. The draft Pest Management Plan (PMP) comprises Chapter 15 of the EA report. The PMP indicates that the technical assistance service providers for Mineros and Pailon will formulate and carry out a plan for providing advice and training on integrated pest managementand on safe pesticide handling and storage. This plan will be refinedduring the PPF phase. In accordance with the Bank's Pest Management Policy (OP 4.09), the PMP indicates that any pesticide procurement under the project will be submittedto the Bank for prior review. The PMP specifies that the project will not procure highly hazardous compounds in the World Health Organization's Classes IA and IB. The environmental monitoring of pest management on beneficiary farms will be coordinated by thePCU, as part of their overall supervision of compliance with Farm Management Plans (POPS,Planes de Ordenamiento Predial). 78 Cultural Property. According to the EA report, no important sites o f archaeological or historical interest are known from the rural lands which would be eligible for acquisition and development under the program. In the event that important cultural property i s discovered by beneficiaries after the land has been acquired, the POP would be amended to ensure that the site in question is not disturbed by agricultural activities. Component 2 civil works which would damage archaeological or historical sites are not eligible for project support. The environmental rules for contractors (EA, Chapters 9 and 13.5) specify chance finds procedures inthe event that archaeological relics are uncovered during civil works construction. Soil Conservation. Soil erosion is a serious problem in much o f Santa Cruz, especially during windy periods. The project's technical assistanceto beneficiaries will cover the use o f sufficient trees as windbreaks, reduced tillage, and other soil conservation techniques. Eligible lands for acquisition or investments under the program will need to have suitable soils, as well as being consistent with the official LandUse Plan (PLUS) o f the Department o f Santa Cruz. EnvironmentalManagementPlan: The Environmental Management Plan for this project is contained within Chapters 8-12, 14-15, and 18 o f the EA report. The key environmental criteria and procedures for project implementation are also contained within the Operational Manual. These criteria and procedures include: a. Land Screening Criteria. Lands excluded from this program (ineligible for acquisition under Component 1 or investments under Component 2) include those (i)located within or adjacent to existing or proposed protected areas (including National Parks, Biological Reserves, Biosphere Reserves, National Reserves, and IntegratedManagement Areas) and Forest Reserves; (ii) containing known critical natural habitats (including Nande Yari and Arenales de Guanacos inCharagua); (iii) for forestry or other non-agriculture, non-grazing land uses in zoned the PLUS; (iv) parcels with more than 40 percent forest cover (except in Charagua); (v) deforested after January 1, 2005 (to avoid creating any perverse incentives for landowners to clear lands just to sell them, notwithstanding current market conditions); (vi) containing important known archaeological, historical, religious, or sacred sites; (vii) with soils that are largely unsuited to the planned agriculture or ranching systems; or (viii) in flood-prone areas, where frequent crop losses would be likely without major new drainage works (which would be outside the scope o f this project). To facilitate the proper application o f these criteria during project implementation, the PCU will preparemaps o f each municipality, indicating the zones in which lands could not be acquired under the program (due to one or more o f the above restrictions). The specifications (scale, etc.) will be completed during the PPF phase and target date for completing these maps will be completed during negotiations. b. Beneficiary Selection Criteria. The project's eligibility criteria for beneficiary farmers explicitly disqualify persons who knowingly settled within protected areas or Forest Reserves. Farm ManagementPlans. Eachbeneficiary group that acquires land underthe program will be required(under Bolivian law, as well as the Operational Manual) to preparea Farm Management 79 Plan (POP) that specifies the intended land uses and cultivation practices to be used in each portion o f the parcel. The PCU will review and approve each POP, as well as periodically supervise field implementation by the beneficiary farmers (who would suffer financial penalties for not following the POP closely enough). The PCU will not approve POPs which would imply the deforestation o f more than 5 percent o f the parcel to establish the intended production systems. The POP is thus an important tool for (i) protecting the remaining, forested portions o f land parcels acquired under the program; (ii) matching intended land uses to site-specific soil, slope, and drainage conditions; (iii)promoting good environmental practices, including soil conservation methods; and (iv) promoting integrated pest management and safe pesticide use, handling, and storage. InvestmentScreeningCriteria. The types of Component 2 investments that cannot be financed under the program include (i)mechanized land clearing; (ii) or improved roads through new forests; (iii)dams 10 meters or higher; (iv) large-scale drainage or flood protection works; (v) aquaculture with ecologically risky non-native species; (vi) new irrigation areas larger than 200 ha per subproject; (vii) use o f highly toxic pesticides (World Health Organization Categories IA or IB); (viii) use o f wild species that are endangered or under strict legal protection; or (ix) works which would damage archaeological or historical sites. EnvironmentalRules for Contractors. For the Component 2 land improvement civil works (such as farm access roads and water systems), these environmental rules cover construction and maintenance practices (erosion control, waste disposal, pollution prevention, etc.), personal behavior (no hunting, wildlife capture, burning o f vegetation, etc.), chance finds procedures for cultural property, and financial penalties for non-compliance. EnvironmentalMonitoring. Environmental monitoring will be coordinated by the PCU ,as an integral part o f the project's overall monitoring and evaluation activities. The EA report recommends that the environmental indicators to be used in such monitoring include (i) changes inforest cover and other landuse changes onbeneficiary farms (the neededdata canbe collected under the project's broader socio-economic impact monitoring, rather than requiring a separate study); (ii)proportion o f beneficiaries using pesticides, and those using I P M techniques; (iii) proportion o f beneficiaries using specified soil conservation or (in Charagua) range management techniques; and (iv) compliance by beneficiaries with POPs. EnvironmentalResponsibilities. A full-time environmental specialist will be hired inthe PCU to oversee the environmental aspects o f the project. This specialist's responsibilities will include, inter alia, (i)ensuring compliance with the land and investment screening criteria, (ii) reviewing and verifying compliance with POPs; (iii)ensuring that the technical assistance provided to beneficiaries adequately incorporates environmental (including IPM) considerations; (iv) field supervision of Component 2 investments and contractor activities; (v) providing environmental advice and arranging training (as needed) for PCU colleagues and service providers; and (vi) arranging and supervisingenvironmental monitoring o f project impacts. Public Consultation. In the course of EA report preparation, a wide range of stakeholders (including indigenous and other likely project beneficiaries, conservation NGOs, and local government officials) were consulted for their views about the environmental and other aspects 80 of the project. The draft EA contains a partial list of the stakeholders consulted (see Annex 12). A particularly important finding from this consultation process is that the Capitania de Alto y Bajo Isoso (CABI), an indigenous NGO with co-management responsibilities for the Kaa-Iya Gran Chaco National Park, is highly supportive of this project. The Kaa-Iya National Park superintendent (representing SERNAP, the Bolivian protected areas agency) also has no objection to the project and does not foresee any conflicts betweenthe project andthe park. Indigenous Peoples (OD 4.20). The direct project beneficiaries would be predominantly indigenous peoples. Inthe case of Isoso, the beneficiaries would be the native Izoceno (Guarani) indigenous group, who would further consolidate their existing TCO (indigenous reserve) by acquiring some of the inholdings from non-indigenous cattle ranchers who would be willing sellers. In the case of Minero and Pailon, the direct beneficiaries would largely consist of colonists from highland indigenous (typically Quechua and Aymara) populations who migrated within the last 1-2 generations from the Bolivian altiplano and high valleys to the Santa Cruz lowlands. Thus, the PAD for this project will serve as the Indigenous PeoplesDevelopment Plan (IPDP) specified under OD 4.20. A summary of the social and cultural assessment (Annex 11) carried out by the borrower will be disclosed in the Infoshop as well as in-country prior to appraisal. A process of consultation has been carried out that includes the indigenous leadership, local authorities and stakeholders (a table depicting this process i s inAnnex 10). Involuntary Resettlement (OP 4.12). The criteria within the Project Operational Manual for screening of eligible lands are expected to exclude all of the possible scenarios for involuntary displacement (such as lands with squatters, resident laborers, or overlapping titles or legal claims). 81 Annex 11. ExecutiveSummary of Social Impact Study Bolivia:Landfor AgriculturalDevelopmentProject. EXECUTIVE SUMMARY SOCIAL AND CULTURAL STUDY Viceministry of Land Ministry of SustainableDevelopment SOCIAL ANALYSIS AND ACTION PLANFORTHE LAND TENURE AND AGRARIAN DEVELOPMENT PROJECT Introduction This summary describes social dimensions o f the Land Tenure and Agrarian Development Project as well as procedures that have been carried out in the development o f the studies and social evaluations within the framework o f a process seeking to generate a model complementary to those already existing on what concerns land distribution, bearing with it a process o f sustainable development and improvement inliving conditions for participatingbeneficiaries. Social consultations were made at all times with participation o f people involved at different levels; support documents such as lists o f participants and notes taken during meetings are to be found among those attached to this summary and whose reading i s recommended to have an integral and global vision of the work undertaken inthe social area along the studies. Social Objectives The project focus is on campesino and indigenous young and poor families with land or with insufficient land, o f communities and municipalities o f the areas defined for project implementation. Aside from buying land, the project contemplates productive support. Socially, the following objectives are expected: 0 Poverty reduction: is the main social objective of the Project; to improve living conditions o f rural campesino and indigenous families through the access to land and support for production. 0 Equitable and fair access to land: main instrument -and at the same time objective o fthe Project- to achieve poverty reduction. Social Inclusion: beneficiaries will improve their income and thus will become active participants in the economy, politics and the full exercise o f citizenship, with conditions equal to those ofthe rest o f society. 82 0 Consolidation and enforcement of tenures: support for production will favor the consolidation o f tenures especially on what concerns Indigenous Territories (TCOs), favoring social equity. The tenure o f those poor campesino families, which do not have support for production and thus do not take advantage o f their land tenure, will be consolidated as well. a Productive Autonomy: promote the creation of independent productive associations with the capability o f insertion into market systems. 0 Gender Impact: the Project pretends to favor women (heads o f households) in their right to the legal tenure o f landwith gender equity. 0 Organizational strengthening: with training and assistance on management, organization and planning issues. This strengthening will enhance credibility o f the organizations andtransparency intheir management. Context One o f the great challenges o f the Bolivian government to deepen and improve the results o f the agrarian reform, i s to create alternative or complementary mechanisms for the equitable access to the land o fpoor indigenous and campesino families, since demand on land is accumulated given that the mechanisms foreseen by the Agrarian Law cannot fully satisfy such demand. The agrarian reform process in the country has reached a critical point due to pressure that it exerts in productive lands, given that fiscal land i s more and more scarce and its vocation i s greatly forestry. On the other hand, there is a great unmet and accumulated need o f land on the part o f indigenous and campesino communities and small owners. It is necessary to seek complementary mechanisms -to that already existent- that are expeditious and allow the effective (productive) access to land on the part o f farmers that have no capital. The project falls within the 2015 Goals o f the UnitedNations, whose final objective is based on the Strategy for the Poverty Reduction. According to data handled by the INRA, 93% o f the land in Bolivia has property rights, be it in legal or illegal form, which implies a virtual absence o f productive land with agricultural vocation, aside from the existence o f a land market that i s irregular, skewed, unequitable and unfair. It i s therefore necessary for the State to intervene actively in its regulation and to control distortions. Charts with information and data o f land in Bolivia, in the Santa Cruz Department, and in the municipalities o fproject intervention (data obtained from INRA, August 2002) follow: 83 BOLIVIA: AREA DISTRIBUTEDBYBENEFICIARY ACCORDING TO TYPE OFTENURE Type of Tenure % Beneficiaries Area YOArea BeneJciaries Small 279.523 32,48 5.043.204,4144 5,41 Medium size 125.029 14.53 16.532.903.5278 17.74 Enterprise 19.486 2,26 3 1.097.403,6092 33,37 CampesinoLots 4.026 0,47 23.880,9006 0,03 CommunityProperty 342.491 39,80 12.829.087,9831 13,77 T.C.O. 77.714 9,03 26.718,826,123 1 28,68 No Data 12.358 1,44 931,485,2941 1,oo Total 860.627 100,OO 93,176,791,8523 100,oo Bolivia:Area distributed by Beneficiaryaccordingto type of use of the tenure Use of the tenure Beneficiaries %Beneficiaries Area %Area Agriculture 382.265 44,42 9.058.076,5938 9,72 Stock Farming 54.380 6,32 25,089,683,3226 26,93 Mixed 405.262 47,09 49.385.569,3 801 53,OO Others 927 0,ll 468.003,0806 0,50 N o data 17.793 2.07 9.175.459.4752 9.85 Total 1860.627 ~100,oo 193.176.791,8523 I100,OO Source: Agrarian Statistics. Land Tenure inBolivia (1953-2002). 2002. Santa Cruz: Area distributedfrom 1953 to 2002: Period Beneficiaries %Beneficiaries Area YOArea 1953-1958 1.013 0,70 95.379.7496 0,30 1999-2002 31.436 21,80 10.304.03 1,4999 28,70 Totals (1953-2002) 17.137 144.162 35,905,056,2358 100 I Types Santa Cruz: Area distributedaccordingto type of tenure (1953-2002) of Tenure I Beneficiaries I %Beneficiaries I Area Distributed YOArea I Small 54.75 1 38.00 2,252,459,4091 6.30 Medium size 22.051 15.30 7.360.562,9385 20.50 Enterprise 11.140 7.70 18,892,283,2379 52.60 Campesino Lots 1.328 0.90 1.005,9934 0,oo Communitytenure 21.749 14.90 808.75 1.5325 2.30 T.C.O. 31.653 22.00 6.243.079.3670 17.40 Without classification 1.786 1.20 346.913,7574 1.00 Total 144.162 100.00 35.905.056,2358 100.00 84 Use of the Tenure Beneficiaries %Beneficiaries Area Distributed YOArea Agriculture 49.389 34.30 2.564.339,7813 7,lO Stock Farming 12.507 8.70 11.004.697,5501 30,60 Mixed 75.72 52.50 14.240.693,8544 39,70 Others 308 0.20 410.260,1164 1,lO Undetermined 6.236 4.30 7.685.082.9336 21,40 Total 144.162 100.00 35,905,056,2358 100,OO There are no disaggregated data on land tenure at the municipal level; a process of land clean up i s being undertakenat present for agrarian tenures that will facilitate the elaboration of pertinent reports during the course of the PPF application for the Project. To date, 14% of municipal area at Mineros has been cleaned up, 26% at Pailon and 32% at Charagua. Notwithstanding, if the following data is taken into consideration, the majority of potential beneficiaries do not have or have insufficient land. The following table has been elaborated with percentages: Type of Worker Type of Tenure Percentage Salaried Workers Notenement 32% Agricultural worker Rental 5% Smallowners Less than 10 has. 31% Smallproducers Largerthan 10to 40 has. 16% Medium sized producers Larger than 40 to 80 has. 4% Small community productiveunits Between 2 and 5 Has. 12% According to the Municipal Development Plan, in Charagua, 85% of families have community tenure and 15% individual tenure. At this municipality, indigenous populations have requested a total of 1.722.323 has. as Indigenous Territory (TCO) which represents 23% of the municipal area. At Mineros, community inhabitans acceded to land in different ways; 77% provided by the former Agrarian Reform National Council [Consejo Nacional de Reforma Agraria], 15% by direct procurement, 5% by spontaneousoccupation and y 3% by inheritance. Land tenure and its legal aspect are somehow reflected inthe award of titles. At Mineros, 88% of individual owners have Agrarian Reform titles, 8% have their titles being processed or not yet cleaned up, 4% do not have any document insupport of their land's tenure. The majority of the Guarani indigenous population, main beneficiary of the project, does not have land and are salariedworkers and day laborers for private enterprises or prosperous settlers (menonites and Westerners) (PDM 2003). At Pail6n there are three types of land tenure: urban and rural communities, a major part of which bear definite urbanization signs and are the basis for the OTBs (Territorial Base Organizations) that have acquired their lands through a grant from the State or over time (which 85 i s denominated "campesino lots") with tenures of 0,5 to 70 hectares. On the other hand, there are the private small-medium tenures, medium sized and large whose owners normally reside in Santa Cruz and to whichthe menonite settlers are assimilated, with tenures of 70 to 250 hectares. Finally, indigenous communities in the process of obtention of lands for collective use (this group is out of the project). (PDM, 2003) Concerning the use of the land, municipalities selected for project implementation show a mostly agricultural vocation as is detailed inthe following tables: Municipality of Charagua:Use of land Extensive Stock farmingusewith potentialfor 1.883.357,211 26,32 IntensiveStock FarmingUse 39,101,457 0,55 Silvicultureandgrazing Use 12.349,433 0,17 LimitedSilviculturaland grazing farming Use 222.839,256 3,ll MunicipalityofMineros:Landuse Source: LandUsage Plan 86 Municipality of Pail6n: LandUse Source: LandUsagePlan Concerning types of crops andproduction volumes, there i s the following data: Pail6n: Area by crop at the communities 1.CROPS I Hectares I Yield Tn/Ha I TotalProd.Tn/Ha Pumpkin 5.0 0.2 1 .o Total 3.674.5 Source: Municipal DevelopmentPlan, 2003. Mineros: Area by Crop at the communities Source: FORTEMUProject,2003. 87 This information is not registered at the Municipalitiy of Charagua. However, it is fair to say that the main crops, as stated in the MDP, are corn, sorgum, soy, sesame, vegetables, watermelon, yuca and potatoes; likewise, the average o f hectares cultivated per family i s 2,2 hectares and the product mostly grown i s corn; loss in the harvest i s up to 80.1% (Rapid Diagnosis o f Drought at the BolivianChaco region, M A C A and Ministry o f Defense 2004). The following table has been elaborated on what concerns the destination o f production at the project intervention areas and using data from direct field observations, from interviews and the PDMs (Municipal Development Plans): Municipality Self consumption Market Charagua 86% 14% Mineros 5% 95% Pailon* 22% 78% The project foresees to undertake a detailed study over the market and land tenure at the three municipalities under intervention, given that the information existing to date i s insufficient. It has not beenconsidered appropriate to handle existing provincial data since it would skew reality at the municipalities. LegalFramework The project i s covered by the national legal framework that seeks to improve productive and living conditions for indigenous and campesino communities, based in respect to social rights and the environment, inaccordance with the following legal instruments: The Political Constitution of the State (C.P.E) acknowledges, respects and protects social, , economic and cultural rights o f indigenous and campesino populations that live in the national territory, especially on what concerns their rights to landtenure, ensuringthe use and sustainable utilization o f this resource. Likewise, the State acknowledges the right to productive and union associations, and the legal personality o f indigenous and campesino communities. Article 134 o f the Constitution states: "Economic organization must essentially respond to social justice principles directed to ensuring all inhabitants a living for human beings," seeking the "Welfare o f the Bolivian population." Likewise, "private initiative will receive incentive and cooperation from the State, whenever it contributes to the improvement o f the national economy" (article 144 C.P.E). Likewise, articles 165, 166,168, 173 o f the same legal document, establish that the State has the obligation to provide promotional loans to campesino populaltions in order to upgradeagricultural production. Likewise, the INRA Law states that it i s the policy o f the Bolivian State to create a complementary mechanismto accede to landtenure, foreseen by Law No1715. 88 Paragraph I11 o f Article 3 o f Law No2225 dated 31 July, 2001,National Dialogue 2000, states that the Bolivian Strategy for Poverty Reduction acknowledges as its mainbeneficiaries the poor populations o f the country, with focus on women and particularly on indigenous communities andtowns and marginal urbansettlements. It is important to articulate economic and productive actions that generate impact models inthe national economy at the areas with more pressure over land. Article 32" o f the Law on Popular Participation establishes that Executing Institutions should have as beneficiaries, among social subjects, directly or through intermediary organizations, the Territorial Based Organizations. Supreme Decree No27298 dated 20 December, 2003, created a financial line to be managed by the National Social and Productive Investment Fund- FPS, and institutedthe legal precedent for the creation o f financial lines to be managed by intermediary financial organizations, as a direct transfer mechanismto productive indigenous and campesino communities. Law 1715 dated 18 October 1996 establishes two instruments for the State to grant lands to indigenous and campesino populations: i)distributionoperates over land identified or reclaimed to the State through the free donation o f landto communities and lucrative award through public licitation; and ii)redistribution o f land that operates based on expropriation and subsequent award through public licitation. Other legal provisions that frame the project: Environmental Law o f 1992 ensures the use, management and conservation o f natural renewable resources inindigenous lands and enforces the evaluation o f environmental impacts o f projects that can affect indigenous communities. Inorder to complete the legalframework, a Supreme Decree is onthe works to: I. Approve the LandandAgrarian Development Project(PRO -TIERRAS-DA), whose objective i s to improve the living conditions o f low income indigenous and campesino families, through a complementary mechanism to accede land and productive and social support (community investments). 11. Approve a new line o f funding so that the Ministry o f Sustainable Development can channel public financial resources, through the Fund for the Development o f the Financial System and Support to the Productive Sector (NAFIBO/BDP), benefiting indigenous, campesino and native communities, as a rapid and effecient means o f direct transfer o f public financial resources to those communities acknowledged as the main beneficiaries o f the Bolivian Strategy for Poverty Reduction, Law No2235 dated 31 July, 2001, o f the National Dialogue. 89 Project Areas: General Characteristics The area of project intervention comprises 3 municipalities: Charagua, Pailon and Mineros. However, given the recent division of the last municipality, social consultations were carried out at communities that now belong to neighboring municipalities (Fernhdez Alonzo and Saavedra). As per the census carried out by the INE in 2001, rural and urban populations at these municipalities are distributed as follows: Municipality Urban Rural Annual Population 20.789 27.915 6.96 8.79 18.976 I 45.853 I 5.08 I 0.78 A projection for the year 2005 has beenmadewith these data which, as has beenobserved during field visits, coincides more with present reality: Total YO % % Municipality Urban Rural Total Population Population Population Indigenous Indigenous indigenous Native High Low Population Population population lands lands Charagua 2.853 24.507 27.360 90,53 24.770 85 14 1 Pailon 9.327 29.120 38.447 71,20 27.375 20 72 8 Mineros 32.769 19.575 52.344 67,95 32.95 1 5 75 20 These data support the classification made of municipalities inregard to population dynamics: 0 Charagua: municipality that expels population due to difficult productive conditions. 0 Pail6n: municipality intransition. Receivedpopulation during the sixties and seventies with settlement plans -among those that of the World Bank for Eastern Lowlands- i s becoming a municipality in transition and thus expelling population in the long range, in light of production difficulties due to scarcity of resourcesto address drought. Mineros: population data are enlightening showing a strong population pressure due to highly productive land that incentivates emigration for temporary work and the enlargement of the agricultural frontier. Social characteristics of the project areas The project will be implemented at three municipalities of the Santa Cruz Departmentthat show social, economic and environmental differences. Immigrants of diverse origin socially compose Pailon as well as Mineros: mainly High Lands Inter-Departmental migrations, natives of the 90 region (guaranies, chiquitanos and guarayos) as well as foreign immigrants (menonites, Brazilians, Japanese, among others). Other important factors are the weather and the land, since at Mineros the soil is fertile and there is constant rainfall, something that is very irregular at Pail6n. On the contrary, at the Charagua Chaco, the tenure is of the community, mostly populated by the guarani indigenous population; land and weather factors are harder (semi arid region), with stock farming rather than agricultural vocation. Thus, we find a Municipality that is recipient of population (Mineros), a municipality in social transition (Pail6n) and a municipality that expels manual labor to the integrated North (Charagua). In the case of Charagua, the intervention areas are Indigenous Territories (TCOs): North Charagua and the Low Isoso. TCOs are community tenures for indigenous populations; however, inthe process of demarcation and awarding of community tenures, the State respected the tenure rights of the former land and private owners -to which the natives call Third Parties. These have remained with the more fertile and large lands, in many instances limiting the productive capability of the communities that grow demographically without the possibility of giving productive land to young families, forcing population to abandon their own community lands, creating acceleratedprocesses of economic, social and cultural decay inthese populations. To address this situation, the project focuses on the support to the access to land of young families in order to alleviate pressure on the agricultural frontier (Integrated North), to avoid more migrations and to consolidate indigenous tenures through land procurement and support to production. Social Actors Social actors are all those that are going to benefit directly or indirectly from the project. The Pro-tierras-DA identifiedthe following actors: 0 At the municipal level: - Communities: community members and base organizations both indigenous and campesino (OTBs). Government and municipalinstances. - -- Technical assistance enterprises. Agricultural and cattle raising services. At the departamental level: - - Prefectureof Santa Cruz. Departmental Agrarian Commission and institutions involved. - Technical assistance enterprises, - Agricultural and cattle raising services - Financial Institutions. 0 At the nacional level: -- INRA - Agrarian Superintendence Ministryof SustainableDevelopment. 91 IndigenousPopulations Most of the populations at which work is to be undertaken in the intervention areas is indigenous: quechua, guarani, aymara and chiquitana, among others. The level of acculturation at each one o f these groups i s variable; notwithstanding, all declare themselves indigenous by origin, with economic activities mainly in agriculture and stock farming. Quechua and aymara natives, especially predominant at the municipalities of Pail6nand Mineros (66% and 75% of the indigenous populations respectively) preserve their native language, even though Spanish i s used more often even in the family context. Their relationship with Andean cultureis spiritual, and socially and economically organic. Guarani indigenous, that are the majority at the municipality of Charagua (85% of the total) and minority at Mineros (20%), preserve their languagethrough use inall contexts, although Spanish i s used freely. Language becomes the main mechanism of cultural assertiveness, supported by other cultural forms that stay alive at indigenous communities, such as social and community structures, and a cosmovisionthat establishesspecialrelationships with environment. Chiquitano natives (approximately 20% at the municipality of Pail6n from which they are natives) have suffered a strong acculturation process through many centuries. In most cases, Chiquitanos do not speak their language and there are scarcely trace of cultural traditions of which they have been destituted. Notwithstanding, they identify themselves as indigenous and are part of the Chiquitana Indigenous Organization. Likewise, municipalities of Mineros and Pail6n are areas for settlement and their constitution as municipalities is based on migrant populations through several programs in the decades of the fifties through the eighties. To date still experience more restricted but sustained migration flows, mainly at the municipality of Mineros. Within these programs, many natives of high lands, mostly of quechua and aimara origin (departaments of Chuquisaca, Tarija, Cochabamba, Oruro and Potosi, mainly from mining centers), as of the sixties moved to low landsas a result of the enhancement of agroindustry in Santa Cruz and the guarani migration flows populated the Integrated North (Mineros). The project has found the third and second generation of the first settlers with recent migrants mainly at Mineros. To date, at the three municipalities, the land is not sufficient for all their descendants who are forced to work as paid workers or day laborers. In many cases, at Pail6n and Charagua, this brings migration to the Integrated North because there i s more demand of manual labor (harvest) although there are some that venture to seek land at areas at the agricultural frontier, adding in many cases to the moves of the so called "landless," and getting involvedinillegal andviolent situations. At the Indigenous Territories (TCOs) of the guaranies, although it may seem contradictory, there exists a de facto individual tenure of the land that i s respected even through generations (is inherited) andthe distribution of those depends on the productive capability ofthe family andnot on the need due to family enlargement. This reality reflects that individualismhas gained space 92 and thus it must be taken into account on what concerns productive associations; it is not possible to work with extended and diverse groups, groups should be based on family ties or cultural ties. Gender Relations One o f the social objectives o f the project seeks to favor women (heads o f households) with the right to the legal tenure of land with gender equity. The project must place special attention on this point since duringthe studies it has been verified that, as has historically happened, women are displaced to the domestic context and have little influence on the rest o f political and social activities; the population of single, abandoned, divorced mothers grows continuously. Female school desertion i s 70% larger than that for males (data obtained at fieldwork). There are differences in gender relationships among natives coming from the high lands and those o f low lands. The quechua and aimara women are more participatory than guarani and chiquitano women in the decision-making and in power relations. On the other hand, female natives coming from the high lands do not encircle their activities inthe domestic context, being more active outside o f the home than those o f the low lands (peddlers, harvest for private owners, domestic employees, laundresses, etc.). In spite o f these differences, participation o f women in productive associations should be an aspect in which the project should put special attention since this participation i s not going to be considerable through their own initiative. This is due to diverse circumstances that have been detected through fieldwork: 0 Cultural issues that relegate women to the domestic context. 0 Their activities at home limit their availability at the time o f assuming other types o f activities. 0 Many women do not make decisions by own initiative without their husbands' consent. 0 Higher illiteracy rate among women, inmost cases due to desertion at basic education. 0 Women, especially guaranies, speak their own language more fluently than Spanish. 0 The lack o f documentation o f natives in Bolivia is well known; this situation is much more serious for women, which presents a barrier at the time o f exerting their rights for the legal tenure o fthe land. The following recommendations are made to addressthese difficulties and achieve gender equity inthe activities andprocesses ofthe Pro-tierras-DA: 0 To favor women associations (heads o f households) among their members. 0 To facilitate training courses for women intasks that can be performed within productive associations inorder to support their work and good functioning. 0 To include women in the rights to tenure entitlements over land to participate legally o f the benefits in equal conditions and not be devoid of the same for eventual conditions - desertion, widowhood, divorce, etc. that can terminate their couple status. - 0 To promote campaigns for the provision of 1.D.sthat can be extended to all those persons without a national identity document. 93 Social evaluation process Social evaluation has been a constant factor in the study process for the design of the project which contemplated the direct and active participation at all times of beneficiaries, this as part of the methodological approach for the design and implementation of the project. Inthis sense, 25 meetings have been held for presentation of the project with indigenous and campesino organizations, 5 with municipal governments, and 12 with government institutions; likewise, 13 workshops were carried out for information feedback and endorsement for the implementation of the project. In order to make this approach effective, fieldwork at the intervention sites has been accompanied with surveys, talks, analytical workshops with multidisciplinary focus and direct participatory observation. The main needs, advantages, risks and impacts of project implementation at the social level for the benefit or detriment of possible beneficiaries and those external risks that canthreatenthe good development of the project, have beenidentified. Participation of and consultation with social actors Inthe phase of studies and designofthe Pro-Tierras-DA, as previously stated, social actors have beeninvolved at all times. Meetings and workshops with the actors involved have been carried out at all levels. Meetings were carried out with government instancesthat are going to participate inthe process: Prefecture of Santa Cruz, Municipalities, Councils, Panels of Dialogue and communities at the municipalities of the intervention areas. Meetings have beenheldfor the presentation of projects at all communities and neighborhoods of the municipalities from 22 September to 6 October 2004: - Pail6n: Sinai, Nueva Belen, Rosal 1, Rosal Centro (with the attendance of community - membersof Nueva Esperanza) and25 de Mayo. Mineros: Barrio Guarani and Barrio Cordillera, and communities in Betania, Puente -- Caimanes and EstanciaPeta. CharaguaNorte: Caipepe, Chorrito Alto, Chorrito Bajo, Taputa, Taputami. Bajo Isoso: at the communities of Auki, Iyovi, Coropo, Aguaragua and Rancho Viejo, as well as an extended meeting with the captains of the 14 communities inthe area. At the governmental level meetings, their interest and commitment with the Project were ensured; at the communities of settlers and natives, information was provided and obtained the authorization needed to initiate the study phase of the Project and their initial suggestions to the proposedapproach. After conducting the studies and writing the reports, workshops were carried out for information feedback with the collaboration and management of the Mayors o f the Municipalities (23 November 2004 at Pail6n; 24 November 2004 at Charagua; 25 November 2004 at Mineros). Representativesof all communities at which work had beencarried out and organizations of civil society -stock farmers, cotton growers, unions of agricultural workers, etc., atended; the information obtained was presentedwith subsequent discussion andthe plenary for conclusions. 94 In Santa Cruz City (19 October 2004), an extended workshop took place for information feedback, atended again by representatives o f the communities, as well as government entities and those o f civil organizations involved inthe process (CAO, FEGASACRUZ, Federaci6n de Colonos, etc.) Later (duringthe months o f November, January, February and March) meetings were heldwith the Captains of guaranicommunities of the Highand Low Isoso and Charagua Norte, as well as with the Guarani People Assembly and new meetings were held over the progress o f the Project at the different municipalities and with different social actors. To finish the social consultations at the preparatory stage, field work i s planned at the intervention sites o f the project for information feedback and to explain the Manual o f Operations in order to enrich its content with the participants' interventions and opinions, as well as to start their training on the steps they should follow and requirements needed to become beneficiaries o f the Pro-tierras-DA.' Summaryof the consultationprocess The participatory and consultation process has developed -up to now- in two phases, the first prior to carrying out social studies and the second after them. This process contemplates a participatory methodology in the design as well as in the implementation o f the project with direct participation o f beneficiaries, decision-making falling on organized civil society and the target population. Prior to carrying out the first meetings and field visits to the communities, secondary data was collected on the areas o f intervention and was afterwards validated with information obtained in fieldwork. The process o f data collection in consultations and social participation took place through meetings, analytical workshops, semi structured interviews and participatory direct observation; informal semi structured talks were heldwith key informants. The second phase was undertaken through information feedback workshops at which the involvement of participants was fundamental at all times to enrich and modify studies, as well as for the elaboration o fthe Manual o f Operations. At workshops planned at municipalities during the current month of March, the Manual of Operations will be presented and group discussion sessions will be carried out as well as plenary meetings for questions and conclusions. See annex o f social consultations specifying: dates, places, participants, key subjects, results, and list o f participants to verify the number and identity o f participants at each one o f the activities. Mainrecommendationsand inputsto projectdesign For more information over the consultation process, see the annex on social consultations specifying: date, place, time, issues, participants and results ofthe meetings. 95 The project design was modified due to the information feedback workshops and discussions thereof. A series o f conclusions and recommendations were reached that are important to take into account inProject implementationto ensure its good performance. Beneficiaries: poor indigenous and campesino families Beneficiaries are young indigenous and campesino families o f the communities and municipalities o f Mineros, Pail6n and Charagua and settlers coming from High and L o w Landsas well as indigenous native to the regions accordingto the following detail: Municipality YO % YO Indigenous native population HighLands L o w Lands Charagua 85 14 1 Pail6n 20 72 8 Mineros 5 75 20 These must be indigenous and campesino families with minimum five years experience in agricultural work that do not possess land or have insufficient land. Because of this, most o f them are salaried workers at enterprises and sugar cane factories inthe vicinity, day laborers, especially at harvest time (sugar cane harvest), unskilled laborers, cowboys, tenants, etc. That i s to say that they perform agricultural activities inlandsthat they do not own. It will be an indispensable condition to have minimum5 years o f agricultural experience and the same time ofresidence at the community to facilitate entrenchment and social control. To prioritize the access to land o f young families -being the head o f the household 18 to 35 years o f age- as well as that o f women whose participation should be direct and active facilitating training courses and including them inthe legal rights o f tenure titles to the land inequal conditions. To provide continuous legal assistance to mend problems o f this nature as well as technical assistance to add aggregate value and sustainability, contemplating internal and external markets and converting beneficiaries in active subjects o f the financial market - thus not dependent on other producers- through credits suitable to their means. To consider a support unit for strengthening, leadership and management o f resources o f productive associations, since leaders are usually discredited through administrative issues, more so when they do not have the capacity to manage resources. To foster the family composition o f associations given that this type o f alliances exists already in fact and beneficiaries express their doubts about the conformation o f mixed associations due to negative prior experiences. To respect traditional mechanisms for empowerment. However, the creation o f bylaws i s recommended in order to form the institutions legal framework and promote rotation inorder to avoid social conflicts and mismanagement o f resources. 96 To vary the amount levels o f the different components according to the characteristics o f the landandthe needs for infrastructureofthe areasunder intervention. 0 To seek control mechanisms to avoid politization o f the project this could affect the selection o f productive associations that apply to become beneficiaries. To strengthen base campesino and indigenous organizations and seek consensus and dialogue with all o f them, avoiding to foster conflict situations and to generate transparency in the process. Project benefits for social actors Implementation o f the project will bring benefits for different social actors, for direct beneficiaries as well as for organizations and institutions that are part o f it. Benefits There are distinct benefits for those families without land and for those that have insufficient land: 1. Benefits for young indigenous and campesino families without land: 0 Landtenure. 0 Secure income and dignified life. 0 Access to technological and financial resources. 0 Small landholders with resources to work the land, innovating technology and productive models. 0 Possibility o f adding aggregate value to part o f their products. 0 Financial flows that allow improvements in economy, savings, investment, credit management. 0 To become independent and self sufficient. Liberation from landjobbing. 0 Strengthened associate work. 0 Revalorizationo f cultural identity. 2. Benefits for indigenous and campesino families with insufficient land: Sufficient productive land. Sufficient income to ensure social and cultural reproduction o f the family unit and a dignified life. Capacity for financial and technical investment. Strengthening and consolidation o f their tenures with capacity to make technological innovations and improve their productive systems. Not havingdependents: children can integrate to work or the new resources could helpthembecome independent. Possibility o f additing aggregate value to part o f their products. Hiredtechnical support. Capability o f resource management. 97 0 Associated work that promotes community unity and helps in the growth o f internal markets. Besides, this would lead to the achievement of the social objectives of the project: 0 Poverty reduction. 0 Equitable and fair access to the land. 0 Social Inclusion. 0 Tenure consolidation and strengthening 0 Productionautonomy. 0 Gender Impact. 0 Organizational Strengthening. Institutions and organizations - Benefitsfor the communities 0 Group formation and identification of problems and options. 0 Consolidation and/or enlargement o f their territories 0 Access to technological and financial resources 0 Improvement o f their living conditions. 0 Strengtheningtheir organic, administrative and financial capabilities. 0 Enhancement o ftheir economy 0 Access to internal markets. - Benefitsfor indigenous organizations 0 Strengthening their capabilities. 0 Credibility. - Benefitsfor municipalities 0 Growth and enhancement o f their economy. 0 Improvement o f their infrastructure. 0 Greater credibility within the local civil society. - Benefitsfor financial entities 0 Increased clientele. 0 Enhancement o f financial flows with important economic amounts. 0 Economic profit. - Benefitsfor agricultural and technical assistance organizations in the zone 0 Increased clientele. 0 Enhancement o f the market. 0 Local economy enhanced, which reverts intheir benefit. 98 - BeneJitsfor the Santa Cruz Department and the national level. Poverty reduction andhencereduction of social conflicts. Reduction of landpressure and landjobbing. Regulation of landmarkets. Participation of socialactors during project implementation The project methodological approach contemplates the direct and active participation of social actors in the design as well as in the implementation of the project. Direct participation mechanismsare: Training indifferent areas. Analytical workshops and meetings. Participatory monitoring and evaluation. Diffusion of Project informationinseveral languages. CODAL: Council for the Local Agrarian Development, with the participation of representative of different sectors of civil society with decision-making capacity in the first instance. CCODDA: Departmental Consultative Council for Agrarian Development, which discusses and guides policies, monitors implementation andrecommends adjustments. CCONADA: National Consultative Council for Agrarian Development, performing the same functions as the Departmental one. , Consultation mechanisms and instances will ensure the continuous participation of social actors and will facilitate managementtransparency and credibility. PotentialRisks Two important risks have beenidentifiedfrom which other negative outcomes are derived: 1. Credit default o Different social conflicts could arise, as a consequence of credit default from any of the productive associations' members: - - Internal conflicts within the productive association. - Possible forced eviction of defaulters. - Loss of credibility for the associations and their sponsor organizations. Distrust generated at financial institutions with the rest of beneficiaries, which could mean denial of funding to new associations. o As a consequence of a collective agreement for credit default the following could happen: - --- Internal conflicts at the municipality. Possible evictionby force from the lands. Risking the implementation of the Project inthe country. Weakening the State capacity to implement public policies on land tenure and support to the poorest. 99 2. Project politization. This risk could detract Project goals. It has to be noted that there are constant low intensity conflicts among leaders o f different campesino, settlers and natives' organizations and that these could use the project as a weapon for mutual attack or even attack to the Government. Ifthis should happen, the most serious consequences would be: - Generation and encouragement o f conflicts among organizations and - communities. Discredit o f the project, the World Bank and the Bolivian Government. 3. Inequity at the communities. Preferential support to families o f young men and women with no land or insufficient land, could generate internal imbalances if we do not know how to handle a more equitable distribution with multiplyingeffects for the process at the interior o f communities and municipalities. It should be noted that the problem of land tenure in Bolivia is complicated and polarizes many interests. Thus, low intensity conflicts amung different sectors: public, private, enterprises, large owners, settlers, campesino, indigenous, etc. are continuous and sometimes derive in focused violence, which does not mean that this i s a generalized situation. These conflicts will accompany the project in all phases; however, the Pro- tierras-DA has foreseen mechanisms so that these tensions do not interfere in its implementation. Nevertheless, the existente o f these problems i s the justification for the Project. Mechanisms to preventrisks are: 1. On what concerns credit default, create agreements to favor beneficiaries, as long as interest rates and payment periods are customized and on line with their possibilities. Likewise, provide the necessary productive support to facilitate success in their agricultural activities, which ensures income. On the other hand, the five years support with technical assistance to the productive capabilities of beneficiary groups, will allow the premature detection o f this trend and the possibility to control it, aside from other options to resolve defaults: a) Replace the members that are not inagreement with commitments. b) Credit overhaul. c) Land rentals d) Partial sale ofthe tenure. 2. On what concerns Project politization, talks and meetings have beenheld with polarized groups that have different interests over the land tenure issue. The endorsement o f all organizations involved has been obtained. Relationships are going to be maintained during implementation. The project will have a communications and diffusion component that will explain mechanisms and regulations, risks and benefits o f the project, based on lessons learned in project implementation. 100 Besides, in order to avoid any type of ruling and political control, proposals undergo social control from civil society andthe State andthe technical endorsement of the UT. Being this a project funded by the World Bank, safeguard operational policies that affect, inthis case, indigenous populations, cultural property and involuntary resettlement should be dealt with. Impactson indigenouspopulations As has been stated, most of the project's beneficiaries (72% approximately) are indigenous, a reason why this safeguard has special importance. Working groups have suffered, in large or lesser degrees, acculturation processes that have been assimilated to the campesino world and to the logic of the productive subsistence unit as well as to the market invery bad conditions, even within the Indigenous Territories (TCOs) and therefore respond to the profile of the Pro-tierras- DA beneficiaries. Responding to the safeguard, in the design as well as in the implementation phases, it is contemplatedthat: 1. They do not suffer adverse effects andthat their dignity and humanrights are respected. 2. They will receive benefits culturally and socially compatible with their ways of living. 3. They participate in sustainable development processes that respect their traditions and cosmovision. 4. They participate actively and directly inthe Project design and implementation processes. The preparation of a Plan for the Development of Indigenous Populations is not considered necessary since most of the project's beneficiaries are indigenous populations and, besides, because they are not isolated indigenous populations and in the project design the necessary measures have already beentaken to incorporate the mandatesofthe DO 4.20. CulturalProperty OPN 11.03 abides by the definition of the United Nations of the term "cultural property," of which we cite the following: ". ..siteshaving archeological (prehistoric) paleontological, historical, religious, and unique natural values". The only area of intervention inwhich we will find sacred places that have to do with Nature is the Indigenous Territory of guaranties (TCO) in Bajo Isoso. This has to do with water, forests and mountains. There are certain sacred places, worshipped by isoseiio guaranies that due to religious beliefs are prohibited for human beings. Main places are the lagoons, highlighting those of Yande Yari, or Mother Lagoon, forests and mountains: San Miguel, La Serrania de Guanaco and Serrania de Charagua. Notwithstanding, there are guarani beliefs and internal mechanisms that will impede that the project could induce -without this being the intention- the creation of human settlements in sacredareas, thus the cultural properties of the guarani isoseiio people will remain protected. Likewise, the Manual for Project Operations explicitly requires that consultations be made at the sites to make sure that landthat i s eligible does not have cultural properties. 101 Involuntary Resettlement projects, if unmitigated, often gives rise to severe economic, social, and environmental risks". As stated in the first point o f this safeguard: "involuntary resettlement under development Meaning that many times development projects end up being harmful to people involved in them, inspite o fnot having beenpotential beneficiaries at the beginning. Project PRO-tierras-DA, considers the purchase by beneficiaries o f private agricultural properties for production. It has to be noted that in the implementation area there are sufficient tenures which qualify for procurement and in which there are no human settlements, meaning that no involuntary population resettlements will have to be undertaken. Because o f this, it has been considered unnecessary to contemplate mitigation measures presented by this operational policy, beingthese respected and complied with by default. Likewise, the Manual for Project Operations explicitly prohibits the approval o f a proposal in territories with human settlements. Monitoringand Evaluation The monitoring and evaluation system is a crosscutting activity in the whole process o f conception and implementation o f the project, more so when we initiate the project through a pilot phase. Due to its nature, the project has the methodology o f direct participation of beneficiaries in design and implementation; in this sense, it is essential for the process to measure social and technical learning, as well as be aware at all times o f the beneficiaries' performance and ifprogramming i s adjusted to their conditions. Monitoring o f activities, processes, results and impacts achieved should be permanentlyreflected upon and adjusted during Project implementation. To establish indicators, we will use quantitative and qualitative data. These data will serve to feed into the information system, which, in turn, will feedback continuous evaluations among the team, beneficiaries and institutions involved. The Monitoring and Evaluation System i s in the design process and will be finished during the stage o f PPF implementation. 102 3 W 80 a, 2g9 a 3 N . I I I I I I I I I I I I? m iW 0 YV '? W aE 'd 3C 0 0 0 c! IA 2 0 0 Q 800 m t-4- m I I I j I I I m Iz cc 0 I vl d x x - vl 0 2 . 0 c? 0 Q 0 0 2 0 \ .. hl hl 2 00 I I I I I I I I I d v-l 0v-l 0 3 3 I I I I I I I m 30 .I 0 Y 4 1 0 .I Y 0 41 Y v) 2 U El I IA ed .I 0 0 Q 0 ed El e hl Ga m hl 4 rg In 0 0 e x 0 0 Q e m 00 CY 0 hl I I I I I W Elm 0 I I I I I I I I I I I m \o Q\ m I I I I I i i I I i i i 3 3 I I I I I N N I I I I 1 1 I I I 1 r-vl 1 c 0d Q 0 .. 2 3 . 0 0vl t- 00 I I I I I I I I I I I rwl4 m m I wl p: 0 'I! 00 3 2 d - wl 00 00 -. Q Q 3 B cu m cu 2 I I I I I I I I I I I I I- O 0 ?? s: 0 i c I I I I I I I I I I l I I I I li! 3 I I t I I 1 1 I I I I I I I I I I I 0 0 2 I I I I I I I I I I I I N N b I 0 0 0 0 In 3 3 3 I I I I I I I I m a , 8 s = a , 8 s I I I I 3 t-4 c! G a, 1 a 0 0 3 ,.- l- I I I l I I I I I I I s v, N I I I Q) kep 0 1-1 I 8 Q . 0 I I A . In N In 0 I I I I I I I I I I I a0 c) 0 'E0 c) cV I rJ a 8m I rr 0 .C E> I I I I I I I I I 1 1 I I I I I 1 0 0 2 B c? 0 3 \3 dc\l I I I I I I I I I 1 I I 1 I I I I I I W m b 4- 0 I ( I I I I I I I I I I I m 0 . CJ 0 3 1 0 0 l- 2 N m I I I I I I sw .@ I I I I I m r I I I W s P) ii; F i 0 0 E: B P) c) tl N 1 -t / + ----I-- -If Annex 13: ProjectPreparationand Supervision BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject. Planned Actual PCNreview February 2004 February 10,2004 Initial PID to PIC February 10 2004 February 10,2004 Initial ISDS to PIC February 10 2004 February 10,2004 Appraisal December2004 April 20,2005 Negotiations August 2007 August 21,2007 BoardRVP approval October 2007 October 30,2007 Planneddate of effectiveness January 2008 Planneddate of mid-termreview June 2010 Plannedclosing date June 2013 Key institutions responsiblefor preparation of the project: Ministryof Rural Development, Agriculture and Environment (Viceministryof Lands), Ministry of Development Planning (Viceministry for Public Investment andExternal Financing). Bank staff and consultantswho worked onthe project included: Name Title Unit Malcolm Childress Sr. Land Admin. Specialist LCSAR Jorge A. MuAoz Sr. Land Admin. Specialist LCSAR George Ledec Sr. Environmental Specialist LCSEN Alonso Zarzar Sr. Social Development Specialist LCSEO David Tuchschneider Sr. Rural Development Specialist LCSAR Patricia Mc Kenzie Sr. Financial Specialist LCSFM Lourdes Linares Financial Specialist LCSFM Luis Schwarz Financial Specialist LCSFM MiriamCespedes ProcurementOfficer LCSPT Alvaro Larrea Procurement Specialist LCSPT Michael Goldberg Financial Sector Specialist LCOPR Solange Alialli Lawyer LEGLA Fabiola Altimari Lawyer LEGLA Rolande Pryce Lawyer LEGLA Teresa M.Roncal Operations Analyst LCSAR Leila Diana Sarauis Project Assistant LCSAR Bankfunds expendedto date onproject preparation: 1. Bank resources: $155,920 2. Trust funds: $0 3. Total: $155,920 Estimated Approval and Supervision costs: 1. Remaining costs to approval: $20,000 2. Estimated annual supervision cost: $80,000 (plus additional FAOCP) 132 Annex 14: Documentsinthe ProjectFile BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject. GovernmentDocuments 1. Law 1715 2. Law 3545 3. SupremeDecree 28160 4. SupremeDecree28495 5. LandMarket Background Study 6. Technical Assistance Background Study 7. Financial-Economic Background Study 8. Production Models Background Study 9. Operational Manual SafeguardDocuments 11. Environmental Study 12. Social Assessment World BankDocuments 13, Financial Management Capacity Assessment 14. Procurement Capacity Assessment and Update 133 Annex 15: Statementof Loansand Credits BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject. Differencebetween expected and actual Original Amount inUS$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO82781 2004 BO First ProgrammaticBank and Corporate 15.00 15.00 0.00 0.00 0.00 21.00 19.85 0.00 PO73367 2003 BO DecentInfras for Rur Transformation 0.00 20.00 0.00 0.00 0.00 21.56 14.01 0.00 PO68968 2002 BO RoadRehab.& MaintenanceProject 0.00 77.00 0.00 0.00 0.00 67.15 36.68 0.00 PO74212 2001 BO-HealthSector Reform APL I1 0.00 35.00 0.00 0.00 0.00 25.28 -16.50 0.00 PO57416 2001 BO-INDIGENOUS PEOPLES DEVT 0.00 5.00 0.00 0.00 2.20 2.76 4.01 0.00 PROJECT (LIL) PO60474 2001 GEF BO-Sustainabilityof ProtectedAreas 0.00 0.00 0.00 15.00 0.00 5.70 2.09 0.00 PO65902 2000 BO HYDROCARBON SECT. SOC.& 0.00 4.80 0.00 0.00 0.00 2.64 2.40 0.00 ENVlRM.(LIL) PO55230 1999 BO ABAPO-CAMlRI HIGHWAY 0.00 88.00 0.00 0.00 0.00 12.17 8.18 0.92 PO62790 1999 BO INST REF (OLD CIV S) 0.00 32.00 0.00 0.00 0.00 7.87 2.56 5.80 PO40085 1998 BO PART RURAL INVESTMENT 0.00 62.80 0.00 0.00 3.33 34.57 33.52 6.32 PROJECT PO57396 1998 BO REGULATORY REF. & 0.00 20.00 0.00 0.00 0.00 4.34 3.62 0.00 PRIVATIZATION (TA) PO06204 1998 BO- EDUCATIONQUALITY 0.00 75.00 0.00 0.00 0.00 3.72 4.52 0.00 PO06197 1995 BO LAND ADMINISTRATION 0.00 20.40 0.00 0.00 0.00 3.94 -1.36 3.51 Total: 15.00 455.00 0.00 15.00 5.53 212.70 113.58 16.55 BOLIVIA STATEMENT OF IFC's Held and DisbursedPortfolio InMillions ofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1995/98 BISA 0.00 0.46 0.00 0.00 0.00 0.46 0.00 0.00 2003 Banco Sol 5.50 0.00 0.00 0.00 5.50 0.00 0.00 0.00 1999 CBTl 0.00 0.00 0.83 0.00 0.00 0.00 0.83 0.00 1994/00 COMSUR 1.25 0.00 0.00 0.00 1.25 0.00 0.00 0.00 2001/03 Caja Los Andes 8.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 1991101 Central Aguirre 1.99 0.00 0.00 0.00 1.46 0.00 0.00 0.00 1999 Electropaz 19.90 0.00 0.00 0.00 19.90 0.00 0.00 0.00 2003 FIE 2.19 0.00 0.00 0.00 2.19 0.00 0.00 0.00 1993 GENEX 0.23 0.00 0.00 0.00 0.23 0.00 0.00 0.00 1999 Illimani 4.61 1.oo 0.00 0.00 4.61 1.oo 0.00 0.00 1996 Mercantil-BOL 2.14 0.00 0.00 0.00 2.14 0.00 0.00 0.00 Minera 0.00 3.40 0.00 0.00 0.00 3.40 0.00 0.00 134 2003 PRODEM 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 2003 TDE S.A. 15.00 0.00 15.00 0.00 15.00 0.00 15.00 0.00 TFSA 0.00 4.44 0.00 0.00 0.00 4.44 0.00 0.00 TRECO 0.00 2.94 0.00 0.00 0.00 2.94 0.00 0.00 2001 Telecel Bolivia 5.56 0.00 5.00 4.29 5.56 0.00 5.00 4.29 Total portfolio: 69.37 12.24 20.83 4.29 68.84 12.24 20.83 4.29 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2005 Gasyrg 0.05 0.00 0.00 0.10 2001 PQB 0.01 0.00 0.00 0.00 Total pendingcommitment: 0.06 0.00 0.00 0.10 135 Annex 16: Country at a Glance BOLIVIA: BoliviaLandfor AgriculturalDevelopmentProject. Latin Lower- POVERTY and SOCIAL America middle- Bollvia & Carib. Income Development diamond' 2003 Population, mid-year(millions) 9.0 534 2,655 Life expectancy GNi per capita (Atlas method, US$) 890 3260 1,480 GNi (Atlas method, US$ billions) 8.0 1741 3,934 r Average annual growth, 1997-03 Population(%) 2.2 15 0.9 Laborforce (%) 2.6 2.1 12 GNI Gross per primary Most recent estlmate (latest year avaliabie, 1997.03) capita nroilment Poverty(%of populationbelownationalpo veflyline) 63 Urbanpopulation (%of totalpopulation) 63 77 50 Lifeexpectancyat birth (years) e4 71 89 infant mortality (per 1000iivebirths) 58 28 32 Child malnutrition(%of children under5) 6 n Access to improvedwater source Access to an improvedwater source (%ofpopulation) 83 66 81 I illiteracy (%ofpopulation age !5+J 0 11 D Gross primaryenrollment (%ofschool-age population) 114 P 9 n? Bolivia Male 114 Dl 10 -- Lower-middle-income group Female 10 P 6 in KEY ECONOMIC RATiOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economic ratios' GDP (US$ billions) 2.7 5.7 7.8 8.O Gross domestic investment1GDP 02 16.6 14.7 n o Exports of goods and serviceslGDP 28.3 59.1 219 215 Trade Gross domestic savingslGDP ll.5 7.3 9.6 8.O Gross nationalsavings1GDP B2 7.6 119 9.1 T Current account balance1GDP -5.7 -7.3 -4.4 .14 Interest payments1GDP 7.7 2.2 13 l.Q Total debt1GDP 152.3 75.1 82.4 59.1 Total debt servicelexports 51.2 36.7 28.4 319 Presentvalue of debtlGDP 23.1 Presentvalue of debtlexports 07.5 Indebtedness 1983.93 1993-03 2002 2003 2003-07 (averageannualgrouth) GDP 2.3 3 2 2.8 2.5 3.6 -Bolivia GDP percapita 0.0 0.8 0.5 0.5 1.8 Lower-middle-incomegroup ~ STRUCTURE of the ECONOMY 1983 1993 2002 2003 Growth o f investment and GDP (%) (%of GDP) Agriculture 20.7 B.3 14.6 14.6 40 industry 42.3 34.2 33.3 33.2 20 Manufacturing 9.8 18.8 15.0 14.7 0 Services 37.0 49.5 52.1 52.2 -20 Private consumption 73.5 79.4 74.8 77.4 Generalgovernment consumption -40 9.0 D.4 15.4 14.5 Imports of goods and services 24.0 28.4 26.9 24.4 -GDI -GDP 1983-93 1993-03 2002 2003 (averageannualgmuth) Growth of exports and imports (%) Agriculture 2.6 2.4 0.6 3.O 30 T Industry 1.4 3.3 4.2 2.5 20 Manufacturing 2.2 3.0 2.2 0.9 10 Services 2.1 3.6 2.3 3.3 0 Private consumption 2.9 3.2 15 0.9 -10 Generalgovernment consumption -1.2 3.1 3.3 -0.4 -20 Gross domestic investment 5.2 15 0.5 -22.7 Imports of goods and services 8.0 3.9 7.7 -7.1 136 Bolivia PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 I Inflation Domestic prlces (Oh) I (%change) Consumer prices 328.4 9.3 2.4 3.8 Implicit GDP deflator 265.2 6.6 2.7 7.2 Government flnance (%of GDP,includes current grants) Current revenue 22.7 24.8 23.5 98 99 00 01 02 03 Current budget balance 3.1 -0.4 -0.6 Overall surpiusideficit -6.1 -8.9 -7.9 -GDP deflator -CPI TRADE 1983 1993 2002 2003 (US$ millions) Export and import ievels (US$ mill.) Total exports (fob) 755 7 0 1299 1,479 T Hydrocabons-gas 2,500 33 119 ni Soya 58 56 88 Manufactures 219 267 Total imports @if) 577 177 1,770 1,675 Food 44 75 Fueland energy 4 52 83 I Capital goods 222 456 454 Export price index(S95=00) 188 91 88 90 97 98 99 00 01 02 03 Import price index(S95-WO) 57 94 99 D2 w Exports 0 Imports Terms of trade (S95=WO) 296 97 90 89 BALANCE o f PAYMENTS 1983 1993 2002 2003 (US$ millions) I Current account balance t o GDP (Oh) Exports of goods and services 852 894 1534 1,720 0 Imports of goods and services 686 1,347 2,049 1,959 Resource balance 187 -452 -515 -239 -2 Net income -425 -205 -202 -262 -4 Net current transfers D6 238 369 387 -8 Current account balance -152 -418 -347 -lu Financing items (net) 441 601 71 9 8 8 Changes in net reserves -286 -182 275 -14 -10 Memo: Reserves including gold (US$ millions) 243 495 807 843 Conversion rate (DEC,locaVUSS) 4.70E-4 4.3 7.2 7.7 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) Composition o f 2003 debt (US$ mill.) Total debt outstanding anddisbursed 4,069 4,307 4,867 4,739 IBRD 2 0 9 9 0 0 IDA 92 547 1321 1,362 I G:370 Total debt service 461 334 476 593 IBRD 23 35 0 0 IDA 1 6 15 26 Composition of net resourceflows Officialgrants 01 175 591 Officialcreditors 76 182 228 86 Private creditors -30 11 -75 -185 Foreigndirect investment U I24 677 Portfolio equity 0 0 0 I D 1.883 World Bank program Commitments 0 51 77 0 Disbursements D 68 a 4 58 A IBRD E - Bilateral B IDA -. D. Other multilatwai F- Private Principalrepayments D 25 7 18 1 C - I M F G - Short-tern 137 Annex 17: Map No. IBRD 33374 BOLIVIA: BoliviaLandfor Agricultural Development Project. 138 IBRD 33374 70°W 65°W BOLIVIA SELECTED CITIES AND TOWNS B R A Z I L DEPARTMENT CAPITALS NATIONAL CAPITAL To RIVERS Porto Velho 10°S Abunã MAIN ROADS RAILROADS Miles PA N D O DEPARTMENT BOUNDARIES Riberalta Cobija Madre de Dios INTERNATIONAL BOUNDARIES Asunción Asunción 60°W This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Puerto Heath Yata Guaporé Group, any judgment on the legal status of any territory, or any Lago Lago endorsement or acceptance of such boundaries. Madidi Huaitunas Rogaguado P E R U Beni Magdalena Lago B E N I Rogagua Santa Ana Lago de Yacuma San Luis Reyes Apere amoré San Apolo M Trinidad Paraguá San Borja S an 15°S L A PA Z Puerto Miguel Blanco Martín 15°S Acosta Lago Nevada Caranavi Ascención Ascención Titicaca Ichoa To Illampu Puno (6,362 m) Guaqui Quiquibey Concepción Concepción LA PAZ AZ Nevada Las Petas Viacha Illimani pay) (6,462 m) Chapare Gran d e San Ignacio C O C H A B A M B A Ichilo Yapacaani (Gu Cochabamba Montero S A N TA C R U Z Desaguadero San José de Chiquitos José Oruro Santa Cruz To Nevada Sajama Arica (6,542 m) Cordiller O R U R O Banados del Lago C o rdiller Aiquile Roboré Roboré Izozog Puerto Poopo Sucre Santa Suárez Suárez Salar de o Ana Coipasa Potosí Potosí To 20°S Iquique O Central Tarabuco C h a c Salar de C Pilcomayo G r a n To Campo Grande Carniri 20°S na Uyuni H Uyuni U Q U I S PA R A G U AY ce Pila y a A C A P O T O S Í To O C H I L E ccidental Villa Montes Mariscal Estigarribia Pacific To Calama G ra n d eeLd Yucuiba Tarija ípez TA R I J A Viljazón iljazón To Tartagal To BOLIVIA Abra Pampa 0 50 100 150 Kilometers To San Ramón de la Neueva Orán 0 50 100 Miles A R G E N T I N A 70°W 65°W 60°W SEPTEMBER 2004