Document of

The World Bank 0Le goFOR OFFICIAL USE ONLY C P

Report No. 2924-BR

STAFF APPRAISAL REPORT

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

May 30, 1980

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit - Brazilian Cruzeiro (Cr$)US$1.00 - *Cr$42.33 (January 1, 1980)

Cr$1.00 - US$0.023624Cr$1 million - US$23,624

WEIGHTS AND MEASURES

1 meter (m) = 3.28 feet1 kilometer (km) = 0.62 miles1 hectare (ha) 2 10,000 m2 = 2.47 acres1 square kilometer (km ) = 100 ha = 247.1 acres = 0.386

3 sq. miles

1 cubic meter (m ) 1.31 cubic yards = 264.2 USgallons

1 kilogram (kg) = 2.2 pounds

1 ton = 1,000 kg = 2,205 pounds

GLOSSARY OF ACRONYMS

(see next pages)

GOVERNMENT OF BRAZIL FISCAL YEAR

January 1 to December 31

STATE OF MINAS GERAIS FISCAL YEAR

January I to December 31

* Average Exchange Rates: 1975 1976 1977 1978 1979

US$1.00 = Cr$ 8.128 10.786 14.138 18.317 27.581

FOR OFFICIAL USE ONLY

GLOSSARY OF ACRONYMS

BB = Barco do Brasil, S.A. (Bank of Brazil)BCR 3 Baiico de Credito Real de Minas Gerais, S.A.

(State Credit Bank)BDMG Banco de Desenvolvimento de Minas Gerais, S.A.

(State Development Bank)BEMG = Be.tco do Estado de Minas Gerais

(State Bank of Minas Gerais)BNDE = Banco Nacional de Desenvolvimento

(National Development Bank)CAMIG = Companhia Agricola de Minas Gerais (Agricultural

Trade Company of the State of Minas Gerais)CASEMG = Companhia de Armazens e Silos de Minas Gerais

(State Storage Company)CEAG-MG = Centro de Apoio e Pequenas Industrias do Estado

de Minas Gerais (Centre for Assistance to SmallIndustries in the State of Minas Gerais)

CEE = Caixa Economica do Estado de Minas Gerais(State Savings Bank)

CEMIG = Centrais Eletricas de Minas Gerais, S.A.(The Minas Gerais Electrification Company)

CETEC = Fundacao Centro Tecnologico de Minas Gerais(Technological Center Foundation of theState of Minas Gerais)

COPASA = Companhia de Saneamento do Estado de Minas Gerais(State Sanitation Company)

COSEMEG = Commissao Estadual de Sementes e Mudas de Minas Gerais(State Commission for Seeds and Nurseries)

DAE = Departamento de Agua e Energia Eletrica(State Water and Electric Energy Agency)

DER-MG Departamento de Estradas de Rodagem do Estado deMinas Gerais (State Highway Department)

DNER = Departamento Nacional de Estradas de Rodagem(National Highway Department)

DNOCS Departamento Nacional de Obras Contra as Secas(National Department of Anti-Drought Works)

DNOS = Departamento Nacional de Obras de Saneamento(National Department for Watersupply and SanitationWorks)

EMATER-MG = Empresa de Assistencia Tecnica e Extensao Rural deMinas Gerais (State Technical Assistance and RuralExtension Company)

EPAMIG = Empresa de Pesquisa Agropecuaria de Minas Gerais(State Agricultural Research Institute)

FJP = Fundacao Joao Pinheiro (Joao Pinheiro Foundation)FUNRURAL Fundo de Assistencia ao Trabalhador Rural

(Social Security Fund for Agricultural Workers)ICM = Imposto Sobre Circulacao de Mercadorias

(Tax on Product Circulation)IEF Instituto Estadual de Florestas

(State Forestry Institute)MVR = Maior Valor de Referencia

(Maximum Reference Value)

This document has a restricted distribution and may be used by recipients only in the performanceof their oMfcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

GLOSSARY OF ACRONYMS (Continued)

PCU Project Coordinating Unit of the Second RuralDevelopment Project in Minas Gerais

PRODECOM Programa de Desenvolvimento de Comunidades(Community Development Program)

PRODEMATA = Projeto de Desenvolvimento da Zona da Mata(First Rural Development Project in Minas Gerais)

RURALMINAS = Fundacao Rural Mineira, Colonizacao e DesenvolvimentoAgrario(Rural Development Foundation in Minas Gerais)

SEA Secretaria de Estado da Agricultura de Minas Gerais(State Secretariat of Agriculture)

SEE Secretaria de Estado da Educacao(State Secretariat of Education)

SEPLAN = Secretaria de Estado do Planejamento e de Coordenacao Geralde Minas Gerais(State Planning and Coordination Secretariat)

SES = Secretaria de Estado da Saude de Minas Gerais(State Secretariat of Health)

SETAS = Secretaria de Estado do Trabalho, Acao Social eDesportos de Minas Gerais(State Secretariat of Labor Social Action and Sports)

SOAPA = Sistema Operacional da Agricultura, Pecuaria eAbastecimento(Agricultural Sector Operational System)

SUDECOOP = Superintendencia de Cooperativismo da SEA(State Superintendency of Cooperatives)

TELEMIG = Telecomunicacoes de Minas Gerais(State Telecommunication Company)

UFV = Universidade Federal de Vicosa(Federal University of Vicosa)

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

Table of ContentsPage No.

I. THE AGRICULTURAL SECTOR ................................ 1

The Sector in the Economy .............................. 1

Government Agricultural Policies ....................... 1

Bank Involvement in the Agricultural Sector .... ........ 2

II. THE STATE OF MINAS GERAIS AND THE PROJECT AREA .... ..... 2

The State .............................................. 2

The Project Area ....................................... 4

III. THE EXECUTING AGENCIES ................................. 9

State Framework for Coordinating theRural Development Program ............................ 9

institutions Engaged in Rural Development in the

Project Area ......................................... 9

IV. THE PROJECT ............................................ 10

Origin ................................................. 10

Design .................................................. 10Objectives and Strategy ................................ 11

Brief Description ...................................... 12

Detailed Description ................................... 14

V. PROJECT COSTS AND FINANCING ............................ 27

Project Cost ........................................... 27

Financing .............................................. 29

Procurement ............................................ 29

Disbursement ........................................... 30

The report is based on the findings of an appraisal mission in January 1980

composed of Messrs. E. Los, L. Coirolo, J. Macgregor, A. Cornejo, H. Wagner,

Ms. J. de Regt, Ms. P. Pomerantz (Bank) and Messrs. V. Sear, R. Lattimore,

M. Weber, R. Elmore, F. Yepes, J. Mora (Consultants).

Table of Contents (Continued)

Page No.

VI. PROJECT IMPLEMENTATION ......... ......... .. . . 31

Organization and Management ..... ....................... 31Project Coordination Unit ............. ................. 31Operating Agreements and Procedures .................... 32Project Monitoring . ........ s ........................... . 33Project Evaluation . ...... . ...... . ........ ... ............... . 33Accounts and Auditing ..... ............................. 34

VII. PRODUCTION, DEMAND, MARKETING AND PRICES ............... 34

Farm Production .. ......... ...... .. .................... . 34Demand ........................................................... 36Marketing and Prices .... ............................... 37Non-farm Enterprise Production and Demand and Marketing 38

VIII. FINANCIAL ANALYSIS .. ................................... 38

Illustrative Farm Types ........................ ........... 38Non-farm Activities .................................... 40Farm Income ......................................................... 40Non-farm Income ............. ............................. 41

IX. ECONOMIC BENEFITS AND JUSTIFICATION .............. ...... 42

Economic Rate of Return ....... ................. ........ 42Sensitivity Analysis .... .................................. 43Employment ............. .................................. 44Fiscal Impact .................................. ................ 44Environmental Impact ...... . ......... ............... .. ....... 45Project Risks ........................................ 45

X. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATIONS 46

ANNEXES

1. Resume of Achievements under the First Rural DevelopmentProject .......................................................... 50

2. Characteristics of the Project Region and Project AreaTables: 1. Natural Features and Population . .......... 51

2. Agricultural Production ................... 523. List of Executing Agencies ............................. 534. Structure of the Marketing Component ................... 545. Technical Details of Feeder Roads Component

Tables: 1. Design Standards for Municipal Roads ...... 562. Municipal Roads to be Improved by

June 30, 1983 ............................. 57

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Table of Contents (Continued)

Page No.

ANNEXES

6. Criteria for Assistance to Communities ................... 587. Annual Phasing of Cost

Tables: 1. Annual Phasing of Project Costs ............. 602. Annual Phasing of Program Costs ............. 613. Annual Phasing of Training Activities

and Costs ................ .. .............. . 628. Flow of Information and Project Funding .................. 649. Procedure of Disbursement against Statement of Expenses .. 6510. Estimated Schedule of Bank Disbursements ................. 6811. Organizational Chart of Project Administration ........... 6912. Implementation Schedule ....... . . .. . . . . . . . . . . . ... . . . . . . . . . 7013. Key Factors of Project Monitoring ........................ 7314. Agricultural Development ...................... .............. 76

Table: 1. Summary of Illustrative Farm Models .......... 7815. Financial Analysis of Illustrative Farm Models

Tables: 1. Input and output coefficients per hectare ... 792. Farm Model 3, farm between 0-10 ha; Cropping

Pattern, Financial Analysis, Debt Serviceand Cash Flow Projection .................... 80

3. Farm Model 4, farm between 10-50 ha; CroppingPattern, Financial Analysis, Debt Serviceand Cash Flow Projection ........ ...... 82

4. Farm Model 14, farm between 50-100 ha andReforestation; Cropping Pattern, FinancialAnalysis, Debt Service and Cash FlowProjection .................................. 84

5. Farm Model 15, farm with land reclamation;Cropping Pattern, Financial Analysis, DebtService and Cash Flow Projection ............. 86

6. Estimated Farm Income of Project Participants 887. Financial Rates of Return for Project Farm

Models ......... .............................. 8916. Financial and Economic Analysis of Small Non-Farm Models .. 90

Tables: 1. Condensed Financial Position of Selected Non-Farm Enterprises . .......... ... .............. . 91

2. Enterprise Model No. 4, Financial Analysis,Debt Service and Cash Flow Projection .... *... 92

3. Estimated Family Income and Internal Rate ofReturn of Non-farm Producers .........*0*...... 93

17. Cost and Benefit Stream for Economic AnalysisTable: 1. Economic Analysis of the Total Project ........ 94

18. Related Documents Available in Project File ............ ... 95

MAPS

Project Regions and Climate - (IBRD 14693)Project Sub-Regions I and II - (IBRD 14954)Project Sub-Regions III and IV - (IBRD 14694)

I. THE AGRICULTURAL SECTOR

The Sector in the Economy

1.01 Agriculture continues to be an important sector in the Brazilianeconomy, employing 36.2% (14.6 million) of the economically active popula-tion (1976) and contributing about 12% of the total GDP and 56% of totalexport earnings. Brazil is the world's largest exporter of coffee andorange juice, the largest producer of sugar cane, and the third largestproducer of soybeans. Other major agricultural exports include meat andfish products, cotton, maize, peanuts, cocoa, castor oil, and sisal. Themost important products for the domestic market include cassava, maize,rice, wheat, beans, potatoes, vegetables, bananas, citrus fruit, dairyproducts, poultry, beef and pork; coffee, sugar, soybeans, cotton andcocoa are also important. Brazil is largely self-sufficient in basic foodproduction, except wheat, more than half of which is still imported.

1.02 From 1970-74, the agricultural sector performed well in meetingdomestic demand for food and fibers as well as in supplying an increasingvolume of export commodities. During the period, the average annual growthrate was 6.9%. Until 1978, the value of agricultural production continued togrow, although at a lower rate than that of the industrial sector or the GDPas a whole. In 1978, agricultural output declined by 2%, largely due to asevere drought in the south resulting in substantial crop losses. In 1979,the agricultural sector showed a 3.5% growth rate, compared to 6.5% for theindustrial sector and 6% for the economy as a whole.

1.03 Despite productivity gains, expanded production areas, and increasedmarket integration, much of the sector continues to employ traditional agricul-tural practices and rudimentary technology. Constraints on increased agricul-tural production, particularly for small farmers, include: limited access toinstitutional credit, extension, and modern agricultural inputs; lack cfsupporting services, such as marketing, storage, and transport facilities;uncertain land tenure and a highly uneven agricultural land distribution; andthe absence of a stable price policy and adequate mechanisms to provideincentives for agricultural producers. Reflecting these problems, outmigra-tion from rural areas has led to accelerated urban growth, placing evengreater demands on the Brazilian agricultural sector.

Government Agricultural Policy

1.04 Agricultural development has been assigned a high priority inBrazil's Third National Development Plan (1980-84). Major policy objec-tives include: (a) increased basic staple and export production, withspecial emphasis on small and medium producers; (b) the creation of anintegrated system of production, storage, transport and marketing; (c) theexpansion of agricultural research activities and the increased use ofmodern inputs and appropriate technology; and (d) the decentralization ofagricultural policy execution, increasing the participation of the privatesector and state and local governments. Recent measures have tended to

confirm the government's commitment toward stimulating agricultural productionand raising rural incomes, particularly among small producers. These measureshave included: (a) the strengthening of the research and extension serviceswith a new emphasis on the needs of small farmers; (b) the support of specialregional programs, such as the Development Program for Integrnted Areas inthe Northeast (POLONORDESTE), that focus on poorer regions and small-scalefarmers; and (c) the announcement of a series of actions (pacote agricola) inMay 1979, which included increased access to institutional credit. However,Brazil's high inflation rate and large public sector deficit during the late1970s are forcing the government to restrain public expenditure and interestrate subsidies. In December 1979, a new economic package was announced, whichlowered the interest rate subsidy on agricultural credit. The package alsoremoved export subsidies and included a 30% devaluation of the cruzeiro.These measures, partially aimed at stimulating agricultural export growth, andintroduction of a large-scale alcohol production program demanding increasedcultivation of sugarcane, demonstrate new economic priorities.

Bank Involvement in the Agricultural Sector

1.05 The Bank has so far made 18 loans, totalling US$625.7 million,for agriculture and rural development in Brazil. These include two, amountingto US$125.3 million, for agro-industries; two, totalling US$60.5 million, forlivestock development; one for US$18.2 million for grain storage; one forUS$40 million for agricultural research; one for US$100 million to improveagricultural extension services; and eleven, totalling US$281.7 million forvarious settlement, irrigation and rural development projects, nine of whichare located in the Northeast. Five additional agricultural and rural develop-ment operations are currently at a relatively advanced state of preparation:two rural development projects and a agricultural credit project in theNortheast; a second agricultural research project and a Northwest agriculturaldevelopment project. Additional agricultural and rural development projectsare under consideration for possible future Bank financing. Completionreports have been issued for the grain storage and the two livestock develop-ment projects.

II. THE STATE OF MINAS GERAIS AND THE PROJECT AREA

A. The State

Location and Natural Features

2.01 Minas Gerais is the sixth largest state in Brazil. Centrally locatedwith a total area of 587,170 km (7% of Brazil), its natural resource base,has favored mining, industrial, and livestock development. The state possessesdiverse ecological areas, ranging from the tropical, dry northern plains tothe sub-tropical moderately humid south, and from the mountainous east to themid-western plains. Rainfall is closely related to changes in altitude, which

ranges from 200 to 2,000 m above sea level. The most important climatic factoris the duration of the dry period, varying from three months in the south andeast to seven months in the north and west. The s?ate's capital, Belo Horizonte,with a population of about 3 million in a 3,000 km metropolitan area, iscentrally located in relation to Brazil's other major cities: Sao Paolo(586 km away), Rio de Janeiro (482 km), and Brasilia (600 km).

Social and Economic Conditions

2.02 The state has a total population of about 13 million (1977), ofwhich 37% is rural. While urban population is growing at an average annualrate of 4%, rural population is decreasing at an average annual rate of 1.51%.In the period from 1970-77, outmigration from the state's rural areas totalledsome 2.3 million persons, one million of whom left the state completely.About 31% of the economically active population is occupied in industry, 1%in mining, 37% in agriculture and 31% in the service sector. In 1978, agri-culture contributed 14% to the total state GDP; industry, 35%; mining, 3%; andthe service sector, 48%. Average per capita income in 1976 was approximatelyUS$1,280. However, it is estimated that the poorest 50% of the population, alarge part of which is rural, had an average annual income of about US$300,below the Brazilian relative poverty level (US$330). In 1970, 69% of thestate's population had no access to potable water, and 59% had no electricity.These percentages are far greater in rural areas. Of the population 10 yearsof age and older, 67% had less than a primary school education, and studentsfrom rural areas accounted for only 24% of total enrollment. In general, thestate is characterized by wide regional disparities, with the rural areas ofthe north and northeast of the state showing the lowest degree of socio-economic development.

Agricultural Production

2.03 The state's average annual growth rate for 1970-78 was 10.2%, but in1978 the state achieved only a 3.4% rate of growth. While clearly reflectingeconomic problems of a national scope, the declining growth rate in MinasGerais was also related to the poor performance of the agricultural sector.The average annual growth rate for the sector during 1970-1978 was only 4.5%,and in 1978, the value of agricultural output declined by 10%. The limiteduse of modern technology and the lack of a stable price policy and of comple-mentary services such as storage and marketing facilities continue to be majorcontributing factors to the worsening agricultural situation. Agriculturalland (42 million ha), including forests and natural pastures, accounts formore than 70% of the state's total land area. Natural pastures comprise 62%of total agricultural land. Cropped lands are 8% of the total, with some57,000 ha of irrigated lands. Average farm size is approximately 92 ha, but82% of all farms, accounting for 23% of total agricultural land and almosthalf of all cropped lands, have areas of less than 100 ha. Some 85% of thestate's farms are owner-operated, with the remainder under various forms oftenancy or sharecropping arrangements. While coffee, cotton, soybeans andsugarcane are the most important commercial crops, large quantities of beans,corn and rice are also grown within the state, mainly for domestic consumption.Livestock and milk production contribute almost 50% of the total value ofstate agricultural production, but the subsector shows little dynamism with an

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average growth rate of only 1.8% in 1970-1978. Forestry production, largely aresult of significant reforestation investments, is currently the most rapidlygrowing subsector, accounting for approximately 13% of the state's totalagricultural production.

Rural Development

2.04 In the past, little attention was paid to Minas Gerais' smallfarmers. However, the worsening situation in the agricultural sector andthe increase in rural outmigration coupled with changing national policiesemphasizing the importance of small-scale agriculture, have recently focusedmore attention on small farmers. Public investment in agriculture (Cr$1.4billion in 1979) remained relatively steady at about 3% of total stateexpenditures during the period 1977-79. Part of this expenditure financedseveral rural and regional development projects, including: (a) Gorutuba,part of the POLONORDESTE program; (b) "POLOCENTRO", an infrastructure, creditand technical assistance program, in the central and northwestern regions ofthe state; (c) Geoeconomica de Brasilia, designed to restrict rural flightto Brasilia by bringing improved public services and productive opportunitiesto the surrounding rural populations; and (d) PROTDEVALE, a series of physicalinfrastructure and social service projects in the Jequitinhonha Valley, one ofthe state's poorest rural areas. To date, however, the Bank-financed FirstRural Development Project in Minas Gerais (PRODEMATA) 1/, initiated in 1977,is the state's most comprehensive effort aimed specifically at improvingeconomic and social conditions for the rural poor. By the end of its implemen-tation period, it is hbped that the project will have benefitted some 25,500small farmers. Partially based on the successful experience of the PRODEMIATAproject (Annex 1, gives details), high priority has been assigned in thestate's Third Economic and Social Development Plan (1980-83) to increasingagricultural productivity among small farmers and improving the standard ofliving of the state's rural poor.

B. The Project Area

Location

2.05 The region in which the project would be located covers the entireeastern portion of the state, comprising almost 50% of total state area. Thisregion contains four sub-regions, Nordeste, Vale Rio Doce, Zona da Mata, andSul de Minas, each with distinct physical and social-economic characteristics(Annex 2, Table 1). Within these sub-regions, 102 municipalities were selectdbased on agricultural potential and a high degree of small farmer concentration(para 4.06). These municipalities, covering some 61,000 km2, constitute thespecific project area. (Map IBRD 14693)

1/ Loan 1362-BR of US$42 million.

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Natural Features and Climate

2.06 The project area is ecologically quite diverse, with the followingmajor sub-areas: (a) the northern cerrado, with acidic soils of limitedfertility (40% of the total project area); (b) the more humid, hilly lands ofthe south and southeast Zona da Mata, with a variety of soil types (37%);(c) the grasslands (campos) at higher elevations in the south and the Vale RioDoce, with sandy, gravelly, or rocky soils (8%); and (d) floodplains (varzeas)located throughout the project area (15%). The mean annual rainfall increasesfrom 500 mm in the north to over 2,000 mm in the southeast. However, thepattern is discontinuous, with enclaves of higher rainfall near mountainridges and escarpments (see Map IBRD 14693). The dry season increases to thewest and north, ranging from three to seven months per year, and is concen-trated between May and September. The annual hydrological deficit is almostzero in the south and southeast and increases to 500 mm per year in the farnorth. Mean annual temperatures range from 24.5 C in the north to 20 C inthe south and southeast, with 17.5 C in the mountain areas, where minimumtemperatures below zero occur. The annual average of the relative humidityranges from 70% in the north to 85% in the humid areas in the south.

Socio-econmic Conditions

2.07 The population of the proje2t area is about 1 2million (1978). The 2average population density of 15.5/km varies from 5/km in the north to 62/kmin the most populous southeastern municipality. The overall annual populationgrowth rate in the area is about 0.15%, compared with 1.6% for the state.Rural population is steadily decreasing, indicating a rapid emigration tourban areas, mainly outside of the project area. Urban population in theproject area only increased from 25% of total population in 1970 to 29%(1977). The population is young, with 45% under the age of 15. The averagefamily composition of about 5.0 persons is similar to that found in otherless developed rural areas in the state and in Brazil. The table belowprovides details:

I II III IV TotalVale Zona Sul de Project

Nordeste Rio Doce da Mata Minas Area-

Municipalities 25 9 25 43 102Area (km2) 40,844 2,011 5,218 12,725 60,798Population (1977) 447.522 54,132 166,071 274,307 942,032Population density(persons/km2) 11.0 26.9 31.8 21.6 15.5

% population increase1970-1977 +6.0 -4.5 -1.7 +0.2 +2.2

% rural population(1970) 78.7 73.7 75.0 54.7 70.8

% increase ruralpopulation 1970-1977 +3.4 -9.2 -4.8 -16.0 -3.9

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2.08 Agriculture is the chief economic activity of the area. The per-centage of the economically active population engaged in agriculture hasremained relatively stable (75%), while the percentage engaged in industry(8%) has increased rapidly. Among the rural population, members of small farmfamilies typically have per capita incomes of about US$200 per annum. Incomeof dairy farmers or those with about 50 ha of land using some improvedtechnology, rises to about US$400 per capita.

Land Distribution

2.09 Land distribution in the project area is skewed, with about 82% ofthe farmers cultivating 25% of the farm area. Average farmsize is about 40 ha,but about 42% of the farmers have less than 10 ha. Details are given below.

I II III IV TotalVale Zona Sul de Project

Nordeste Rio Doce da Mata Minas Area

Number of Farms

Number of farmsowner operated 31,486 2,985 13,947 23,742 72,166

Non owner farms 1/ 7,107 351 2,188 4,610 14,256Farm area (ha):owner operated 1,694,698 148,666 411,806 981,167 3,236,337Cultivated by non-owners 87,782 5,962 26,294 47,218 167,256

% Farms by Farm Size 2/

Less than 10 ha 46.2 27.0 45.0 36.4 41.911 - 50 ha 39.0 48.9 39.8 42.5 40.751 - 100 ha 7.6 12.6 9.4 12.3 9.7above 100 ha 7.2 11.5 5.8 8.8 7.7

% Farm Area by Farm Size 2/

less than 10 ha 3.9 2.8 5.2 3.3 3.311 - 50 ha 15.7 24.5 32.1 24.9 21.051 - 100 ha 9.7 18.7 29.0 21.2 16.1above 100 ha 70.7 54.0 33.7 50.6 59.1

1/ Includes renters and sharecroppers, but excludes landless laborers andsquatters.

2/ Data for owner-operated farms.

Source: IBGE census 1975, Fundacao Joao Pinheiro

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Land distribution is also marked by regional differences. The dry northeasthas more large holdings, with small farmers located along the fringes of thevarzeas. The Vale Rio Doce has fewer farms under 10 ha. In the denselypopulated Zona da Mata, fragmented holdings predominate. In the south, wherethere are more large holdings, there are also substantial poverty pockets ofsmall farmers who originally migrated from neighbouring areas with largeplantation or commercial enterprises.

Agricultural Land Use and Production

2.10 Relative to its size and population, the general region in whichproject municipalities are located is the most important agricultural area ofthe state (para 2.05). The region produces 60 to 70% of the Minas Geraisagricultural production, excluding manioc and cotton. The 102 selectedmunicipalities of the project area cover about 10% of the state, but onlyproduce approximately 8% of the state's agricultural production, excludingcotton, beans and pigs (Annex 2, Table 2). Low production levels are chieflythe result of a lack of infrastructure and public services and the low levelof technology employed. Since the ecological conditions do not differ muchfrom those in other parts of the region, there is a distinct margin foragricultural development. About 70% of the project area, or 4.2 million ha,is cultivable land. About 8% of cultivable land is under forest, with 2% inpermanent crops, 12% in temporary crops, 60% in pasture land, 10% in fallow,and 8% not utilized. About 0.1% is irrigated. Herbaceous cotton is exclusivelygrown in the northeast, and garlic cultivation is best suited to the northeastand Vale Rio Doce. Beans, maize and manioc are often grown in mixed croppingsystems and cover 63% of the cropped area. Coffee (13%) and sugarcane (5%)are also important. Fruit and vegetable cultivation (3%) is expanding as isrice cultivation (13%) on land reclaimed from varzeas. All farmers, includingcattle farmers, grow some or all of the basic food crops, but generally thelarger farmers concentrate on cattle. Farmers having less than 50 ha producethe bulk of the food crops for sale in the urban centers. Virtually all smallfarmers in the area have some livestock, especially pigs.

Agricultural Services

2.11 Agricultural extension services are mainly credit-oriented andfavor larger farmers in the project area. EMATER-MG (the State TechnicalAssistance and Rural Extension Service) has established local offices in24 out of the 102 municipalities of the area. In 1979 about 45% of ruralcredit was granted for livestock (generally on large and medium scale farms )and 60% went in large loans to 10% of the borrowers. Agricultural credit ischanneled principally through agencies of the government owned banks.Fifty of the 102 municipalities of the area have a local bank agency, but onlyin 37 municipalities are large numbers of small farmers operating within a20-km range of these facilities. The State Agricultural Trade Company (CAMIG)is the main agricultural input supplier in only five of the project areamunicipalities. Similarly, the state-operated storage system is underdevel-oped in the area. Because public marketing services do not reach the smallfarmer effectively, private intermediaries remain the major link betweenfarmers and markets.

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Industry

2.12 The industrial development in the project area is mainly limited to

cottage industries and concentrates on food processing and artisan works. At

present, there are an estimated 2,400 non-registered and 1,200 registered

small enterprises, each employing an average of about 2 to 3 persons. Nearby

industries in the region, such as the Vale Rio Doce mining centers, also have an

impact on the project area, providing additional employment opportunities for

area residents.

Physical Infrastructure

2.13 The federal and state road system is well developed in the south and

east of the project area, but less developed in the north where 26 project

municipalities are not linked up to it. Feeding into the primary road system

is a municipal road network of about 20,000 km of generally poorly maintained

roads. Many communities are isolated and are connected to the municipal roads

only by farm tracks. The municipal centers of the project area are served by

CEMIG (Minas Gerais Electrification Company) and DAE (State Water and Electric

Energy Agency). About 16% (1970) of all houses in the project area had

electricity, but only 3% of the rural properties were served. Of the 102

municipal centers, 18 are served by COPASA (State Sanitation Company). Of

the 622 rural communities in the area, about 25 have simple water supply

systems. About 15% of all houses in the area receive water from public

systems, private wells or nearby springs. Some 49 municipal centers have

some form of solid wa te disposal system, and about 10% of all homes have

some sanitary installition.

Social Services

2.14 Health and education services, although improved in the Zona da

Mata area, are generally weak in the project area. Only 70% of the school age

children attend school. The literacy rate is low. There are about 2,100

primary schools, with 86% offering only grades 1 to 4, and there are 32

secondary schools in the 102 municipalities of the project area, none of which

offers agricultural education. However, in nearby areas of the region, there

are one agricultural university (Vicosa), one agricultural technical school

(Lavras), and five agricultural secondary schools. Infant mortality is high

(100 per thousand) and malnutrition is widespread. Incidence of communicable

diseases is high, due to poor hygienic conditions and inadequate housing.

Schistosomiasis is encountered in most of the municipalities, and Chagas

disease (South American trypanosomiasis) affects 19% of the population,

contributing to the low life expectancy of about 44 years (against 55 for the

state). The area has about one hospital bed per 1,000 inhabitants. There are

35 hospitals in or near the project area and 98 health centers and 120 rural

health posts in the project area. The medical coverage of the population is

estimated at 30% and the immunization rate at 10%.

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III. THE EXECUTING AGENCIES

State Framework for Coordinating the Rural Development Program

3.01 The state has developed a Rural Development Program (Programa deAssistencia de Produtores de Baixa Renda) which consists of various ruraldevelopment projects, including one in the northwest with IDB financing andrecently one in the north (1979) under the POLONORDESTE program. The centralcoordinating agent of the early projects, including the Bank-financed Zona deMata Rural Development Project, is RURALMINAS (Rural Development Foundationin Minas Gerais), an agency linked to the Secretariat of Agriculture. Sincean increasing number of public institutions have participated in these proj-ects and in the state's Rural Development Program, the Secretariat of Agricul-ture itself has now been designated as the primary coordinating agent forrural development in the state. Each participating agency has a managerappointed for each project in which it participates. The managers overseethe implementation of the components their agencies are in charge of, monitorimplementation progress, and prepare the annual operational plan. Inter-institutional integration is the responsibility of the project coordinator inthe Secretariat of Agriculture. The Secretariat of Planning retains overallcontrol of the state program and administers program and project funds.

Institutions Engaged in Rural Development in the Project Area

3.02 The Secretariat of Agriculture carries out its executing taskthrough the Agricultural Sector Operational System (SOAPA), consisting of theState Technical Assistance and Rural Extension Company (EMATER-MG); the StateAgricultural Research Company (EPAMIG); the State Superintendency of Coopera-tives (SUDECOOP); the State Forestry Institute (IEF); the State AgriculturalTrading Company (CAMIG); the State Commission for Seeds and Nurseries (COSEMEG);the State Storage Company (CASEMG); and RURALMINAS. Other agencies involvedin rural development in the project area are: the Government-owned Bank ofBrazil (BB) and the State Savings Bank (CEE), the State Credit Bank (BCR), theState Bank of Minas Gerais (BEMG) and the State Development Bank (BDMG); theSecretariats of Education (SEE), Labor, Social Action and Sports (SETAS)and Health (SES); the State Highway Department (DER-MG); and the State Waterand Electric Energy Agency (DAE). Further support comes from a wide range ofpublic agencies and programs involved in rural development such as the Programfor the Execution of Health and Sanitation Activities (PIASS), the NationalDepartment for Water Supply and Sanitation Works (DNOS), the NationalDepartment for Anti-Drought Works (DNOCS), the National Highway Department(DNER), and the Center for Assistance to Small and Medium Entreprises (CEAG-MG),as well as from private or semi-private companies, such as the Minas GeraisElectrification Company (CEMIG) and cooperative organizations. The overalleffectiveness of these agencies in rural areas was initially hampered bylimited resources, administrative constraints, inadequate coordination, and,in some cases, relatively little field experience. In the past some agencieshave developed an implementation capability more rapidly than others, which inturn accentuated the need for improved inter-agency integration. As thevarious projects developed, the state took corrective steps and promoted better

- 10 -

integration, and the institutions involved have adjusted themselves success-

fully. Several additional institutions will be included in the proposed new

project, such as the Secretariat of Labor, Social Action and Sports, DER-MG

and CAMIG, which would have to adjust their implementation capabilities to

the project requirements, but the State and the institutions 1-ve so far

demonstrated a capacity to address rural development project issues success-

fully.

IV. THE PROJECT

A. Origin

4.01 The state has assigned high priority to assisting low income rural

producers, and it has initiated various programs for rural development (para

2.04). Because of the positive results of the Bank-financed rural development

project in the Zona de Mata (para 4.03) and the state's desire to extend

similar benefits to other poor, rural areas, the state requested Bank assis-

tance in March 1979 for the preparation and implementation of a rural develop-

ment program of wider scope. The Bank agreed to do so for regions in the

state with a high concentration of low income producers and with sufficient

productive potential. The project was prepared between July and December 1979

by the State Planning Institute (Fundacao Joao Pinheiro) in close collaboration

with the Bank and the future implementing agencies (Annex 3).

B. Design

4.02 The project would build on the experience of the Bank's First

Rural Development project in Minas Gerais and rural development projects in

other parts of Brazil. Problems and issues highlighted in those projects have

been taken into account, and wherever possible, corrective measures have been

incorporated into project design.

4.03 The First Rural Development Project in Minas Gerais, initiated in

1977, has the objective of assisting 25,500 small farmers in the Zona da Mata

area. The project, including rural credit, agricultural support services, and

social and physical infrastructure investments, is expected to be completed on

schedule (December 31, 1981), and is substantially achieving its objectives

(Annex 1). The project has, however, raised some issues which are related to

three main aspects: (a) selection of project components; (b) start-up problems

in project Implementation, and (c) integration of project activities. First,

the Zona da Mata project did not include marketing and feeder road components.

The lack of adequate feeder roads has, in some cases, limited the full partici-

pation of isolated communities and the lack of proper marketing services has

reduced the impact of efforts to actively involve farmers' communities and

farmer groups in the development process. The proposed project would include

selected feeder road and marketing investments and provide for a pilot com-

munity development component. Second, some initial difficulties in project

implementation were experienced due to the lack of participation of operational

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personnel in project preparation. The proposed project has involved a cross-section of personnel from the participating agencies in project preparationand appraisal. The first project's coordinating unit also had to dedicatemuch time to the establishment of a monitoring structure. The proposedproject would benefit from this pioneering work and would further improve theusefulness of monitoring to project managers. Finally, the first projecthighlighted the need for better integration within and between the executingagencies. During project design, special attention was given to institutionbuilding, internal information systems of the agencies, and interagencycooperation. Features such as formal agreements regulating inter-agencycooperation and an administrative system for the community centers to be usedby various participating agencies, would strengthen these aspects of theproject.

4.04 Experiences from other completed rural development projects werealso taken into account during project design. Although many of these proj-ects were smaller and included less products and components, they have indi-cated several issues which are relevant for the proposed project. Theseissues include: (a) the tendency for overly optimistic appraisal estimatesof the execution capacity and the rate of productivity increases; (b) theimportance of project flexibility to adjust to important changes in circum-stances, while maintaining basic project objectives; (c) the need for strongpolitical commitment from the State and Federal Government; (d) the need tofocus directly on the lowest income strata of the target group; and (e) theneed to involve target group beneficiaries, families, and communities moreactively in project implementation. Project preparation and design haveaddressed these issues in the following manner: (a) generally conservativeyield estimates have been applied and targets have been set in accordancewith the implementation capability of the participating agencies and theabsorption capacity of the target group; (b) project administration andmonitoring activities have been designed to ensure timely data collection anda proper feedback of information to the local executive level, in order toensure as much flexibility as possible; (c) political commitment has beentangibly demonstrated during project preparation, particularly through theactive involvement of government officials on all levels; (d) project actionswere aimed at the poorest rural inhabitants of the project area by settingmaximum income or property limits for participation in certain project activi-ties; and (e) project design has included provisions for improved socialextension services, assistance for farmer associations, and community develop-ment activities.

C. Objectives and Strategy

4.05 The proposed project would support state policy which gives priorityto increasing productivity and raising living standards in rural povertyareas. Taking advantage of the project area's development potential, a broadrange of project activities would be directed to specific target groups oflow-income, small producers. Project objectives include:

(a) increased production and productivity in agriculture and smallnon-farm enterprises;

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(b) increased rural per capita income levels and rural employmentopportunities, improved income distribution, and the dampeningof rural-urban migration;

(c) improved physical and social infrastructure;

(d) increased local participation in the execution of projectactivities; and

(e) improved institutional capability in project execution, monitoringand evaluation.

4.06 The project would operate in a wide region (50% of the state) wheremost low-income producers are found. Project activities would be concentratedon selected "development pockets," 102 municipalities, with the highestconcentration of small, low-income producers. It is expected that the activi-ties in the development pockets would have a demonstration effect on surround-ing areas, serving as a catalyst for the expansion of rural developmentactivities throughout the project region and eventually throughout the state.Concurrently, the project's emphasis on institution building would improve thegeneral effectiveness and implementation capabilities of the participatinginstitutions.

D. Brief Description

4.07 The project would include the following activities:

(a) the provision of agricultural medium and long term credit to 30,000small farmers (including sharecroppers and tenants), with less than100 ha of land, living on or near their farms and obtaining morethan 50% of family income from agricultural activities, and theprovision of rural credit for electrification of about 5,500 smallfarms;

(b) the strengthening of land titling services, agricultural extension,agricultural research, and storage and marketing services;

(c) the provision of special support for reforestation (10,000 ha) onabout 4,100 small farms and reclamation of swampland (6,000 ha) onabout 1,800 small farms;

(d) the promotion of cooperative development, assisting about 14 agri-cultural cooperative societies, 350 farmer groups and 120 pre-cooperatives, reaching a total of about 9,000 farmers;

(e) the provision of technical assistance to about 1,100 small non-farmenterprises, each with less than 10 employees, fixed assets of lessthan 300 MVR I/ and annual sales of less than 600 MVR;

1/ The MVR (maior valor de referencia), established in 1975, is a standardunit of value used in various financial transactions. Originallybased on the minimum wage, it is now adjusted periodically. One MVRequaled Cr$1,962.20 or US$46.35 as of January 1, 1980.

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(f) the improvement of the municipal road network through systematicmaintenance, upgrading about 3,360 km of municipal roads andconstructing about 100 km of roads connecting isolated comuni-ties, and the installation of telephone communication in 34municipalities.

(g) the strengthening of community development, education and healthservices, including the construction or rehabilitation of communitycenters, schools, village health centers, water supply systems andsanitation installations; and

(h) the provision of project management, including administration,monitoring and evaluation.

4.08 The size of the area operated by the project beneficiaries wouldvary from less than one to as much as 100 ha, depending on the region. In thesouthern regions of Zona da Mata and Sul de Minas, which currently possessstronger infrastructure and support services, farmers cultivating more than 50ha would not be direct project beneficiaries (except for reforestation assis-tance). The distribution of expected direct farmer beneficiaries by farm sizeis given in the following table.

LandlessTotal FarmersProject Included

0-10 ha 10.1-50 ha 50.1-100 ha Area in Totalno % no % no % no % no %

1. Nordeste 6,220 47.3 5,380 40.9 1,560 11.8 13,160 100 1,660 12.6II. Rio Doce 440 33.6 660 50.4 210 16.0 1,310 100 110 8.4III. Zona de

Mata 2,500 53.3 2,190 46.7 0 0 4,690 100 390 8.3IV. Sul de

Minas 5,310 49.0 5,530 51.0 0 0 10,840 100 840 7.7

Total Proj-ect Area 14,470 48.2 13,760 45.9 1,770 5.9 30,000 100 3,000 10.0

LandlessFarmersIncluded inTotal 1150 7.9 1,500 10.9 350 19.8 3,000 10

By the project's fifth year, 37% of the small farmers in the project munici-palities would have benefitted from project assistance, with a higher rate forlandowners (up to 40%) and a lower rate for landless farmers (about 20%). Theincremental number of farmers directly assisted annually, would increase from2,000 in the first year to 8,000 in the fourth and fifth years of the project.

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E. Detailed Description

Credit

4.09 Agricultural Credit. Use by small, low-income farmers of insti-

tutionalized credit would be expanded significantly. The project would

finance medium and long-term credit to establish permanent crops; to make

on-farm improvements such as on-farm storage installations and stables; to

improve pasture; to purchase livestock, when part of an integral crop and

livestock farm development plan; and to undertake reforestation and land

reclamation. In the sub-areas of the Northeast and Vale Rio Doce, credit

would be made available to farmers with less than 100 ha, and in the Zona da

Mata and Sul de Minas, to farmers with less than 50 ha, since in the latter

regions, farmers with more than 50 ha generally have access to normal credit

channels. For reforestation credit, the farm size limit would be uniformly

100 ha throughout the project area. To complement the project financing of

medium and long-term credit, the state government would take all steps necessary

on its part to assure the adequate provision, through the participating banks,

of seasonal credit to the project beneficiaries (para 4.12).

4.10 The credit would be administered by the BB and four state banks

through 57 existing agencies and advance credit posts and at least 20 planned

new posts. During negotiations assurances were obtained from the State that it

would promote the establishment of the new posts not later than June 30, 1982.

Credit procedures would be simplified, based on experience under the first

project and new federal regulations. Credit terms and conditions for project

participants would be the same as for standard rural credit lines. The

effective interest rate for 1980 will be 29% for investment credit, with

repayment terms for the latter up to 10 years, including a grace period of up

to six years in the case of reforestation. Seasonal credit, not financed

under the project, currently bears an interest rate of 24%. The repayment of

seasonal credit, normally within 60 days of harvest, would depend on the

production cycle of the crop produced. Although rural credit interest rates

remain negative in real terms, they reflect almost a doubling from the rates

in effect prior to December 1979 (13-15%). The increase, although modest, is

an important tangible step in the Government's stated plan to gradually reduce

the implicit interest rate subsidy by increasing the nominal interest rates

simultaneous to other parallel actions to reduce inflation. In view of this,

and the fact that project credit would be closely directed to beneficiaries in

the lower income classes, the Bank should be prepared to acquiesce to the rate

structure. Furthermore, the project's extension and monitoring activities

would minimize the possibility of resource misallocation.

4.11 Project investment credit would be available for up to 100% of total

costs of the investment. Seasonal credit (not financed under the project)

would be available for up to approximately 70% of total production costs

including labor. Project credit would be limited to farmers with a total of

less than 100 MVR 1/ indebtedness, except in the cases of land reclamation,

with significantly higher crop yields, electrification and charcoal production,

where it would be 180 MVR.

1/ Equivalent to about US$4,600. See also note on page 12.

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4.12 During negotiations assurances were obtained from the State that itwould: (a) provide, or make necessary arrangements for the provision of,funds to finance through the participating banks seasonal short-term creditrequired by the Project beneficiaries for annual crops and the establishmentof two-year crops; (b) add financial agents only with prior Bank approval; and(c) inform the Bank of any change in lending terms or conditions. The receiptby the Bank of signed arrangements between the State and the financial agentsensuring the collaboration of the agents in the execution of the project,would be a condition of disbursement for the credit component.

4.13 Rural Electrification Credit. The project would provide rural electricservice in 32 municipalities of the project area, to an estimated 5,500 farmsof 100 ha or less. This represents about 16% of the target population in therelated area. The project rural credit would finance branch distributionlines and transformers and meter installations. The terms and conditions forthis credit would be the same as those stipulated for agricultural credit(para. 4.09-4.12). The cost of the required additional trunk lines (US$7million) representing 40% of total network costs, would be financed by theState Government. In-house wiring and farm equipment would be the farmers'own responsibility. According to past experience, the total number connectedover time increases (by 30% or more) when benefits become visible to initialnon-participants. Therefore, costs per connections should decrease over time.

4.14 The executing agencies would be CEMIG and DAE. CEMIG supplies 80%of the electrical energy in the state and DAE has had ample experience inproviding electrical service in remote areas. The user rates charged wouldbe in accordance with those applicable elsewhere in the state. Operations inrural areas would be initially supported by the revenues from higher urbantariffs. However, past experience in Minas Gerais indicates that in ruralareas with a high development potential, such as the selected municipalities,revenues would eventually cover operating and maintenance costs. Duringnegotiations assurances were obtained from the State that (a) the necessaryfunds would be made available to the executing agencies for the timely construc-tion of necessary trunklines; (b) the average costs per km of distributionline (including trunk and branch lines) would not exceed US$3,400; and (c) theaverage costs per KVA of transformer and meter installation would not exceedUS$100.

Agricultural Services

4.15 Land Titling Services. The project would provide land titlesto about 9,000 small farmers, thereby improving security of tenure andthe access to institutional credit. The executing agent would be RURALMINAS.The project would finance salaries of incremental staff, cars, equipment andmaterials for land surveying and the preparation of documents, and the costsof legal procedures and advice.

4.16 RURALMINAS is authorized by State law to legitimize and regularizeland ownership in Minas Gerais. Since 1966, it has legitimized 2,700 landtitles covering about 2.8 million ha. However, the situation in the threenorthern sub-areas of the project remains unsatisfactory, with about 50% ofthe lands owned by small farmers lacking proper land titles. RURALMINAS

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currently operates with about 100 technicians and 14 local offices in theproject area. Only a relatively small increase in staff and equipment wouldbe needed for the additional project activities, which would include a specialpromotion campaign during the first year. Although project beneficiarieswould contril- te a nominal fee of about 5% of total costs, the state intendsto waive a traditionally required payment of about US$10 per ha for thetitling of lands officially belonging to the state (e.g., untitled landsfarmed by long-time squatters).

4.17 Agricultural Extension. The project would expand extension servicesin the 78 municipalities of the project area which now receive no or minimalservice. It would also improve the quality of extension services by intensiveretraining, assigning extensionists to specific municipal areas, and focussingon farm management problems. In addition, the extension service would activelyparticipate in the activities under the credit, land reclamation, cooperative,community development and marketing components. The project would provide for:(a) establishment of 18 new local offices and the increase of the number ofagricultural extensionists to 143 (from 43) and of social extensionists to 93(from 13); (b) the improvement of communication services with local offices;(c) the training of extensionists, farmers, and farm family members; (d) theemployment of about 12 extensionists to assist specifically land reclamationunder the project, and (e) establish a permanent staff of technicians forproject marketing activities (para. 4.28). Salaries of incremental staff,incremental operating costs, cars, and the costs of training would be financedunder the project.

4.18 The executiTg agent would be EMATER-MG. EMATER-MG gained consider-able experience during the first project in reaching small farmers and,particularly, landless farmers. Low-income producers have become successfullyinvolved in commercial farming activities through an intensive promotion andassistance effort. In order to reduce the costs of such assistance, EMATER-MGwould intensify its use of the group approach, including audio-visual methods,radio messages, and as appropriate printed leaflets. Its work would focus onthe farmer's family and community, which in many cases play decisive roles inthe farmer's acceptance of technological and social change. For this reason,the number of social extensionists would be significantly increased in theproject area. After initial contact with small groups of about 15 farmers,meeting of larger groups would be organized to provide information on topicssuch as marketing, credit procedures, and community matters. These contactswould be followed up by agricultural extension activities (including fielddemonstrations of results and specific cultivation techniques and farmer"field days") and by social extension activities (including demonstrations,community courses and instruction weeks in areas related to nutrition, childcare, and home improvement). The extensionists would be backed up by subjectmatter specialists in the regional offices. During the larger group meetings,they would also be assisted by local bank agents and regional officers ofother participating agencies. Extensionists would cooperate closely withSUDECOOP in the assistance of about 350 farmer groups (para 4.30).

4.19 To increase its effectiveness, EMATER-MG would concentrate itsefforts on about 400 (out of 622) communities. It would attempt to introduceabout 30,000 small farmers into the rural credit system and increase the

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coverage of farm families by the social extension service from 2,400 to about37,000. By the third year each extension officer would reach an additionalnumber of at least 50 farmers annually with supervised credit. The coverageratio would ultimately be about 250 farmers per agricultural extension officerand about 400 families (or 4 communities) per social extension worker. Toreach this coverage, it is assumed that farmers would graduate within two orthree years into virtually direct bank clients, requiring only limited assis-tance from the extension officers for credit applications. EMATER-MG wouldcontinue to give these farmers technical assistance and farm management andmarketing information. During negotiations assurances were obtained from theState Government that all of the new extension officers would be employed andtrained not later than June 30, 1982.

4.20 Research. Agricultural research under the project would be speci-fically oriented toward the needs of small farmers within the project area,and would concentrate on the main crops 1/ and on livestock as part of mixedfarming systems. Farm management research initiated under the first projectwould be continued. Provisions would be made for about 400 experiments anddemonstration plots annually, of which at least 50% would be at the farm levelwith 20% on farms of less than 10 ha. The project would finance vehicles,equipment, salaries of incremental staff and incremental operating expenses,consultancies and the publication of results.

4.21 EPAMIG would be the executing agent for the project's researchactivities. It would cooperate closely with the IEF in the initiation ofagro-forestry experiments designed to investigate the possibilities of reduc-ing the unproductive period of reforestation for small farmers. The researchneeded to improve on-farm storage would be executed in cooperation with theUniversity of Vicosa, which has valuable experience in this field. Marketingresearch would be executed in collaboration with EMATER-MG, CAMIG and theProject Coordination Unit. EPAMIG would annually prepare a detailed experi-ment and demonstration program after consultation with EMATER-MG, which wouldpromote demonstration activities, divulge research results, and inform EPAMIGof the acceptance of new techniques among project farmers. The annual researchprogram would be sent to the Bank for comment. Because of the importance ofobtaining results which could be applied in the project, assurances wereobtained at negotiations from the State that EPAMIG would annually publish theresults of its overall project research activities in one of its monthlybulletins. Since research in the field of small farm management constitutesan essential part of the program, the appointment of a full-time farm manage-ment specialist to the project research staff would be a condition of disburse-ment against expenses made under the research component.

4.22 Land Reclamation. The project would assist about 1,800 small lowincome farmers to establish the most appropriate system to reclaim and cultivate6,000 ha of swampland (varzeas). Special efforts would be made to assure thatappropriate land use and drainage are maintained after sub-project completion.The operational capacity of the land reclamation subsidiary of the executingagent, RURALMINAS, would be strengthened. The project would operate in four

1/ Beans, maize, cotton, manioc, rice, banana, garlic and tomato.

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concentration areas, one in each of the four project sub-areas. RURALMINAS

would execute the reconnaisance, land surveying, farm planning, and the actualimplementation of the individual subprojects, in full cooperation with EMATER-MG

agricultural extensionists. In order to better focus on target group farmers,

the areas selected for reclamation assistance would be where qmall farmers would

account for at least 30% (in the three sub-areas other than Zona da Mata) to

50% of the reclaimable land. To help RURALMINAS expand its capacity and

gradually develop into an agency able to work with small farmers in a commer-

cially viable way, the project would finance certain additional reclamationequipment, initial costs and start-up supply of materials for the establishment

and operation of four regional offices, salaries of incremental technical

assistance and planning personnel and consultant services.

4.23 RURALMINAS has considerable practical experience in land reclamation,but has not yet institutionalized many of its operating procedures. RURALMINASwas also a pioneer in "varzeas" mechanization work, which temporarily over-

shadowed the necessity for preventive equipment maintenance and operational

efficiency. Also, a cost control system was only introduced recently.

During negotiations assurances were obtained from the State that consultantswould be employed not later than June 30, 1981 on terms and conditions accept-able to the Bank to assist RURALMINAS in improving its cost accounting system,

in organizing a preventive equipment maintenance system, and in better structur-

ing operational procedures.

4.24 Due to the pioneering nature of initial RURALMINAS work in the

"varzeas", a variety of problems, such as the unexpected high costs of riverregulation, were experienced. As a result, the state was forced to assume

additional costs in many cases and has granted subsidies on an ad hoc basis

(e.g., not charging established rates to some clients). In addition, charges

to farmers for land reclamation services have been subsidized, since they are

based on machine-hour rates using over-optimistic parameters. It is estimated

that only about 65% of the costs (equipment replacement and machine operating

cost, but not including a proportional share of administration overhead) arerecovered through machine hour charges. Since the potential productionincreases on reclaimed "varzeas" justify greater cost recovery, the subsidies

would be reduced gradually. During negotiations assurances were obtained fromthe State that, not later than December 31, 1980 a system would be established

to eliminate unprogrammed subsidies and that, not later than June 30, 1983,tariffs would be applied to recover full machinery operating costs, full

machinery replacement costs and reasonable administrative costs related

to on-farm development works. Assurances were also obtained from the Statethat the equipment financed under the project would be used exclusively in

the project area during the project implementation period and that reports

and proposals from the consultants would be sent to the Bank for comment as

soon as they become available, but not later than January 1, 1982.

4.25 Reforestation. The project would aim to develop wood and charcoal

production on small farms. About 10,000 ha on 4,100 farms would be reforested,

and 300 ha for agro-forestry experiments would be established by IEF in

cooperation with EPAMIG (para. 4.21). The project would provide technicalassistance to the beneficiaries and free seedlings, fertilizers, and insecti-cides for the first two planting years. It would finance the establishment

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of nine new nurseries, the production of seedlings on 21 nurseries, theestablishment of 13 local IEF forestry extension offices, and the salariesof 15 new extensionists.

4.26 IEF gained considerable experience in small farm reforestation underthe first rural development project. Though small farmers have demonstratedan initial reluctance to engage in reforestation activities because of theseven-year gestation period, there is a growing interest in trees as a farmcrop. This is in part due to rapidly increasing prices of firewood, fenceposts and minor construction wood. The project credit component would beavailable to help finance the farmers contribution, which would consist oflabor, the costs of necessary fencing, and possibly the installation ofcharcoal ovens. The IEF would promote charcoal production on small farms withmore than 15 ha, since at least 5 ha of trees would be required to supply asmall stove adequately. During negotiations assurances were obtained from theState that (a) provision of free inputs would be limited to 10 ha per farmerin order to reach as many as possible; and (b) at least seven new nurserieswould be established not later than June 30, 1981.

4.27 Marketing. The project would take the initial steps toward thecreation of a better integrated marketing system, offering more marketingoptions to the small farmer, within the project area. Project actions wouldbe aimed at increasing the small farmer's bargaining power and allowing himaccess to Government-sponsored minimum price acquisition and loan programs.Project activities would include: (a) expansion of input sales activities ofCAMIG and agricultural cooperatives, and the construction of about 20 inputsupply outlets; (b) construction of 20 to 25 new public storage facilities,ranging in capacity from 300 to 3,000 tons; (c) establishment of a permanentgroup to conduct market opportunity research; and (d) training courses forboth administrative and field-level personnel. The project would financeconstruction costs; incremental salaries and operating costs associated withcarrying out studies and training, and coordination of component activities;vehicles and equipment. Other project components would also reinforce themarketing component. These include research and credit for improvementsin on-farm storage and extension activities to disseminate to small farmersmarket price and quality information and to promote the adoption of newmarketing and storage technologies and institutional forms.

4.28 Project marketing activities would be carried out by several agencies:CAMIG (input supply and storage operation); EPAMIG (research); EMATER (exten-sion); SUDECOOP (extension in cooperatives); CASEMG (storage construction);and the Federal University of Vicosa, UFV, (training). Details of the struc-ture of the marketing component are given in Annex 4. Overall control wouldbe the responsibility of an already nominated marketing coordinator in theproject coordination unit. The State has formally constituted a State Market-ing Commission, composed of the presidents of the involved institutions andchaired by the Secretary of Agriculture. The commission would give overallpolicy guidance to the State's marketing activities.

4.29 CAMIG would play a central role in project area marketing activities.It would purchase and store production as an agent of the Government-sponsoredminimum price program. Since CAMIG has no previous experience in this field,the project would make provisions for two full-time consultants to strengthen

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CAMIG's organization and implementation capacity. In a complementary effort

to complete the information about current marketing problems and opportunities

for the area's small farmers, EPAMIG would undertake a survey during the first

project year. Project actions in subsequent years would be adjusted to take

into account the EPAMIG study and the consultants' findings. Satisfactory

terms of reference for the consultants and the work program for EPAMIG's

preliminary study have already been prepared. In addition, the State has

taken steps to assure an adequate seed supply to the project area, and the

curricula of the marketing training courses have already been designed.

During negotiations, assurances were obtained from the State that (a) the

results of EPAMIG's study and the program of CAMIG-proposed investments for

storage and input facilities would be forwarded to the Bank for review not

later than June 30, 1981; and (b) any public storage facility of 3,000 tons or

larger in the project area, as determined by the first-year study, would be

constructed with state resources. The employment of CAMIG counterparts for

the consultants will be a condition of disbursement for the component and

disbursements against expenses made for off-farm storage facilities, and farm

supply outlets would be contingent upon Bank approval of location and cons-

truction plans.

4.30 Assistance to Cooperative Societies. The project would focus on

the promotion of farmer groups at the community level, and assist these

groups to evolve into cooperative societies and assist the cooperatives in

improving their operating effectiveness and member service. The project

would aim to increase cooperative membership from 2,400 to 6,000 and to reach

a total of 9,000 farm rs in farmer groups. Some 350 farmer groups would be

formed and 120 pre-cooperatives would be assisted. Technical assistance would

be made available to seven existing cooperatives, and about eight new ones

would be constituted and assisted. SUDECOOP would be the executing agency,

in cooperation with EMATER-MG. The project would finance the equipping of

three SUDECOOP regional offices; incremental salaries and operating costs of

SUDECOOP; cars; salaries of selected managerial and technical staff to be

placed in cooperatives; and training programs for cooperative members and

officials, farmers and technicians of other executing agencies.

4.31 Currently, there are only six agricultural and one artisan coopera-

tive in the project area, with an average membership of 400. Active member-

ship is low and the annual turnover of inputs distributed through the coop-

eratives is only about US$40 per member. Among the criteria to be used to

determine a cooperative's eligibility for managerial assistance would be

specific potential to profit from the assistance; and the existence of a

cooperative management open to operational innovation. The assistance to a

specific cooperative would continue beyond one year only if the active member-

ship would be at least 200, with about 50% being small or landless farmers.

The costs of new managerial and technical staff placed in the cooperatives

would be financed by the project on a decreasing basis, starting with 100%

during the first year and thereafter decreasing annually by 20%. Assistance

would be given only after the conclusion of a contract between the cooperative

and SUDECOOP regulating staffing, administrative and auditing requirements.

SUDECOOP would annually evaluate the performance of each assisted cooperative

in order to determine whether continued assistance would be justified.

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Small Non-Farm Enterprises

4.32 Technical Assistance. The component, to be executed by SETAS, wouldaim to improve the productivity and revenues of non-regi3tered small non-farmenterprises. It would: (a) provide managerial and technical training (exten-sion) to 1,100 non-registered small enterprises, 530 artisans, and 500 indivi-duals who intend to start small enterprises; (b) assist about 950 enterprisesin obtaining credit from existing non-project credit lines, for investment andworking capital; (c) strengthen the organization of SETAS, establish eighttechnical assistance centers, covering 38 municipalities, and train 15 fieldassistants; and (d) provide for the study of improved technology and marketingopportunities. The project would finance salaries of incremental supervisorystaff, field assistants, and teachers for the training courses; incrementaloperating costs, equipment and cars; and consultant studies and provisions toimplement their recommendations.

4.33 There is currently no public assistance to the non-registered smallenterprises, which produce a wide variety of goods and services, mostly forlocal low-income markets. The technical assistance services to be set up bySETAS under the project would be complementary to and collaborate with theexisting service for registered enterprises, which is administered by CEAG-MG.The field assistants would concentrate on the improvement of technical skillsand product quality in order to enhance market opportunities and respond to anincreased local demand which would result from other project activities.During the first three years, about 100 training classes would be taught bythe best local subject specialists who would receive previous training fromSETAS. Tools and equipment for the classes would be provided by a mobile unitfinanced under the project. SETAS would contract the State TechnologicalCenter Foundation of Minas Gerais (CETEC) to provide information about effi-cient production techniques and to conduct applied research in the projectarea. Extensionists would coordinate these activities and stimulate, incooperation with SUDECOOP, entrepreneurs to form associations for more effi-cient input purchasing and product marketing. The component market studieswould be reinforced by a small investment fund of US$300,000, to providefinancial assistance for marketing efforts in line with the studies' recom-mendations. During negotiations assurances were obtained from the State thatterms of reference for such studies would be satisfactory to the Bank, andthat the study results would be presented to the Bank when available, but notlater than June 30, 1982. Assurances were also obtained that the State wouldprovide the Bank with satisfactory detailed terms and conditions for the useof the marketing investment fund prior to its use, and that the State wouldensure the availability of the credit expected to be needed by some 950 smallenterprises (amounting to about US$2 million).

Physical Infrastructure

4.34 Feeder Roads. The project would aim to improve year round accessi-bility to and from project communities with agricultural development potential.It would include: (a) the design and construction of improvements of about3,360 km of municipal roads to appropriate all weather standards; (b) thedesign and construction of about 100 km of new access roads to currentlyisolated communities; (c) the development and equipping of a municipal road

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maintenance program and (d) the training of personnel for maintenance ofessential roads to support the rural development program in the project area.Consultants would be contracted for the preparation of engineering designs andcontract documents for road improvements and construction; supervision ofconstruction; the preparation of a municipal road maintenance nrogram; andassistance in training. Project financed equipment would include about 300units of maintenance equipment procured internationally, as well as an alloca-tion (equivalent to 20% of equipment costs) for required hand tools and spareparts. About 100 units of equipment would be used initially for force accountconstruction and road improvement on up to 20% of total road works, wherecontracting would be impractical. DER-MG would be the executing agent of thefeeder road component.

4.35 The lack of adequate access is a major constraint to accelerateddevelopment in the municipalities of the project area. The existing municipalroad network generally consists of dry weather tracks which are poorlymaintained due to the lack of funds and equipment, proper work planning andpersonnel training. Under the project, DER-MG would annually select, incollaboration with EMATER-MG, the priority feeder roads which would bestsupport other development efforts. The roads would be improved or constructedto one of the two design classes given in Annex 5. The roads for the firstproject year have already been selected. Except where the nature or scale ofroad activities justify work by force account, road works would be awardedthrough local competitive bidding procedures. During negotiations assuranceswere obtained from the State that the length of roads improved under forceaccount would not exceed 20% of the total length of feeder roads included inthe project. Also, the State gave assurances that before initiating roadconstruction work, DER-MG would conclude a contract with each municipality,establishing their respective obligations in maintaining the constructed roadsadequately. Assurances were also obtained from the State that it wouldimprove to BNDE class E standard, by June 30, 1983, an additional 486 km offeeder roads, listed in Annex 5, complementary to the project, to link-upmunicipalities in the project area to the state and federal highway network.These works could be financed under the Bank's lines of credit through BNDEfor financing feeder roads subprojects (loans 1207 BR and 1730 BR).

4.36 DER-MG would acquire the services of consultants to prepare a roadmaintenance program for essential municipal roads in the project area and tomake proposals for the execution of this program, including a financing plan.Such roads would be determined by the consultants out of the total municipalroad network of about 20,000 km. To assist the municipalities in implementingthis program, DER-MG would, under the project, train foremen in organizationand execution of road maintenance work and personnel in use and maintenance ofequipment. During negotiations assurances were obtained from the State toprepare the draft program by June 30, 1981, and to make complementary fundsavailable at the beginning of each quarter from January 1, 1982, to guaranteeproper maintenance of these roads, in case allocated municipal and federalhighway funds would not suffice. DER-MG or the municipalities would provideoperators and assistants for the equipment and workshop back-up servicesaccording to the consultant's studies. During negotiations assurances werealso obtained from the State that the equipment, tools and spare partsprocured under the project would until project completion be used only for

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maintaining municipal roads in the project area. Separate procedures wouldbe maintained to account for handtools and spare parts purchased under theproject. To participate in the maintenance program and to receive additionalfunding from the State, each municipality would enter into an annual agreementwith DER-MG for carrying out the maintenance according to the agreed program.The feeder road component would be coordinated by a DER-MG engineer, who hasalready been nominated, and four teams in the project area, each staffed withsix officers who would accompany all aspects of the project as counterparts.The employment or assignment of the four teams of six officers of DER-MGcounterparts would be a condition of disbursement for the feeder road component.

4.37 Telephone Communication. This component of the project wouldinstall one public pay phone in each of 34 municipal centers where no communi-cation now exists with the rest of the State. The locations are isolatedexcept for messenger service, and the nearest telephone is frequently up to200 km away. A minimum telephone service is a prerequisite to the efficientadministration of such project components as extension and health services andwould help to improve living conditions in the area. DAE would be the execu-ting agent. The proposed telephone units would be the least cost solution andwould consist of a telephone connected by a microwave link to the state-ownedtelephone network (TELEMIG). The instrument would initially be operated bythe municipality and would be available to the public. The rate charged percall would be in accordance with the authorized national telephone tariffsplus a small surcharge to cover local operating costs. The minimum installa-tion would gradually help to develop communications within the area and wouldlater be suitable for extension to provide local service. When fully oper-ational, it would be transferred to TELEMIG for maintenance and operation.

Social Services

4.38 Education. The project would improve primary and secondary educa-tional facilities and services throughout the project area. It would include:(a) development and application of a revised primary school curriculum; (b) thetraining of educational and supervisory personnel; (c) construction materialsand equipment for school canteens, to be constructed by the communities;(d) training courses for the operation of school canteens and equipment forschool gardens; (e) improvement of one primary and four secondary agriculturalschools located outside the project area, but serving the project municipali-ties, including curriculum reform, additional construction, and equipment; and(f) strengthening of project administration. The construction of additionalprimary and supplementary school facilities would be part of the constructionof community centers (para. 4.43). SEE would be the executing agent. Theproject would finance salaries of incremental SEE support staff and theincremental operating expenses, including materials, equipment, and vehicles,to adequately supervise project activities.

4.39 All project activities would be integrated and applied to oneselected school per project municipality, with the intention that the modelcould then be applied to other schools. The SEE would aim to improve thequality of education services by curriculum reform, based upon studies ofcultural and language patterns and upon experience gained under other ruraldevelopment projects in Brazil. In addition, all teachers would be trained;

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school meals and nutrition and health education would be provided; and theschool calendar would be adapted to local needs. The curriculum reform and

the improvement of the agricultural school would allow the schools to serve

as meeting and information centers for small farmers in the area, mainly by

giving more emphasis to small farm problems. During negotiations assuranceswere obtained from the State that it would provide to the Bank, for comment,

the result of the curriculum studies when available; that the new curriculumwould be implemented before February 1, 1982; and that the State would finance

the expenses associated with the provision of school meals in the projectschools.

4.40 Health and Sanitation. The project would improve the quality ofprimary health services and conditions, by (a) strengthening the central andregional health administration; (b) training or retraining some 1,000 healthattendants and 500 supervisory personnel; (c) constructing or improving about

200 health centers or health posts; (d) equipping about 90 health posts;(e) constructing 85 simple water supply systems, reaching about 25,000 families;

(f) constructing and placing 8,000 sanitary installations; (g) carrying out a

Chagas-disease control experiment for about 3,100 houses in two municipalities;

and (h) establishing a program for detection of Schistosomiasis-infestedsnails in varzeas to be reclaimed under the project. The executing agentwould be SES. The project would finance construction costs, equipment, cars,materials, salaries of about 200 new health attendants during 18 months,salaries of incremental SES supervisory staff, and training and retrainingcosts.

4.41 The experieace of the Zona da Mata project shows that the results of

primary health care depend largely on the quality of the attendants, the supportfrom SES, and the extent of community participation. The project would focuson the training of personnel and the strengthening of SES' organisation, bystandardizing its supervision systems, structuring its information system, and

improving the medical supply system for health posts. During negotiationsassurances were obtained from the State that SES would appoint and maintainsufficient personnel to execute the project and adequately staff the healthposts and centers, and that the final plans to strengthen the central andregional health administration of SES will be presented to the Bank byDecember 31, 1980. Community participation would be sought by constructingand remodeling health posts and centers with local contractors or with com-munity assistance. Construction would be initiated only after conclusion of a

contract between the SES and the municipality, regulating maintenance respon-sibilities.

4.42 Since infectious diseases controllable through sanitation measures

account for about 45% of recorded deaths, sanitation and water supply activi-

ties contribute an essential complement to the health services. In collabora-

tion with EMATER-MG, SEE, and SETAS, health and sanitation education would be

provided. In addition, SES would supervise the construction of simple, mainlystandpipe, water supply systems. The source of water would be mostly from

wells with safe groundwater. The quality of water would be controlled and

filtration would be installed as necessary. These systems would each servebetween 100 and 500 families, at an average cost of about US$90 per family.

Before -onstruction of a water supply system, SES would conclude, with themunicipality or DAE, as the case may be, a contract in which one of the latter

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would assume the obligation to operate and maintain the system and to chargeappropriate user-rates. In the case of house connections, this rate shouldcover operation and maintenance costs, and in the case of a standpipe system,a symbolic monthly rate would be collected through community associations.During negotiations assurances were obtained from the State that the detailedplans for any proposed water supply system with costs exceeding US$120/familywould be provided to the Bank for approval prior to construction, and thatadequate arrangements for the efficient operation and maintenance of allsystems would be made prior to their construction.

4.43 Community Centers. The proposed project would establish communitycenters in 32 municipalities equally distributed over the project area. Theproject would locate the centers in communities in need of improved physicalinfrastructure with the objective to reduce construction costs and integratingproject activities. The selection of specific communities would be made oncriteria outlined in Annex 6. The project would finance the costs of infra-structure for the building site, the construction of the basic core of thecenter (school rooms, health post, community meeting room and kitchen), andthe basic equipment for school rooms and health posts. Since the constructionand operation of the centers would involve the participation of the communityand several agencies, the construction would be executed under the aegis ofthe Project Coordination Unit, whereafter SETAS would take over the control ofadministration.

4.44 The type of community center to be built would be tailored to theneeds of the community, and its final design would be chosen with communityparticipation. To ensure this participation, the PCU would involve thecommunity council and would organize meetings with community families.The costs of this preparatory work are included in the project managementcosts (para 4.47). It is expected that four types of centers would be built,depending on the number of families in the community. They would vary mainlyin the number of classrooms, ranging from two to seven. The layout and sizeof the building site would be conducive to future extensions of the centers,although these extensions would not be financed under the project and would bebuilt with the communities' own effort and initiative. Experience in the Zonada Mata has shown that the impact of a community center depends largely on theproper set-up of the center's administration, with the roles and responsibili-ties of the various participating agencies clearly spelled out. An acceptableadministration scheme for community centers has been prepared by the State.During negotiations assurances were obtained from the State that constructionof the centers would be completed before December 31, 1983, to ensure a signif-icant impact on the development of the project area. Assurances were alsoobtained that the final engineering designs and cost estimates for models ofthe four types of community centers would be presented to the Bank for reviewno later than March 31, 1981 and that 2the construction plans of communitycenters with costs exceeding US$150/m would be presented to the Bank forapproval. Disbursement against construction expenses made for the communitycenters would be contingent upon satisfactory evidence of the acquisition ofland and right of way for the building sites of these respective centers.

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4.45 Community Development. The project would finance a community

development pilot project in 21 municipalities selected according to criteriaset forth in Annex 6. The principal objective of the pilot project would beto stimulate community activities and activate community capabilities forself-help. SETAS would be the executing agency and would operate in closecooperation with the social extensionists of EMATER-MG. The project wouldfinance consultant services; incremental salaries and operating costs ofSETAS; cars and a fund to finance community sub-projects stimulated throughcommunity initiatives and development efforts.

4.46 Numerous institutions and social action groups are involved incommunity programs, and project personnel would aim to coordinate theseactivities. In order to assist the communities, SETAS would establish andadminister a Community Development Fund, to finance small sub-projects, whichcould not be financed by either provisions of the proposed project or by otherexisting institutions or programs. The resources of the fund would be usedaccording to criteria listed in Annex 6, and funds would be disbursed onlyafter conclusion of a contract between SETAS and the community describing theproject, its costs and disbursements. During negotiations assurances wereobtained from the State that after two years or disbursement of US$300,000,whichever comes first, SETAS would evaluate, in consultation with the Bank,the impact of project actions on community development before continuing funddisbursements.

4.47 Project Management. The Secretariat of Agriculture (SEA) would bethe central coordinating agent of the project. The SEA would maintain aProject Coordination Unit (PCU) to administer the Project. It would operatefrom a headquarter office in Belo Horizonte and four regional offices (para6.03). The PCU would be in charge of the day-to-day operations (para 6.03)and monitoring of project activities (para 6.06). The evaluation of theproject would be carried out by an independent entity, UFV (para 6.07). Theproject would finance: (a) vehicles and equipment for the PCU's offices;(b) staff salaries and travel expenses; (c) staff training and consultancies;and (d) other incremental operating costs of project management, monitoringand evaluation.

4.48 The PCU's staff would comprise about nine staff officers, includinga special coordinator for monitoring and one for marketing, an accountant incharge of financial control, and an engineer in charge of generally super-vising the construction of the various civil works executed under the project.The regional coordination offices would be staffed by three officers each.The project director and the four regional coordinators have already beenappointed. The project would finance the services of a consultant, who would

advise the project director on matters of cost accounting. Evaluation activi-ties would consist of the execution of baseline studies, continuous evalua-tions of major project trends, and an ex-post evaluation of project impact.

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V. PROJECT COST AND FINANCING

Project Cost

5.01 The total project cost for the 5 year project implementation period(July 1980 - June 1985) is estimated at US$184.6 million. This figure includesUS$5.2 million of taxes, US$9.0 million of physical contingencies 1/ and ofUS$41.9 million price contingencies. 2/ The baseline costs were calculatedin January 1980 prices in Cr$, at an exchange rate of US$1 = Cr$42.33. Theforeign exchange component was estimated at 17.6%, or US$32.5 million. Theproject costs are summarized overleaf and annual phasing is given in Annex 7,Table 1.

1/ Physical contingencies were estimated in relationship with the degreeof preparation of the different project components and constitute on theaverage 6.2% of the baseline costs. Details per component are given inAnnex 7, Table 1.

2/ The price contingencies were calculated over the baseline US dollarcosts plus physical contingencies according to the following percentages:10.5% for 1980, 9% for 1981, 8% for 1982, and 7% thereafter.

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% of total %Baseline Foreign

Local Foreign Total Costs Exchange--------------- US$ million --------------

CreditOn-farm Investment Credit 18.42 2.58 21.00 15.7 12.3Electrification Credit 12.30 4.10 16.40 12.3 25.0

Agricultural ServicesLand Titling Services 0.28 0.07 0.35 0.3 19.0Rural Extension 1/ 15.39 1.54 16.93 12.6 9.1Agricultural Research 2/ 3.78 0.37 4.15 3.1 8.9Land Reclamation 1.56 0.40 1.96 1.5 20.4Reforestation 2.16 0.19 2.35 1.7 8.0Marketing 4.48 0.68 5.16 3.9 13.1Assistance to Cooperative

Societies 4.35 0.57 4.92 3.7 11.5

Small Non-Farm EnterprisesTechnical Assistance 2.22 0.16 2.38 1.8 6.9

Physical InfrastructureFeeder Roads 19.30 9.80 29.10 21.7 33.7Telephone Communication 1.09 0.36 1.45 1.1 25.0

Social InfrastructureEducation 6.69 0.83 7.52 5.6 11.0Health and Sanitation 6.21 0.85 7.06 5.3 12.0Community Centers 3.47 0.51 3.98 3.0 12.9Community Development 1.51 0.09 1.60 1.2 5.5

Project ManagementAdministration and

Monitoring 4.10 0.56 4.66 3.5 12.0Evaluation 2.48 0.22 2.70 2.0 8.0

Baseline Costs 110.13 23.54 133.67 100.0 17.6Physical Contingencies 7.46 1.59 9.05 6.8 17.6Price Contingencies 34.50 7.36 41.86 29.3 3/ 17.6

Total Project Costs 152.09 32.49 184.58 38.1 17.6

1/ Includes agricultural and social extension services, and extensionassistance for land reclamation and marketing.

2/ Includes agricultural and small farm management research, marketingand agro-forestry studies.

3/ Price contingencies calculated as percent of baseline plus physicalcontingencies.

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Financing

5.02 The proposed Bank loan of US$63 million to the State of Minas Geraiswould finance the US$32.5 million foreign exchange component plus US$30.5 millionof local cost. In total the Bank loan will finance 35% of total project costnet of taxes (34% of project costs). The loan will be for a 15 year periodincluding 3 years of grace. To help finance its share of total project costs,the State of Minas Gerais intends to secure by June 30, 1981 about US$50million from one or more external banks under co-financing arrangements. Theusual co-financing links for the commercial bank financing with the proposedBank loan would be provided. The amount and timing of the proposed co-financing would be reviewed with the Bank, taking into consideration theamount of counterpart funding required from the project, other external andinternal resources available to the State, and market conditions.

5.03 The direct and inputed foreign exchange component of the projectis relatively low (17.6%). The high commitment of State Government to theproject and the opportunity to extend to other areas and regions of the statethe experience gained in the past project make appropriate the Bank-financedsupport for more than the foreign exchange component equivalent. It seemsreasonable that the Bank contribute in financing 34% of total project costfor the project to succeed in mobilizing additional Brazilian resources andto maintain a continuous commitment to the project. In addition to totalproject costs eligible for Bank financing (US$184.6 million), the State andFederal Government would finance incremental short-term seasonal credit ofabout US$15.7 million and execute and finance essential complementary activities(such as secondary roads, electrification trunklines, credit to small enter-prises, teachers' salaries, etc.) at a cost of US$33.9 million. The costs ofthe total program would be US$242.6 million of which the State and FederalGovernment would contribute US$171.2 million or 70.5% of total program costs,the Bank US$63.0 million (26%) and the farmers US$8.4 million (3.5%). Detailsof the program costs are given in Annex 7, Table 2. The flow of informationand project funding is given in Annex 8. During negotiations assurances wereobtained from the State and Federal Government that adequate counterpartfunding would be available for the timely execution of the project, andadequate operation and maintenance of facilities and services developed underthe project. Assurances were also obtained from the State that it wouldassure timely acquisition of any additional land or right of way for projectworks.

Procurement

5.04 Farm inputs and investment items would be procured by individualfarmers through local trade channels. Equipment and vehicles for improvementand maintenance by force account of feeder roads (para 4.34) and land reclama-tion (para 4.22) would be procured by international competitive bidding inaccordance with Bank guidelines. Such items would amount to about US$8.8million without contingencies. Vehicles, tractors and other equipment requiredby the various executing agencies over the implementation period are locallyproduced and readily available. Such items (about US$1.0 million) would beprocured in accordance with local procurement and competitive bidding proce-dures, which are acceptable. Construction works for feeder road improvement

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and construction (about US$16 million) would be planned annually on the basis

of previous field surveys, establishing the quantity and quality of works

required, and divided in construction lots per municipality. The Bank would

review the construction standards, bidding and contract documents before the

first round of bidding. Contracts for the works for feeder rcads and for

civil works required for community centers, health centers, health posts,

storage facilities and retail stores (all items totalling about US$17.6

million) would be awarded to pre-qualified bidders on the basis of competitive

bidding advertised locally and in accordance with procedures which are satis-

factory. Brazil has a competitive local construction industry capable of

carrying out the project works. Since individual construction works would be

of minor size and quite dispersed, foreign contractors are not expected to be

interested, though they would not be excluded. Water supply and sanitation

works (US$2.3 million), the equipment for Chagas control (US$0.8 million),

telephone-communication (US$1.2 million) and 20% of the length of feeder road

improvement in areas where contract works would not be practical (US$3.2

million) would be constructed under force account. Project financing for

rural electrification (US$16.4 million) would be in the form of numerous small

credits to individual farmers, who would purchase their connections from CEMIG

or DAE, which would install the connections under force account. Consultancy

services (totalling US$4.8 million) would include about 100 man-years (at an

average of US$3,800/ month). It is expected that the majority of consultant

services could be found in Brazil, but expatriates would not be excluded.

About 85% of consultancy work would go to the feeder road component, about 5%

to marketing improvement, and 10% to management services.

Disbursement

5.05 The proposed loan, which would finance 35% of the total project

cost eligible for Bank financing, would be disbursed at the rate of 34% of

project expenditures for each component. Disbursements would (as in the case

of Loan 1362-BR) be made through the Ministry of Finance in Brasilia and the

State Secretariat of Finance in Belo Horizonte to the project coordinating

fiscal agency SEPLAN, against withdrawal applications covering statements of

expenditures, initiated by the various executing agencies under the project

and certified by the PCU in the Secretariat of Agriculture. Statements of

expenditure would be audited as indicated in paragraph 6.08. Supporting

documentation for credit, salaries, administrative expenses and construction

under force account would not be submitted to the Bank, but would be retained

by the PCU and made available for inspection by the Bank during project

supervision missions. Details of documentation to be submitted to the Bank

for civil works, vehicles, equipment, and consultancies have been reviewed

during negotiations. A description of disbursement procedures against state-

ment of expenses is given in Annex 9. Such procedures have been satisfactorily

applied under the First Rural Development project and enabled the determina-

tion of incremental costs. The estimated disbursement schedule is given in

Annex 10. To ensure a timely project implementation and to enable the full

inclusion of the agricultural season (starting in June) during the first year

of project implementation, the project would reimburse not more than US$500,000

against project expenses made before the date of loan signing, but after

April 1, 1980. Such expenses would mainly include startup costs, costs for

initial studies and hiring of key personnel.

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VI. PROJECT IMPLEMENTATION

Organization and Management

6.01 The State of Minas Gerais has already created a project managementcouncil (conselho diretor) consisting of the Secretaries of Planning, Finance,Agriculture, Health, Education, and Labor, Social Action and Sports. Duringproject implementation, this council would convene regularly to maintain andrefine overall project strategy, evaluate results, and approve annual workingplans and budgets. The Secretary of Planning of the State of Minas Gerais(SEPLAN) would act as overall coordinator and council president, while theSecretariat of Agriculture would be in charge of the day to day coordinationof the activities of the participating agencies. To carry out this task, theSecretariat of Agriculture is creating a Project Coordination Unit (PCU),headed by a Project Director responding directly to the Secretary. TheProject Director would be assisted by four regional coordinators, who wouldensure adequate coordination and integration of project activities at theregional, local and community levels. The participating agencies would eachappoint a full time project manager. These managers would meet with theProject Director and project technicians periodically as the ConsultativeTechnical Group, to discuss implementation progress and monitoring results andmake appropriate recommendations to the Secretary of Planning. An organiza-tional chart of project administration is presented in Annex 11 and a list ofexecuting agencies in Annex 3. A summary of the training efforts plannedunder the various project components, to assure timely and efficient projectimplementation, is given in Annex 7, Table 3.

Project Coordination Unit

6.02 The PCU would have a central office in Belo Horizonte. Regionaloffices would be located in Rio Pardo de Minas, Diamantina, Muriae and Formiga(see Maps IBRD 14954 and 14694). The central office would be responsiblefor the administration of the project at the State level. To carry out thistask, the Project Director would be assisted by: (a) a monitoring and tech-nical assistance unit, consisting of one coordinator and staff officers;(b) an administrative unit, consisting of one accountant and one assistant;(c) a marketing coordination unit, consisting of one coordinator and onetechnician; (d) a civil works engineer; and (e) an adequate administrativesupport staff. Each regional office would consist of a regional coordinator,one credit/production coordinator and one social coordinator and supportstaff. Due to the vast distances and specific characteristics of each region,an internal information and control system would be organized by the ProjectDirector to facilitate the necessary delegation of authority. The regionalcoordinator would also be responsible for organizing local and community levelproject coordination. This would include meetings of municipal consultativegroups and community associations and promotion of an efficient informationflow among the participating agencies. During negotiations assurances wereobtained from the State that it would maintain an adequate and qualified staffin the PCU and its regional offices, and that the Bank would be consultedshould the Project Director have to be replaced.

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Operating Agreements and Procedures

6.03 Because the project requires effective inter-institutional integra-

tion, the State Government, through SEPLAN, would enter into an overall

agreement (convenio) with the SEA. This convenio would specify the project's

administrative structure and SEA's responsibilities 'end obligations as the

project's coordinating agent. Subsequently, SEPLAN and SEA would enter into

tripartite convenios with each executing agency, outlining each agency's

obligations in project execution, project targets, and the funding and imple-

mentation schedules (Annex 12). In addition, with the assistance of the PCU,

convenios would be concluded between the executing agencies and collaborating

agencies (Annex 2). Finally, prior to the construction of civil works, the

executing agencies would conclude agreements with the involved municipalities

and communities to ensure their proper operation and adequate maintenance.

Draft convenios involving the executing agencies and samples of agreements

between such agencies and local entities have been reviewed and found satis-

factory. During negotiations assurances were obtained from State Government

that it would enter into and maintain all such convenios and agreements

throughout the project implementation period. Receipt by the Bank of satis-

factory signed convenios with the executing agency for a given component

would be a condition of disbursement for that component.

6.04 Since the project covers a broad range of activites under diverse

circumstances, the timing and scope of activities would undoubtedly require

adjustments during project implementation. During the month of August, each

executing agency wou'd prepare an annual plan, detailing the activities and

expected expenditure. for the following calendar year. These plans would be

discussed in the Consultative Technical Group, reviewed by the PCU, and

presented to the Project Management Council for its review and approval. The

project's working plan and budget would be presented before September 30 to

the State Government to secure adequate funding in the State Budget. During

negotiations assurances were obtained from the State that the annual budget

proposal would be made available to the Bank by October 31 each year for

comments.

6.05 Since there is an overlap in time and space between the first rural

development project (Zona da Mata) and the proposed project which includes

part of the same region, the State would ensure that the obligations and

responsibilities of project personnel within the participating institutions

and the two coordinating agents (RURALMINAS for the first project and SEA

for the proposed second project) were clearly defined. The participating

institutions would maintain their full support of the first project scheduled

for completion by December 31, 1981. Disbursements for each of the proposed

component activities in the Zona da Mata region would be contingent upon the

satisfactory completion of the corresponding activity under the first project.

The State has also confirmed in a written statement to the Bank that after

completion of the first project, a sufficient number of qualified personnel

would be maintained in the local offices of the participating institutions in

the Zona da Mata to consolidate the progress made under the project.

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Prolect Monitoring

6.06 Project monitoring would be executed by the PCU through the projectmonitoring and technical assistance unit. The basic inTormation for monitor-ing would be provided by the executing agencies, mainly through their ownsupervising and accounting departments. To ensure timely data collection, thePCU would work out with the executing agencies standard information procedures,compatible with the existing administrative systems prevailing in the institu-tions. The PCU would prepare quarterly monitoring reports, giving detailsof project implementation progress and expenses. They would point out achieve-ments as well as shortfalls in project execution, costs relative to expecta-tions, and in general comparisons of actual performance with targets, estimatedcosts and itemized indicators (Annex 13). The monitoring reports would bedistributed to the members of the Project Management Council, the executingagencies, the project component managers, and the regional coordinators. ThePCU would see to it that relevant information reports would be received bythe local officers of all participating institutions. The PCU would workclosely with the project evaluation team to establish key indicators andselect monitoring data, in order to ensure that the evaluation team would haveadequate information to perform its task. The PCU's monitoring unit wouldalso be responsible for the preparation of a Project Completion Report. Duringnegotiations assurances were obtained from the State that the monitoringreports would be made available to the Bank quarterly and that the CompletionReport would be prepared and submitted to the Bank within six months afterproject completion.

Project Evaluation

6.07 To complement monitoring activities, which are intended as a manage-ment tool, project evaluation would aim to provide the State with the necessaryinformation to adjust, when appropriate, project strategy and rural developmentpolicies. Evaluation activities would attempt to formulate and measure theimpact of the project on the development of the project area. Evaluationwill be contracted to the University of Vicosa (UFV), which has considerableexperience in evaluation work for other Bank projects. Due to the size ofthe project area, the UFV would involve other institutions (outside of theexecuting agencies) in the evaluation work, such as the Agricultural schoolin Lavras. A qualified full-time agricultural economist, already nominated,will head the evaluation team as overall evaluation coordinator. The evalua-tion would consist of baseline studies, the preparation of annual evaluationreports, and a post-project evaluation. The pre-project situation would beestablished by baseline studies concerning the present health and educationalsituation and the actual income and employment levels. These studies wouldcover the total population of the project area, giving special emphasis to thetarget group. Annual reports, would call to the attention of the ProjectManagement Council existing development trends in the project area and wouldcontain appropriate recommendations. The evaluation exercise would attempt toanticipate future developments and to assist the State to respond adequatelyto upcoming demands. The post-project evaluation would assess the finalproject impact, and it would assist the PCU in preparing its CompletionReport. During negotiations assurances were obtained from the State that:(a) the baseline studies would be completed before January 31, 1981; and(b) annual reports would be presented to the Bank not later than December 31of each year and that the ex-post evaluation would be submitted to the Bankwithin six months after project completion.

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Accounts and Auditing

6.08 All participating agencies have an internal auditing system and

also are externally audited by the General Auditor of the State and the Govern-

ment Auditors of the Ministry of Finance. Both the BB and the State banks are

audited by the Central Bank's auditing unit. Each of the participating agen-

cies, including the PCU, would maintain separate project accounts of project

expenditures, including expenditures for key complementary activities financed

by the State (para 5.03). The PCU would consolidate project accounts, which

would be audited by an auditor satisfactory to the Bank. During negotiations

assurances were obtained from the State that: (a) copies of the audited

statements of project accounts of the various participating agencies, the

banks, and the PCU would be kept at the PCU and made available for Bank super-

vision; (b) copies of the auditing report of the project auditor would be made

available to the Bank within six months of the end of the State's fiscal year;

and (c) such audit reports would include a separate opinion as to whether the

procedures and controls related to the use of statement of expenditures were

in accordance with the legal project requirements and accurately prepared.

VII. PRODUCTION, DEMAND, MARKETING AND PRICES

Farm Production

7.01 The proposed project would be built upon relatively simple, low risk

agronomic practices (Annex 14). Farmers cultivating less than 10 ha would

mainly improve the production of subsistence crops. Farmers cultivating over

10 ha would also increase subsistence crop production, but would be more market-

oriented. Incremental production would be brought about by increasing the

planted area and land and labor productivity through better agricultural and

managerial practices, supported by intensification of extension and research

services and an improved marketing system. Details of expected productivity

and production increases are given overleaf. Estimated at January 1980

farmgate prices, the annual incremental value of crop production at full

development is expected to amount to US$16.7 million; livestock production, to

US$10.4 million; and forestry production, to US$2.7 million; or a total of

US$29.8 million.

7.02 The basic crops would continue to be the traditional crops: maize,

beans, rice, manioc and cotton. However, a relatively small number of farmers

would experiment with commercial crops such as fruits and vegetables that

could produce cash income for lower-income producers. They would receive

close technical support in improving cultivation techniques and production

systems adapted to the needs of the small farmer, while testing the market

implications of production increases. Projected crop yield increases asso-

ciated with the project are relatively modest and would be, on the average,

less than 50% over a period of five to ten years. In most cases, projected

yields would be less than those already obtained by the most progressive

farmers in the project area. The productivity in livestock production has

also been conservatively estimated, and the increase by full development would

average 33%.

BRAZIL

STATE OF MINAS CERAIS

SECOND RURAL DEVELOPMENT PROJeCT

Project Parttcipante EstLiated Production

Annual rnere_ntat Productionfturt vithout Pro-lect with Project *t Full Develo0ent due to Project at full Developnent

Crop Unit Area yield Production Area Yield Production Production valueHa KA (unitS) ha Ha (unitt) (unite) (us$ 11flon)

Melse 1,000 tore 39,936 1.2 tone 47.9 50,390 1.7 tone 85.? 37.6 4.46Weana 1,000 tons 21,112 0.6 tons 12.7 26,589 u.8 tons 21.3 8.6 4.06

Uce 1,000 tone 7,930 1.0 tons 7.9 14,408 1.5 tone 21.6 13.7 4.04

anitor 1,000 tone 3,851 14.0 tone 53.5 4,417 19.o tone 63.9 30.4 0.97

Cotton 1,000 tone 12,626 0.5 tons 6.3 13,140 0.9 tone 11.8 5.5 1.75

Garlic 1,000 tons 41 3.1 tons 0.13 63 4.0 tons 0.25 0.1 0.53

Banana 1,000 tono 720 13.2 tone 9.5 960 18.0 tone 17.3 8.5 o.60

Tomato 1,000 tone 35 25.9 tone 0.9 56 40.0 tone 2.2 1.3 0.12

Potato 1,000 tons 45 10.2 tone 0.5 63 18.0 tons 1.1 o.6 0.07

Milk 1,000 litre. 300 tt/cow/ 7,392.0 400 It/cow/ 21,116.0 13,784 1.63year year Jleef (liveweigbt) 1,000 tone 3.6 12.6 9.0 7.44 1

Pork (liveweight) 1I000 tons 0.6 a*u 0.8 *u13/ 1.6 1.6 1.37

Wood l,OC0 cubic _ters 6,5oo 260.0 260.0 1.23

Charcoal 1,000 cubic _mtere 3,500 175.0 175.0 1.4Natural pasture ha 200,357 193,506

Fal.ow land ha 6,687.9 18,373

Inproved pasture ha - 6,880

Cropped area ha 66,878.8 67,317.0

Total Farm lrea ha 549,711.0 549,711.0

Total annual value ofincre,wntal.5roductiFoa

(US$ siniion t 29.72

These erops are intercropped, hence areas cropped are not addittiv.2/ &xperisental crops. Production technology would be adapted to emall farmrs.3/ Animal units/ha.

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Demand

7.03 The project area is situated favorably in relation to Brazil's major

urban centers -- Sao Paulo, Rio de Janeiro, and Brasilia. Belo Horizonte

and 11 medium sized cities within the state would also constitute important

demand centers for the project's principal products. Incremental project

production would account for a small percentage of this total potential

demand. Therefore, supply constraints, i.e., inadequate marketing and storage

facilities, which the project would attempt to correct (para 4.29), would

be more likely to affect project production than would demand constraints. In

addition, it is expected that much of the project's incremental food production

would be consumed locally, partially as human and animal consumption in the

project area and partially in the adjacent areas. In some cases, incremental

production would be utilized to lessen expected deficits. This would depend,

however, on the efficiency of inter-regional marketing mechanisms. Most

production surpluses would occur in the southern portion of the area, while

most consumption deficits would be found in the northern areas. The table

below illustrates project area production/human consumption balances of key

project food products. Existing and expected surpluses and deficits would be

leveled by internal trade with adjacent areas (see also para 7.09).

With Project at Full

Without Prolect Development (Year 10)

Pro- Con- Surplus/ Pro- Con- Surplus/

Crop duction sumption Deficit duction sumption Deficit

-------------------------000's of tons------------------------

Maize 241.8 39.5 202.3 386.7 40.4 346.3

Beans 47.1 31.6 15.5 74.7 32.3 42.4

Rice 47.6 60.7 -13.1 83.2 63.3 19.9

Manioc 253.9 1,320.0 -1,066.1 394.3 1,320.2 -925.9

Potato 13.5 12.1 1.4 21.4 20.1 1.3

Banana 41.1 41.8 .7 66.4 51.3 15.1

Tomato 2.9 5.0 -2.1 5.8 6.0 -0.2

Milk(million 1) 207.7 72.8 134.9 257.9 91.2 166.7

Pork 12.2 14.2 -2.1 21.4 17.8 3.6

Beef 19.5 37.0 -17.5 33.3 44.7 -11.4

7.04 Basic Grains and Traditional Foodcrops. All of the project's manioc

production would be readily marketable within the project area, since expected

consumption would be greater than total project area production. The expected

expansion in project area animal production would absorb much of the substan-

tial maize surplus. The smaller surpluses in beans, rice, potato and possibly

maize, would either be channelled to adjoining localities by private traders

or bought by CAMIG and the CFP as part of the government minimum price program.

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7.05 Fruits and Vegetables. Most of the project's surplus productionwould take place in the south of the project area. It is expected that thefruits and vegetables produced would mainly be used to satisfy demand in therest of the project area and in the urban centers of Belo Horizonte and SaoPaulo. The marketing study during the first year would assess the adequacyof existing marketing channels and recommend future improvements (paras 4.29and 7.02).

7.06 Dairy and Meat Products. The surplus milk production would bechannelled through existing cooperatives to meet urban demand, chiefly inRio de Janeiro, Belo Horizonte and Sao Paulo. Project milk, pork and beefproduction would also upgrade rural diets and help meet expected urban demandin the project area and adjoining cities.

7.07 Cotton and Wood Products. The project's cotton production wouldbe utilized by local industries and Sao Paulo textile mills and would bemarketed easily. There is a wood shortage throughout the project area,and the incremental production would be sold locally. Charcoal would mainlybe used to meet on farm needs, with the surpluses sold locally to the steelplants through intermediaries.

Marketing and Prices

7.08 Project actions are designed to improve the small farmer's bargain-ing position in the marketing of his products, enabling him to improve hisshare of the final demand price. Improvements in the road system (para4.34), banking facilities (para 4.12), cooperative marketing capabilities(para 4.28), agricultural extension (para 4.17), marketing information andstorage facilities (para 4.29), would increase the small farmer's marketingopportunities and decrease his vulnerability to seasonal price fluctuations.Currently, there is little direct public involvement in marketing activitieswithin the project area. This involvement would be increased, where neces-sary, to ensure a competitive climate and adequate marketing outlets for theprincipal crops produced by the project's small farmers. To provide smallfarmers with access to the government minimum price acquisition and loanprogram for basic grains, CAMIG has been designated as an official purchasingagent for that program. The project would assist CAMIG to perform this task(para 4.29). Cooperatives, particularly in the south, have proven to beeffective in the assembly and marketing of milk and other dairy products andwould be expected to absorb the project's incremental production. As theproject progresses, and after the year-one marketing study, the market oppor-tunity research group would continue to monitor the marketing arrangementswithin the project area. The extension service would channel necessaryinformation to the small farmer (Annex 4).

7.09 The project's incremental production is not expected to modify theexisting final demand price structure. However, improvements in marketing andstorage capabilities are expected to diminish seasonal price variations andincrease the competitive climate in the project area, augmenting the farmer'sshare of the final demand price. Currently, for basic grains, the farmer'sshare of retail price varies from about 45% to 70%. For fruits and vegetables,

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this percentage is lower, ranging from about 30% to 50%. With the improvedmarketing arrangements, it is expected that the upper ranges of these percent-ages would apply to the small farmer.

Non-Farm Enterprise Production, Demand and Marketing

7.10 The non-farm enterprises would engage mainly in production activitiesutilizing food products, natural and synthetic fibers, wood and bamboo, leather,clay and non-metalic minerals, and metals. A small number also engage inrepair work, other services, and small-scale commercial activities. About 75%of production is sold within the project area, mainly to the lower and middleincome strata. For producers of "artistic" products, a great portion of themarket is in Belo Horizonte, Sao Paulo and Rio de Janeiro. Two recentsurveys indicate that small enterprise sales could be significantly increasedwith adequate credit, technical and marketing support. Sales impedimentsconsist of: (i) product quality problems, which shut many producers out oflucrative urban markets; (ii) low production efficiency; (iii) low marketingefficiency; including a lack of cooperative marketing arrangements which mightallow producers to receive a higher share of the final consumer price and havemore market influence; and (iv) high input prices and low input quality. Theproject would address all such problems, through managerial and technicalassistance, training and cooperative action and credit. The increase inoutput quantity from enterprises assisted should range from 20% for weavers(where expected quality related price increases are more important) to 500%for some confectioners (where production is currently very seasonal and demandis far from satiated). Project-related rural income growth and the tapping ofnew geographical and higher income market strata would help to strengthen themarket prospects for project non-farm enterprises.

VIII. FINANCIAL ANALYSIS

Illustrative Farm Types

8.01 To reflect the variety of ecological and development conditions inthe project area, 17 illustrative farm models were constructed to representagricultural development for project beneficiaries. The charactertistics ofthe sub-regions are described in Chapter 2 and summarized in Annex 2. Inview of existing similarities, the Northeast and Vale Rio Doce sub-areasand the Zona da Mata and Sul de Minas sub-areas were grouped together, whileseparate models were prepared for development on varzeas land, reforestationand for swine production, applicable in all four sub-areas. The models werebased on surveys and information gathered by EMATER-MG and Bank missions andrepresent three different farm types (0 to 10 ha, 10.1 to 50 ha, and 50.1 to100 ha). The principal objective of on-farm development is to increase thefarm cropped area using underutilized lands, and improve farm productivitythrough the use of better agricultural technology and farm management.

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On average the farm system of participants would develop as shown below:

Without Project With ProjectHa Haper % of Total per % of Total

Based on 30,000 participants farm farm ha farm farm ha

Total farm 18.3 100 549,711. 18.3 100 549,711.

1. Flooded Land

not cultivated 1.36 7.4 41,228. 1.2 6.6 35,225.cultivated with crops 0.04 0.2 1,178. 0.2 1.0 6,003.

2. Non-flooded Land

not cultivated:natural pasture 6.7 36.6 200,386. 6.4 35.0 193,507fallow 0.2 1.2 6,688. 0.6 3.3 18,373.unused lands 7.8 42.6 234,530. 6.6 36.0 198,409.

cultivated:with traditional crops 1.9 10.4 57,261. 2.3 12.6 69,857.with other crops 0.3 1.6 8,440. 0.4 2.2 11,457.improved pasture -.0 -.0 -. 0.25 1.4 6,880.forested area -.0 -.0 -. 0.35 1.9 10,000.

A description of on-farm development is given in Annex 14 and the assumeddistribution of cropped areas and the estimated number of particijants per farmmodel is shown in Annex 14, Table 1. To illustrate on-farm operation thefinancial analysis and the cash flow projections were estimated for all farmmodels. Four examples--crops, livestock, reforestation and land reclamation--are presented in Annex 15. Prices of inputs, labor and production sold wereassumed to be those prevalent in the local market. Allowances were made forclimatic variation. It should be emphasized that the models are purelyillustrative and that the return in given years could vary considerably,depending on rainfall and market trends, and that the final distributionof production systems could also vary, depending on market and developmenttrends.

8.02 In general the financial rates of return of the farm models are high,varying from 22% to over 50%. This reflects the fact that farmers willreceive credit and technical assistance for making changes in agriculturalpractices, such as better land preparation, increased seeding rate, and use ofimproved varieties and certified seeds, which have an important short termimpact on crop productivity. They would also receive assistance in improvingmanagerial practices, such as timely applications of agricultural chemicals,proper timing of planting and better use of farm waste. Improved integrationof livestock production into the mixed cropping/livestock production systemwould also provide the farmers with a more stable source of funds in the eventthat climatic conditions adversely affect crop yields.

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8.03 Where significant on-farm investment is planned, such as the recla-mation of varzea land, it is expected to constitute a powerful incentiveto the small farmer for technological advancement. Furthermore, the financialreturn to the farmer from the reclamation of varzea land will at least tempo-rarily continue to be exaggerated for the small farmer until the subsidyelement of reclamation services is eliminated (see para 4.24). Similarly,the return to the farmer of reforestation is increased as a result of thestate's decision to provide the project's low-income farmers with part ofthe forestation inputs free of charge. The estimated financial rate of returnfor all the farm models is presented in Annex 15, Table 7.

Non-Farm Activities

8.04 Based on recent surveys, four representative models were developedas proxies for all non-registered small non-farm enterprises to show how thecombination of credit and technical-managerial assistance would affect them.In Annex 16, Table 1 shows the condensed financial position of several enter-prises and Table 2 shows one of the models. Rates of return on the modelsvaried from 31% to well over 50%. This reflects, in part, the very lowstarting point in terms of quality of goods and efficiency of methods andequipment. Gains in these areas, combined in some cases with formation ofproducer cooperatives, would open new markets and expand old ones.

Farm Income

8.05 Wi:hout the project, the income of a typical potential participantfamily has been estimited to average about US$1,000. It is expected that, asa result of the project, family income would increase to some US$2,200 byabout project year 10. This implies an average cumulative annual increase of8.2%. Expected development of family income is summarized below:

Before At Full ExpectedProject Development 1/ Participation

AverageFarm Family Family PerSize Income Income Capita 2/ Number %

(US$) (US$) (US$)

Farmers 0-10 ha 5.0 448.8 804.1 161.0 14,470 48.2Farmers 10-50 ha 24.3 1,309.8 2,806.0 561.2 13,760 45.9Farmers 50-100 ha 71.6 2,808.6 7,697.6 1,539.5 1,770 5.9Weighted

average/total 18.3 1,004.6 2,208.4 441.8 30,000 100.0Landless farmers

included intotal 3/ 21.4 854.7 1,486.2 297.2 3,000 10.0

1/ Occurring between 5 and 10 years.2/ Assuming a family size of 5.0.3/ Includes farmers without legimatized land titles, renters and share

croppers.

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The smallest farmers (having less than 10 ha) starting from a per capitafarm income level less than a third of Brazil's relative poverty level (US$330)are expected to increase their farm incomes by almost 80% in about four years.Farmers with over 10 ha are likely to more than double their incomes. Thefarm models suggest that for all expected beneficiaries, although the averagefarm incomes would rise from 60% of the current relative poverty level to130% of that level, about 55% of the beneficiaries would remain below thepre-project poverty level, compared to an estimated 80% currently below thatlevel. Hence, most farmers will still need to supplement their income fromoff-farm sources.

8.06 Farmers, cultivating less than 10 ha, most of whom live in theJequitinhonha Valley, are the poorest in Minas Gerais with an estimated familyfarm income below US$200 a year (Annex 15, Table 6). These farmers aremigrating to urban centers and government is making an effort to slow ruralmigration through special development programs, attempting to improve employ-ment opportunities and living conditions. The project activities wouldcomplement these programs and it is expected that the farm family income ofthe project farmers in such category would also increase from less than US$200to US$440 a year. The project effort would also create non-farm income earningopportunities for the poorest farmers, by focussing assistance on small non-farm enterprises in the northeast, and particularly in the JequitinhonhaValley.

Non-farm Income

8.07 Estimates of probable increases in income of project beneficiariesdirectly assisted by the project have been computed in four enterprise modelsas follows:

ExpectedBefore Project At Full Development 1/ Participation

Family Per capitaEnterprise Type 2/ Family income Income income 3/ Number %

- --------------- Us$-

Weaver 1,769 2,856 571 209 22Wood artesan 1,803 2,710 542 247 26Confectioner 1,550 9,090 1,818 256 27Sawmill operator 4,517 6,740 1,348 238 25Weightedaverage/total 2,406 5,472 1,092 950 100

1/ Occurring between years 2 and 5.2/ The examples given are proxies for a variety of smaller types of

enterprises.3/ Assuming a family size of 5.

The weighted average of the incomes of the enterprises receiving credit andtechnical-managerial assistance is expected to increase by more than two-foldover the project period. Excluding the fastest-growing model, the increaseis still more than 50%.

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IX. ECONOMIC BENEFITS AND JUSTIFICATION

Economic Rate of Return

9.01 The economic rate of return for the project has been estimatedat 16%. Various aspects of the project such as investments made to improvehealth, water supply, education services, community development and communitycenters would have an important impact in improving living conditions in theproject area, but since the benefits attributable to these components are notreadily quantifiable, their costs have not been included in the economic rateof return calculation. Costs and direct and indirect production benefits ofall other project components were included. The cost and benefit stream usedfor economic analysis is presented in Table 1 of Annex 17.

9.02 The cost structure used in estimating the economic rate of returnincluded: (a) all on-farm and non-farm small industries investment andincremental operating costs (based on the aggregation of all farm and non-farmmodels), and (b) the off-farm investment and incremental operating costs directlyrelated to agricultural and small rural industries development during the projectperiod. The costs stream includes 100% of the project costs (baseline plusphysical contingencies) for land titling, agricultural research, land reclama-tion, reforestation, marketing, cooperative development, small non-farm enter-prise technical assistance, feeder roads, rural electrification and telephonecommunications; 80% of overall project costs for administration and monitoring(at least 20% of these costs are related to social activities of the project);67% of rural extension service costs (33% of the rural extension servicesare directly or indirectly related to social development activities); and 60%of the costs of the evaluation component (lessons learned from the evaluationof production and social components would mainly benefit subsequent projects).Overall, about 79% of total project costs (excluding price contingencies) wereincluded in the costs stream. Also included are: (a) operating costs for theperiod after project implementation that are needed to maintain project effects,such as extension services for agricultural production and small non-farmenterprises, marketing services and the maintenance of feeder roads; (b) thecosts of investments in secondary and feeder roads and in electrificationtrunklines, complementary to the project but not included in financed projectcosts; and (c) a rough estimate of incremental administration costs associatedwith expanding the network of the rural credit system.

9.03 It should be noted that not all project benefits can be accountedfor by the incremental production of the 30,000 farmers and the 1,100 smallentrepreneurs directly assisted. Increases would also be achieved by otherrural producers as a result of the demonstration of such project activitiesas agricultural extension and research. This effect would be particularlyimportant since direct project participants represent less than 40% of thetotal farmers in the project area and are located in 102 scattered municipal-ities. In addition, investment in the improvement of roads, rural electrifi-cation and communication systems would have a positive effEct on other economicactivities within and outside the project area. These latter benefits werenot quantifiable.

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9.04 An effort was made to capture the various project benefits in theeconomic rate of return analysis. The benefit stream included: (a) allon-farm and small non-farm incremental benefits brought about by incrementsin crops, livestock, forestry and small industry production, based on theaggregation of all farm and non-farm models; (b) an assumed increased produc-tion indirectly derived from the demonstration effect and by the use ofimproved services and infrastructure by farmers other than direct projectbeneficiaries, the benefits to start after year 3 of project implementationand be equivalent to an annual cumulative increase of about 3% until year 10,after which they would level off; and (c) price adjustments to reflect, amongother things, project transport investment, quality differences and the levelof underemployment in the project area. The farmgate prices of products suchas beef, bananas, cotton and maize, which are exported, were adjusted to borderprices, with allowance for quality adjustment and farm-to-border transportcosts. Among inputs, labor warranted a special shadow price. Using 1970 data,and assuming 5 persons per family, with 2.5 persons per family potentiallyeconomically active, the project area contained 419,000 potential fulltimeworkers. The same data show only 270,000 persons actually economically active,35,000 of whom are "underemployed." Thus, the project's incremental labordemand of some 15,600 worker-years at full development would not put muchpressure on wages. To reflect underutilization of labor during a period ofabout six months, a shadow rate of Cr$ 50/day (50% below the market level) wasused in farm and non-farm cost calculations. The value of non-tradables wasmultiplied by a consumption conversion factor of 1.15 calculated on the basisof a project-specific formula to reflect trade distorting tariffs, subsidies,export taxes and quantitative restrictions.

Sensitivity Analysis

9.05 The economic rate of return was not found to be especially sensitiveto changes in costs or benefits, as the results of the analysis show:

Best estimate: 16%

Cost up by 10%: 15%

Cost up by 20% andbenefits down 20%: 11%

Delay in implementa-tion of 1 year: 14%

Elimination of demonstration benefits (para 9.04) from the benefit stream wouldresult in an economic rate of return of 14%.

9.06 The social components of the project (health, education, communitydevelopment and community centers) would improve living conditions, not onlyfor project beneficiaries, but for residents of the project area as a whole.Such works would also interact with agricultural and industrial activitiesto reinforce increased productivity and help create a self-sustained develop-ment process.

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Employment

9.07 The expected development of agricultural activities by 30,000participating small farmers should generate new on-farm employment opportuni-ties equivalent to 8,660 worker-years by year 5 and 12,840 worker-years byyear 10 (full development). Ancillary jobs resulting from the increased agri-cultural production are estimated at 1,000 and permanent jobs resulting fromproject execution activities, at 1,400. Based on local experience with andsurveys of small-scale enterprises, the project would create 2,800 new jobsat an investment cost of around US$1,200 per job, well below alternativeemployment creation costs in industry. Overall, therefore, the project canbe expected to generate the equivalent of some 18,040 new jobs.

9.08 Building on experiences under the first Minas Gerais Rural DevelopmentBank Project, the proposed project interventions have been tailored to reflectthe important role of women in farm families. The extension service agency,EMATER-MG, has adopted a work approach which involves teams of agriculturaland social extension workers and a focus on the whole family as a socio-economic unit. Extensionists would receive therefore one extra week of train-ing about all the project aspects, enabling the extensionists to provide inthe normal course of their work appropriate information to all family members.Other executing agencies also increasingly integrate women in their program,as staff members as well as beneficiaries. An important number of womenparticipated in the preparation of the project, and, during implementation,emphasis would be placed on furthering this trend.

Fiscal Impact

9.09 The project costs of agricultural and small rural industries investment,production support services, and physical and social infrastructure (includingcontingencies) would amount to about US$5,950 for each of the approximately31,000 rural families directly benefited by the project. This figure, however,overstates the cost per family to the extent that agricultural and small ruralindustries activities would generate important demonstration and employmentbenefits beyond the direct target group of 31,000 rural families. It isexpected that the direct and indirect project benefits would reach some 85,000rural families. The extent to which credit for on-farm project costs would berecovered in real terms is difficult to estimate because of the currentinflationary environment in Brazil and the Government's policy of providingsubsidized credit. Assuming a continuing inflation rate similar to theaverage over the last three years (52%) credit recovery for on-farm investmentcosts could well be very low. On the other hand, a decline in inflation or acontinuation of the gradual reduction in the size of agricultural creditsubsidies (a process in which initial, though still marginal, steps wererecently taken by the Government (para 4.10)) would result in higher investmentcredit recovery. Of the estimated US$181.1 million in off-farm total projectand program costs including contingencies (i.e., those other than on-farminvestment, incremental working capital and rural electrification; see alsoAnnex 7), it is expected that around US$71 million (about 39%) would berecuperated during project execution through direct and indirect user charges(i.e., storage, water supply, electricity tariff, road and gasoline taxes),financial contributions of beneficiaries (particularly in health, educationand community center components), and taxes on incremental agricultural andsmall industry production.

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9.10 After year 5 of project implementation, the Government would incuradditional annual costs, falling from US$3.2 million in year 6 to US$1.0million in year 10 and after. These expenses would be incurred principallyfor extension services for farm and non-farm enterprises but would also includecontinued operating costs of the marketing component and the maintenance of'eeder roads. These additional recurrent expenditures are expected, however,to be covered easily by additional revenues of roughly US$5.5 million annuallyrealized from ICM and FUNRURAL taxes which would apply to the incrementalproduction of direct agricultural and small rural industry project participants.

Environmental Impact

9.11 The project should have a beneficial environmental impact. The areaunder crop cultivation by project beneficiaries would increase moderately byabout 20,000 ha, or 4% of total farm area (para 8.01). The cultivated areawould, in general, be improved as a result of better farm management and theplanting of some additional tree crops and reforestation of 10,000 ha, bothresulting in improved erosion control. The project would also provide forcontrol of schistosomiasis infection in varzeas land to be reclaimed byproject beneficiaries, and it would reduce the chances of water contaminationby increasing the number of sanitation facilities.

Project Risks

9.12 The project's success depends on the commitment of the executingstaff in all ranks of the participating agencies. These agencies will imple-ment a great number of activities in a wide region under variable ecologicalcircumstances. Work will need to be carried out in a timely fashion and ina coordinated manner at the local, regional and central level. The risk ofnot achieving adequate inter-agency integration, and, hence, project targets,is, however, lessened by the full involvement of the staff of the executingagencies in project preparation, the level of pre-project implementation ofessential organizational measures, the strong line organization of theexecuting agencies, the experience obtained by these agencies under theFirst (Zona da Mata) Rural Development project, and the extensive trainingincorporated in this project.

9.13 Another risk lies in the absorption capacity of the isolated orneglected municipalities, but this would be minimized by the project's emphasison adequate communication systems and its fully integrated character. Thereis another risk of protracted dry periods, but this is counter-balanced byconcentrating on the development of the cultivation of varzeas in the drynorthern regions, and supporting non-farm employment development. Extensivecrop experimentation and intensified extension services should also help toreduce the negative impact of drought. There is also some risk that theexpected yields would not be attained. This risk is, however, within anacceptable margin, because the average yield increases were estimated takinginto account periodic dry periods. The project would benefit directly orindirectly about 85,000 families (or 425,000 people). The benefits of raisingthe living standard in the rural poverty areas of the State and the long-termbenefit of creating an institutional implementation capability able to sustainindependently the rural development process make the project risks acceptable.

- 46 -

X. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION

10.01 During negotiations, assurances were obtained from the StateGovernment that it would:

(a) provide or make arrangements for the provision of seasonal creditto the project beneficiaries (para 4.12); promote the establishmentof 20 additional banking posts in the project area not later thanJune 30, 1982 (para 4.10); add financial agents only with prior Bankapproval; and inform the Bank of any change in lending terms andconditions (para 4.12);

(b) finance 40% of the costs of the installation of the ruralelectrification network and ensure that the average costs wouldnot exceed US$3,400 per km network line and US$100 per KVA fortransformer and meter installations (paras 4.13 and 4.14);

(c) employ and train all of the new extension officers not laterthan June 30, 1982 (para 4.19);

(d) annually publish the project's research results (para 4.21);

(e) employ not later than June 30, 1981 consultants for the land-reclamation activities (para 4.23) on terms and conditionsacceptable to the Bank; establish not later than December 31,1980 a system to eliminate any unprogrammed subsidy; applytariffs reflecting full machine replacement and operating costs,and reasonable administrative costs not later than June 30,1983; and ensure that equipment procured under the project beused exclusively in the project area during project implementation,and forward consultant reports to the Bank when available, butnot later than January 1, 1982 (para 4.24);

(f) limit project assistance for reforestation to 10 ha per farmerand establish at least seven nurseries within 12 months of loansignature (para 4.26);

(g) forward to the Bank for review the results of the first yearsurvey and the program of CAMIG-proposed investments not laterthan June 30, 1981, and construct any public storage facilityof 3,000 tons or larger in the project area, as determined bythe studies (para 4.29);

(h) execute marketing studies for small non-farm enterprises onterms of reference satisfactory to the Bank and forward thestudy results to the Bank, when available, but not later thanJune 30, 1982; provide the Bank with satisfactory terms andconditions for the use of the Marketing Investmert Fund prior toits use and assure the availability of adequate credit facilitiesfor small enterprises to be assisted under the project (para 4.33);

- 47 -

(i) ensure that the length of roads to be constructed under forceaccount would not exceed 20% of the total length of projectfeeder roads and that about 486 km of secondary roads, comple-mentary to the project feeder roads, would be constructed byJune 30, 1983 (para 4.35);

(j) prepare a draft maintenance program for feeder roads by June 30,1981 and made complementary funds for maintenance of municipalfeeder roads available from January 1, 1982; and road maintenanceequipment procured under the project would be used only in theproject area during project implementation (para 4.36);

(k) forward to the Bank for comment the results of the studiesof the primary school curriculum; implement the new curriculumbefore February 1, 1982; and finance the expenses associatedwith school meal provision in the project schools (para 4.39);

(1) present to the Bank by December 31, 1980, the final plans tostrengthen the health administration structure of SES and ensureadequate staffing of SES to execute the health component(para 4.41);

(m) present to the Bank for approval plans to construct watersupply systems with costs exceeding US$120/family; and makeadequate arrangements for the efficient operation and main-tenance of water supply systems prior to their construction(para 4.42);

(n) complete the construction of community centers by December 31,1983; present to the Bank for approval construction plans withcosts exceeding US$150/m2; and present to the Bank not laterthan March 31, 1981 the engineering plans and cost estimates ofmodels of the four types of community centers (para 4.44);

(o) provide the Bank with a mid-term evaluation of the operationresults of the community development fund before continuingdisbursements (para 4.46);

(p) provide adequate counterpart funding to assure timely andeffective execution of the project and adequate operation andmaintenance of facilities and services developed under theproject (para 5.03);

(q) assure a timely acquisition of land and right of way for theconstruction of project works and buildings (para 5.03);

(r) maintain an adequate and qualified staff in the Project Coor-dination Unit and its regional offices and consult the Bankshould the Project Director have to be replaced (para 6.02);

- 48 -

(s) enter into and maintain or cause to be entered into and main-tained all the necessary agreements between executing andcollaborating agencies to ensure timely and effective projectexecution; prior to construction of civil works, agreementsbetween the executing agencies and the involved municipalitiesor communities to ensure their proper operation and adequatemaintenance (para 6.03); and forward to the Bank for comment theannual budget proposals by October 31 of each year (para 6.04);

(t) make available to the Bank the quarterly monitoring reports,the annual evaluation reports within six months after the endof the year, and the Completion Report and the post-projectevaluation report within six months after project completion,and complete the base-line studies of the project area beforeJanuary 31, 1981 (paras 6.06 and 6.07); and

(u) prepare adequate audit reports and make these reports availableto the Bank within six months of the end of the State's fiscalyear (para 6.08).

10.02 Conditions of disbursement for the following project componentswould be:

(a) for the credit components, the receipt by the Bank of satisfac-tory signed arrangements between the State and the financialagents (4.12';

(b) for the agricultural research activities, that a farm-manage-ment specialist had been appointed to the project researchstaff (para 4.21);

(c) for the marketing component, that counterpart staff for theconsultants had been appointed and in place, and for theconstruction of storage facilities and retail stores, thatthe location and construction plans were satisfactory the theBank (para 4.29);

(d) for the feeder roads component, that counterpart staff forthe consultants had been appointed and in place (para 4.36);

(e) for the construction of community centers the satisfactoryevidence of the acquisition of land and right of way forthe building sites of these respective centers (para 4.44);

(f) for each and every component, except the credit and managementcomponents, that the Bank had received satisfactory signedagreements between the Secretary of Planning, the Secretaryof Agriculture and the corresponding executing agency (para6.03); and

(g) in the Zona de Mata region, the satisfactory completionof the corresponding component activity under the FirstMinas Gerais Development Project (para 6.05).

- 49 -

10.03 No disbursements could be made against expenditures prior to thedate of the Loan Agreement, except that withdrawals in an aggregate amountnot exceeding the equivalent of US$500,000 may be made on account of paymentsmade for expenditures before such date, but after April 1, 1980.

10.04 With the assurances and conditions indicated above, the proposedproject would be suitable for a Bank loan of US$63 million equivalent witha term of 15 years, including a three-year grace period.

- 50 -ANNEX 1

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Resume of Achievements Under the First Rural Development Protact(Loan 1362-BR) as of 31-12-79

AppraisalCompletion Appraisal

Target Target AchievedDecemoer 31 December 31 December 31

1981 1979 1979

Credit

Number of farmers served 25,500 15,650 12,681Sharecroppers served 9,000 5,625 3,073Average loan amount max.150 WVRY ax.150 YVR 70 MVR_/Total agricultural credit extanded(US$OOO) 46,300 28,940 47,434Percentage of loans for farms withless than 50 ha 33,3 33,3 70,5Crop area financed (ha) 89,800 56,500 59,796

Reforestation

Area reforested (ha) 40,000 25,000 7,000*/Number of farmers involved na n.a. 3,832Total costs of nurseries (US5000) 1,000 1,000 1,003

Electrification

L'ngth of trunklines constructed (km) 440 275 360Number of farmers attended 2,000 1,250 1,4252/Average loan amount max.150 IVR max.150 MVR 42 MVRClients per km of branchline 4,6 4,6 4,0

Land Reclamation

Area reclaimed (ha) 200 5,000 3,700Number of farmers attended n.a. n.a. 479Average loan amount max.180 MVR msax.180 l R 29 MVR

Agricultural Services

Number of incremental agriculturalextensionists 200 _00 170

Number of farms analyzed for farmmanagement research n.e. n.a. 46

New ccoperatives established n.a. n.a. 2tncrease in cooperative membership 16,500 10,300 3,000±!Farmrs organized in farmer-groups n.a. n.a. 5,188

social Services

New rural health post constructed 77 49 100Health attendants trained 275 170 297Mothers attended with pre and post-

natal care 38,800 24,250 10,428Average consultation per person forpre and post-natal care 3 3 1,7

Children under 5 controlled onceor more 149,500 93,700 33,382

Beneficiaries for nutrition 48,100 30,000 63,880Tons of food distributed 1,270 795 1,300Sanitary installations placed 14,800 9,250 5,343Water filters installed 18,100 9,310 15,017Comunity Learning Centers built 28 17 12Common Facility Center built 1 1 0Space constructed per Community

Learning Canter(CLC) (*2) 1,015 1,015 1,078Total cost of CLC's per m2 (US$) 171 171 262Incremental number of student

places 6,440 4,000 3,920Number of rural youths trained 15,000 8,375 3,2252/Number of farmers trained 21,000 13,125 i2,1242/

Project Management

Staff of coordination unit n.a. n.a. 10Man-month of consultancies 300 180 35Month delay of monitoring report

after quarter end 1 1 1

Source: AppraisaL Report-1291-BR, Project Coordinating Unit, mission estimates-*/ EstimateT/ w7R, Major Valor ie Ref rincia about US$60, during period uader reviev.

Per 1-1-1930 about US$46.2/ Achiv_ment por Septmber 31. 1979.

- 51 -

ANNEX 2Table 1

BRAZILSTATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Characteristics of the Project Region and Project Area

I. Natural Features and Population

I II III IV TotalVale do Zona Sul of the

Nordeste Rio Doce da Mata de Minas regions

Municipalities 82 90 128 218 518

Area (km2) 122,536 55,361 35,000 771053 289,950

Population (1977) 1,671,261 1,487,105 1,647,872 2,486,307 7,292,545

Population densitypersons/km2 13.6 26.8 47.1 32.3 25.2

% rural population 64.6 39.0 41.9 37.1 44.9

Altitude range (m) 150-900 200-1200 200-1800 600-1400 150-1800

Annual rainfall range(mm) 500-1400 900-1700 1100-1600 1100-1800 500-1800

Months with hydrologicaldeficit 4-9 5-7 4-6 0-4 0-9

Range of annual hydrolo-gical deficit (mm) 50-500 10-90 10-70 10-30 10-500

II. Comparison of Characteristics of theProject Area, Project Region and the State

State ofProject Area Project Region Minas Gerais

Municipalities 102 518 722

Area (km2) 60,798 289,950 587,170

Population (1977) 942,032 7,292,545 13,057,619

Population densitypersons/km2 15.5 25.2 22.2

% rural population 70.8 44.9 37.4

% population increase(1970-1977) + 2.2 + 3.4 + 13.7

% increase in ruralpopulation (1970-1977) - 3.9 - 5.6 - 10.0

Source: 1977. IBGE, Fundaqao Joao Pinheiro

- 52 - ANNEX 2Table 2

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Agricultural Production

Project Region Project Area2/

% of Minas % of MinasGerais Gerais

Crops Units Quantity Production Quantity Production

Beans 000 tons 198.1 69.9 47.1 16.6

Maize " 1401.6 51.2 41.8 8.8

Rice " 362.6 57.0 47.6 7.5

Manioc (root) " 520.5 26.7 253.9 13.0

Sugarcane 4470.9 60.3 560.6 7.6

Cotton 33.9 37.0 22,1 24.0

Citrus million fruits 1021.7 62.0 184.9 11.2

Banana million bunches 20.2 54.2 3.2 8.5

Tomato 000 tons 63.6 67.0 2.9 2.9

Garlic " 6.6 65.8 0.9 8.5

Milk million litres 2063.6 68.9 207.7 6.9

Cattlel/ million head 11.2 54.8 1.3 6.5

pigs3/ " 2,2 79.2 0.5 16.7

1/ 49.4% of Minas Gerais area; 61.4% of its population.

2/ 10.3% of Minas Gerais area; 7.1% of its population.

3/ Total herd.

Source: 1977, IBGE;municipal agricultural production data.

- 53 -ANNEX 3

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

List of Executing Agencies

EXECUTINGCOMPONENTS AGENCY COLLABORATING AGENCIES

Agricultural Development

Agricultural Extension EMATER EPAMIG, RURALMINAS, SUDECOOP,IEF, DAE, CEMIG, SEE, SES, DER-MG-SETAS

Agricultural Research EPAMIG EMATER-MG, IEF, SUDECOOP, VICOSA,CAMIG

Reforestation IEF EMATER-MG, EPAMIG

Land Reclamation RURALMINAS DNOS, EMATER-MG

Production Support

Land Titling Services RURALMINAS EMATER-MG

On-farm Development Credit BBState Banks EMATER-MG

Non-farm Development Credit-/ BB/CEE CEAG, SETAS

Marketing (including inputs and PCU, CAMIG EMATER-MG, SUDECOOP, EPAMIG,seed supply) CASEMG, CEASA, COBAL, COSEMEG

Cooperatives SUDECOOP EMATER-MG, EPAMIG, CAMIG, SETAS

Small non-farm enterprise SETAS CEAG/MG, SUDECOOP, UTRAMIG, CEAPS,CETEC

Physical Infrastructure

Feeder roads DER-MG EMATER, Municipalities

Electrification DAE/CEMIG EMATER, Communities

Telephone DAE TELEMTI

Social Infrastructure

Education SEE EMATER-MG, SETAS, COAGRI, CNEC,CNAE, Municipalities, Communities

Health SES EMATER-MG, COPASA, SEE, DAE, PIASS,Municipalities, Communities

Community Centers SEAE_/ SEE, SES, EMATER, CAMIG,Municipalities, Communities

Community Development SETAS EMATER-MG, Communities

Project Management

Project Adm. and or.itoring SxAx/ _FPLAN, Vicosa University

rvaluation '%icosa Lavras Technical School, SEA,Univ. SEPLAN

x/ not financed by the project

xx/ through the Project Coordination Unit

Note: A glossary of abbreviations and acronyms is provided inside the frontcover of this report.

BRAZIL

STATE OF MIN"S GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Structure Marketing Component for Small ProducersObjectives, Activities, Reponsibilities, and Funding Sources

PrimarilyGeneral Objective Specific Objective Responsible Agenc Collaborating Agenries Responsibilities Source of Funding

I. Improve small farmer A. Establishment of a State Secretariat of Agriculture EMATER-MG, CAMIS, CASEMG, Determination of general State Governmentmarketing policy, Marketing Commission SUDEODOP, EPAMIG, OJSEMEG marketing policiesprogram coordination,and effectiveness

B. Marketing Coordination Project Coordination Unit CAMIG and other executing Coordinate marketing Administration Componentagencies activities

C. Training Fed. University of Vicosa EMATER-MG, SUDEO0P, 3-week training courses Marketing ComponentCAMIG, CASEMG, EPAMIG for state marketing

administrators10-day training coursesfor project area fieldstaff

II.. Improve marketing A. Completion of basic data EPAMIG SUDECOOP, EMATER-MG, UFV, One year analysis of Agricultural Research

information collection CEASA marketing and storage Componentsituation in project area

B. Permanent Marketing EPAMIG SUDEWOOP, EMATER-MG, UFV, Applied market opportunity, Marketing ComponentResearch and Analysis CEASA, COBAL market management, and

market information re-search and analysis

C. Extension for farmers EMATER-MG SUDEODOP, Cooperatives, Dissemination of marketing Agricultural ExtensionMass Media information tp pr*ject's Component

small farmers

D. Extension to non-farm SETAS CEAG, CEAPS, Banks Dissemination of marketing Non-farm Rural Enterpriseproducers information to project's Component

small producers

III. Improve agricultural A. Seed Supply SEA CAMIG, EPAMIG, EMATER-MG, Adequzate seed supply for State Governmentinputs local Private Sector, DPCPOV, project needs, throughavailability COSEMEG production and/or

advance purchase contractswith seed producers

S. Input Supply (including CAMIO SUDEODOP, Cooperatives, Construction and operation Marketing Componentfertilizer supply) EMATER-MG, Private Sector, of additional CAMIG retail

Farmer groups stores in project area.Increased CAMIG operationswith cooperatives serving a

small farmers. x0

BRAZIL

STATE OF MINWS GERAIS

Structure Marketing Comonent for Small ProducersObjectives, Activities, Reponsibilities and Funding Sources (Continued)

PrimarilyGeneral ObJective Specific Objective Responsible Agency Collaborating Agencies Responsibilities Source of Funding

IV. Storage facilities A. On-farm storage research EPAMIG UFV, EMATER-MO Research on improvements Agricultural Researchin on-farm storage Componentfacilities for individualproject farmers andfarmers' groups

B. Extension EMATER-MG SUODEOOP, Cooperatives, Information and assis- Agricultural ExtensionFarmer groups tance to farmers improving Component

or constructing on-farmstorage units

C. Credit Banks EMATERi-MG Investment credit to Rural Credit Componentfinance on-farm storageimiproveme nts

V. Improve public storage A. Intermediate size public CA1IG CASEMO, EPAMIG, UFV Construction and opera- Marketing Componentfacilities storage tion of public storagefacilities with lessthan 3,000 ton capacity

S. Large size public CASEMG EPAMIG Construction and opera- State Governmentstorage tion of public storage

facilities with capacitiesof 3,000 tons or more

VI. Improve agricultural A. Minimum price acquisition CAMIG CFP, Banks Credit program for basic State and Federalproduction farm level and loan program grain storage Governmentsales EGF-AGF sales program

B. Private sector purchases SETAS EMATER-MG, CEAG, CEAPS, Improvements in the Non-farm Rural EnterpriseBanks (BDMG) operation of small, Component

private marketingenterprises

NOTE: A glossary of abbreviations and acronyms is provided inside the front cover of this report.

iall

Fh

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Design Standards for Municipal Roads

Cross-Slope Intermunicipal Roads 1/ Intra-Municipal Roads 2/

of Natural Full Length Improvements Spot Improvements

Description Ground Class E Class F

Design Speed 50% 50(km/h) 20% 40 Not

70% 30 applicable.

Minimum radius for 5% 70 No improvement unless exceptional

Horizontal Curves (m) 20% 45 conditions require widening at70% 30 curve.

Maximum Grade (%) 5% 8 No improvement unless roadbed material

20% 10 and grade combine to make ascent70% 12 impossible during the rains.

Minimum Stopping Sight 5% 50Distance (m) 20% -

70% -

Minimum Platform 5% 6.0* 3.50 m plus ditches 3/

Width (m) 20% 6.0* 3.50 m plus ditches 3/

70% 6.0* 3.50 m plus ditches 3/

Stream Crossings - Culverts and Culverts and paved fords unless depth andBridges or Fords duration of high water dictates a bridge.

Surfacing Gravel or selected Spot selected material where essentialmaterial for vehicular passage.

Approximate Traffic (vehicles - 0-75per day)

1/ BNDE/DNER/IBRD Feeder Roads Manual 3/ Passing bays as required2/ Priority on steep grades, water crossings * Includes ditches

and drainage improvementsP t

- 57 - ANNEX 5Table 2

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Municipal Roads to be Improved by June 30, 1983

Road Kilometers

Novo Cruzeiro-Itaipe 31Itaipe-BR/116 20Carai-BR/116 30Jarainha-BR/217 (POTE) 43Rio Pardo de Minas-S. Joao do Paraiso 96Virgolandia-BR/314 (COROACI) 25S. Geraldo da Piedade-BR/259 (SARDOA) 22Sant. dos Montes-BR/040 18Belo Vale-BR/040 20Senhora dos Remedios-BR/040 25Nova Rezende-Bom Jesus da Penha 40Araponga-Canaa-S. Miguel do Anta 36Jacui-Fortaleza de Minas 27Jacui-BR/491 (GUAKUPE) 38BR/367-BR/451 (CARBONITA) 15

TOTAL 486

Source: DER-MG

February 1980

-'58 -

ANNEX 6Page 1 of 2

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Criteria for Assistance to Communities Under the Project

Community Development

1. The characteristics of a community to be selected for assistance underthe community development component should be as follows:

(a) the community should be receiving assistance fromEMATER-MG or SETASl/;

(b) the community should be located in the project areaat least 10 km from the municipal center and have thepotential to develop into a center for adjacent smallcommunities;

(c) the communities must be accessible by road and becomposed mostly of low-income producers: and

(d) the community should consist of a minimum of 150 families,of which at least 20% live in a village center. Thevillage should possess at least two centers for socialactivities, such as a church/community center or a school/health post.

Community Centers

2. To be eligible for project assistance in constructing a communitycenter, a community should be eligible for assistance in community developmentand, in addition, should:

(a) have, within a 3-km radius, more than 150 schoolagechildren (between 7 and 14);

(b) have available reasonably flat and adequate buildingsite which could be connected with water and electrifi-cation services:

(c) need better infrastructure;

(d) be at least 50 km from another community center; and

(e) receive active participation from the community.

1/ A glossary of abbreviations and acronyms is provided inside the front coverof this report.

- 59 -

ANTNEX 6Page 2 of 2

Fund for Community Development (FUND)

3. To be eligible for financing by the Fund, a sub-project should beformally proposed by a community assisted by SETAS or EMATER-MG. The Fundwould finance only investment costs and limit the financial assistance toUS$10,000 per sub-project and US$20,000 per community. The Fund would notfinance sub-projects, which could be: (a) financed under other projectcomponents (such as feeder roads, water supply, health posts and such); (b)financed by gther existing programs or organizations (such as LBA, PRODECOM,SETAS, CEAPS and church and voluntary organizations); or (c) sponsored by formalentities (grupos de acao de base), such as community councils, which couldgenerate financial assistance from the public sector. In addition, sub-projectsshould:

(a) be located in communities assisted by the project;

(b) be technically and operationally viable and approvedby the extension workers of SETAS or EMATER-MG, eachwithin their institutional competence;

(c) be supported by counterpart resources from the commu-nity, in labor, material or financial inputs, of atleast 40% of the project costs;

(d) reach directly or indirectly as many beneficiaries aspossible, improve income and well-being of communitymembers, have an educational and promotional character,and serve as a demonstration for other communities; and

(e) generate sufficient returns to contribute to a formallyestablished and administered community fund, which wouldfinance future community activities.

* LBA mLegiao Brasileira de Assistencia (Brazilian Assistance Legion)PRODECOM = Programa de Desenvolvimento Communitario (Community Development

Program)SETAS = Secretariat of Labor and Social ActionCEAPS = Consorcio de Entidades de Acao Social (Voluntary Institutional Group

for Coordination of Social Activities)

January 1980

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Annual Phasing of Project Costs

(US$'000)

Percentage Percent Estimated

I/ of Total Foreign Percent of

Year 1- Year 2 Year 3 Year 4 Year 5 Total Baseline Costs Exchange Physical Contingencies

Credit

On-farm Investment 1,100.0 3,000.0 4,500.0 5,400.0 7. ^ 21,uuO.0 15.7 12.5 -

Rural Electrification 1,800.0 3,650.0 3,650.0 3,650.0 3,650.0 16,400.0 12.3 25.0 5.0

Agricultural Services

Land Titling 90.7 71.3 57.8 63.9 66.3 350.0 0.3 19.0 4.0

Rural Extension 3,235.0 3,518.0 3,556.0 3,310.0 3,309.0 16,928.0 12.6 9.1 3.5

Agricultural Research 941.5 854.3 812.4 786.0 751.7 4,145.9 3.1 8.9 3.5

Land Reclamation 620.1 692.7 237.4 202.5 210.4 1,963.1 1.5 20.4 6.0

Reforestation 457.6 363.9 439.2 529.3 557.3 2,347.3 1.7 8.0 5.0

Marketing 123.7 1,305.5 1,297.1 1,219.1 1,219.1 5,164.5 3.9 13.1 11.0

Cooperative Society Assistance 690.5 897.1 1,078.3 1,119.2 1,137.0 4,922.1 3.7 11.5 5.0 1

Small Non-Farm Enterprises 0C

Technieal Assistance 293.4 486.1 487.3 534.4 581.9 2,383.1 1.8 6.9 7.0

Physical Infrastructure

Feeder Roads 600.0 7,100.0 10,500.0 10,900.0 0.0 29,100.0 21.7 33.7 15.0

Telephone Communication 767.0 681.0 0.0 0.0 0.0 1,448.0 1.1 25.0 5.0

Social Infrastructure

Education 2,682.6 1,881.0 988.5 986.1 977.8 7,516.0 5.6 11.0 5.0

Health Services 589.2 2,723.9 1,508.9 1,392.1 846.8 7,060.9 5.3 12.0 5.0

Community Centers 1,489.0 1,829.0 546.0 112.0 0.0 3,976.0 3.0 12.9 15.0

Community Development 238.8 258.9 318.9 408.9 379.0 1,604.5 1.2 5.5 10.0

Project Management

Administration and Monitoring 850.6 1,010.8 956.9 922.5 921.5 4,662.3 3.5 12.0 3.0

Project Evaluation 1,021.0 418.6 418.6 418.6 418.6 2,695.4 2.0 8.0 5.0

Total Baseline Costs-/ 17,590.7 30,742.1 31,353.3 31,954.6 22,026.4 133,667.1 100.0 17.6 6.16

Physical Contingenciqs 984.2 2,301.5 2,467.8 2,454.8 U41.0 9,049.3 6.U 17.6 _

Price Contingencies3 l,o57.5 6,477.4 9,671.4 12,934.6 10,917.o 41,d5n.7 29.34/ 17.6 -

Total Project Costs 20,432.4 39,521.0 43,492.5 47,344.0 33,7b5.2 1U4,575.1 3U.1 17.6

1/ Year one of the project corresponds to July 1, 1980 to June 30, 1981, and so on for subsequent years 1

2/ In prices at time of appraisal (January 1980) converted to US$ at Cr$42.33 = US$1.00

3/ Price contingencies were calculated over the baseline costs plus physical contingencies according to the following percentages; 10.57. for 1980, 97 for 1981,

87. for 1982 and 7% thereafter.

4/ Percentage calculated on baseline costs plus physical contingencies.

BRAZILSTATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Annual Phasing of Program Costs

(US$' 000)

Percent Estimated

at Baseline Percentage Percent Percent of

1/ Costs of State of Total Foreign PhysicalYear I- Year 2 Year 3 Year 4 Year 5 Total Financed Program Program Costs Exchange Contingencies

A. Total Project costs, eligiblefor Bank financing (see Annex 7,table 1) 20,432.4 39,521.0 43,492.5 47,344.0 33,785.2 184,575.1 - 76.1 17.6 6.8

B. Rural Credit not eligiolefor Bank financing

lucremental on-farmWorking Capital 800.uu 2,000.00 2,900.0 9,300.0 3,300.0 12,300.0 - - 7.6

-rice Contingencies 42.0 294.0 693.0 1,072.0 1,321.1 3,422.1 - - 7.6

Sub-total 842.0 2,294.0 3,593.0 4,372.9 4,621.1 15,722.1 - 6.4 7.6

C. tinancedbthe Stat

Credi for non-farm small

enterprises 97.4 277.5 421.1 521.5 562.9 1,880.4 7.5 - 15.0

Agricultural Services

Land Titling 100.0 100.0 100.0 100.0 100.0 500.0 2.0 - 19.0 4.0

Physical Infrastructure

Feeder Roads 1,500.0 2,500.0 3,000.0 - - 7,000.0 28.1 - 33.7 10.0

Electrification 800.0 1,500.0 1,500.0 1,500.0 1,600.0 6,900.0 27.7 - 25.0 5.0

Social Infrastructure

Education 505.8 894.3 894.3 894.3 894.3 4,083.0 16.4 - 2.0 5.0 .

Health Services 53.4 823.5 1,312.5 937.0 1,139.5 4,265.9 17.1 - 2.4 5.0

Project Management

Evaluation 59.5 59.5 59.5 59.5 59.5 297.5 1.2 - - 5.0

Total Baseline Costs 3,116.1 6,154.8 7,287.4 4,012.3 4,356.2 24,926.8 100.0 - 18.3 6.0

Physical Contingencis 225.0 417.9 492.3 173.6 183.7 1,492.5 6.0 - 18.3 -

Price Contingencies- 330.8 1,268.5 2,248.3 1,561.3 2,129.2 7,538.1 28.5-/ - 18.3

Total costs of program financedby the State 3,671.9 7,841.2 10,028.0 5,747.2 6,669.1 33,957.4 136.2 14.0 18.3 -

C. Costs financed by the beneficiaries

Farmers!/ 385.2 898.8 1,241.2 1,412.4 1,418.4 5,356.0 - - 0.0 10.0

Small Entrepreneurs 26.1 58.9 82.0 99.2 102.6 368.8 - 0.0 10.0

Iotal Baseline Costs 411.3 957.7 1,323.2 1,511.6 1,521.0 5,724.8 100.0 - 0.0 -

Physical Contingencies 41.1 95.8 132.3 151.2 152.1 572.5 10.0 - 0.0 10.0

Price Contingencies 44.8 203.3 420.6 620.2 784.7 2,073.6 33.0-i/ - 0.0 -

Total Value of Input by theBeneficiaries 497.2 1,256.8 1,876.1 2,283.0 2,457.8 8,370.9 146.2 3.5 0.0 -

E. Total Program Costs (A+B+C) 25,462.1 50,904.6 58,998.9 59,787.4 47,472.5 242,625.5 - 100.0 15.9 6.3

1/ Year one of the project corresponds to July 1, 1980 to June 30, 1981, and so on for subsequent years.

2/ Price contingencies were calculated over the baseline costs plus physical contingencies according to the following percentages: 10.5% for 1980, 97. for 1981,

8% for 1982 and 7f thereafter. no, f

3/ omputed costs of fmily labor not financed by short tem credit4/ Percentage calculated on baseline costs plus physical contingencies.

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Phasing of Training Activities and Costs

Unit Costs Units Year I Year 2 Year 3 Year 4 Year _ Total Remarks

---- -- z--- -- ~_US$ 0-'

Extension Service

1. AgricultuLral Extension

Initial Training 840 100 50.0 34.0 - - - 84.0

Retraining 1360 400 - 136.0 136.0 136.0 136.0 544.0 each 2 years

Marketing Course 680 120 81.6 - - - - 81.6

Farm Management Course 270 600 32.4 32.4 32.4 32.4 32.4 162.0 each year 120

Farmers Training 2.5/day 30,000 10.0 25.0 35.0 40.0 40.0 150.0 2 days/farmer, once

Sub-total - - 174.0 227.4 203.4 208.4 208.4 1,021.6

2. Social Extension

Initial Training 840 80 67,2 - - - - 67.2

Retraining 1360 320 - 109.0 109.0 109.0 109.0 436.0 each 2 years

Project Training Course 680 420 68.0 54.4 54.4 54.4 54.4 285.6 first year 100, thereafter

80 each year

Farm Family Instruction 2.5/day 37,500 50.0 125.0 175.0 200.0 200.0 750.0 2 persons/family, twice for 2 days

Sub-total - - 185.2 288.4 338.4 363.4 363.4 1,538.8

Marketing Services

Training Admistrative Personnel 600 30 18.0 - - - - 18.0

Training Field Workers 270 170 47.3 - - - - 47.3

Sub-total - - 65.3 - - - - 65.3

Assistance to Cooperative Associations

Training Courses for:

Technicians Executing Agencies 600 5 0.6 0.6 0.6 0.6 0.6 3.0 About 25 participants/course-

Community Leaders 350 20 1.4 1.4 1.4 1.4 1.4 7.0 " " " "

School/Community Centers 240 50 2.4 2.4 2.4 2.4 2.4 12.0 " 20 "

Marketing Courses 500 16 - 2.0 2.0 2.0 2.0 8.0 " - .

Directors of Cooperatives 400 6 0.8 0.4 0.4 0.4 0.4 2.4 " 15 "

Managers of Cooperatives 400 2 - 0.4 - 0.4 - 0.8 " " . "

Accountants of Cooperatives 400 2 - - 0.4 - 0.4 0.8 " > " m s.

Sub-total - - 5.2 7.2 7.2 7.2 7.2 34.0 -o3 -J

Assistance to Small Non-Farm Enterprises "

Training Courses for:

Field Assistants 3000 6 6.0 12.0 - - - 18.0

Field Assistants Retraining 2000 3 - - 0.2 0.2 0.2 0.6

Small Entrepreneurs 500 103 17.5 11.0 10.0 7.5 5.5 51.5

Teachers of Technical Courses 2500 6 4.0 3.5 3.0 2.5 2.0 15.0 (2500 US$ is average of variable

Sub-total - - 27.5 26.5 13.2 10.2 7 .7 85.1 costs)

1/ Courses of 1-7 days, only administrative costs included. SUDECOOP staff act as instructors.

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Phasing of Training Activities and Costs (Continued)

Unit Costs Units Year 1 Year 2 Year 3 Year 4 Year 5 Total RemarksUS$ US$ 000 - --------

Feeder Roads

Road Maintenance 1000 1800 - 600.0 600.0 600.0 - 1,800.0 Includes consultant fees andPersonnel on-the-job operation costs.

Total number consists of 250Education foremen, 600 operators and 950

1. Basic Education labor.Curriculum Development 850 200 91.0 26.3 22.1 15.3 15.3 170.0Training Teachers 550 600 27.5 55.0 82.5 82.5 82.5 330.0Trainipg Educational Staff 800 455 71.4 63.6 76.2 76.2 77.8 365.2Training Supplementary Staff 335 300 22.0 29.2 8.3 20.5 20.5 100.5 Including librarians, health education,e.o.TrAining Courses for Canteen Operation 200 204 8.0 .8.0 12.5 12.5 - 41.0

2. Complementary EducationSecondary schools staff training 130 320 23.7 6.0 6.0 6.0 6.0 47.7Farmers training 12 1,600 3.8 3.8 3.8 3.8 3.8 19.0 adult educationConselheiro Mata agricultural

school:staff training 690 100, 17.6 11.4 17.6 11.4 11.4 69.4farmers training 630 300 3.8 3.8 3.8 3.8 3.8 19.0 agricultural courses

Sub-total - - 268.8 267.1 232.8 232.0 221.1 1,161.8

Health Services

Training of: Includes training of currently but not yetijealth Attendants 350 440 - 90.0 - 38.0 28.0 156.0 trained health attendants.Medical Personnel 350 50 - 14.0 - 3.51 - 17.5 ring project periodRetraining Health Attendants 200 1000 40.0 50.0 90.0 100.0 120.0 400.0 Twice durigpoetproRetraining Medical Personnel 100 200 7.0 7.0 10.0 10.0 9.8 43.8Retraining Supervisory Personnel 1300 55 32.5 112.0 - - - 144.5

Sub-total - 79.5 273.0 100.0 151.5 157.8 761.8

Sanitation

Training of Supervisors and Inspectors 470 17 8.0 - - - - 8.0Training of Operation Auxiliaries 360 9 3.2 - - - - 3.2

Sub-total - - 11.2 - - - - 11.2

Community Development

Field Assistants 250 7 1.8 - - - - 1.8 Initial preparation of staff.

Project Management -5 PInstruction Courses 500 10 2.0 1.0 1.0 1.0 5 promotioal meng publi . _

servants and Bank personnel.0GRAND TOTAL - - 820.5 1.630.6 1,496.0 1,573.7 965.6 6.486.4

Costs in % of Total Project Costs - - 3.9 3.9 3.1 3.0 2.5 3.2

- 64 - ANNEX 8

BRAZILSTATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECTFlow of Project Funds and Information

MINISTRY OF FINANCE ._ - - - - - - - - - J - \IORLD BANK

BRASI LI A |

SECRETARIAT OF PLANNING SECRETARIAT OF FINANCE

PRESIDENCY OF THE REPUBLIC -_ _ _ _ _ OF THE STATE OF MINAS

BRASI LIA GERAIS

I I! _ ~ ~~~~~~ ., .. 1 SECR ETAR I AT OF

BANCO BANCO DO ESTADO I - - - - - - - PLANNING AND GENERAL

DO CREDIREAL AND I COORDINATION OF MINAS

BRASIL CAIXA ECONOMICA GERAISESTADUAL | I

I _ _ _ __ _ _ i I . I I

* .9 . I , i SECRETARIAT

T , X _ OF1 * L. AGRI CU LTURE

FARMERS I rBENIFICIARIES *

PARTICIPATING AGENCIES

_ _ _ Bank Funds_, _ -Funds of the Federal Government

.. Funds of the State GovernmentRural Credit Funds

- Information Flow World Bank 21378-

- 65 - ANNEX 9Page 1 of 3

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Procedures of Disbursements Against Statements of Expenses(SOE)

Budgeting and Funding

1. Each executing agency would conclude a contract (convenio) with theSecretary of Planning and the Secretary of Agriculture, stating its obligationsunder the contract, including objectives, physical targets and available fundsduring each year of the project period. Each participating agency would prepareannually before August 31 a working plan and budget for the next year. Afterreview by the Project's Coordinating Unit, these plans would be discussed by theconsultative technical group and thereafter presented to the State Council forapproval (see organization chart, Annex 11). The budgets would include a draw-down scheme. The participating banks are rediscounted by the Central Bank.

Expenses to be Covered by SOE's

2. Disbursements against standard documentation cover the procurement ofcivil works (including feeder roads which are constructed under contracts,community centers, health centers, water supply systems constructed undercontracts, storage facilities, and retail stores); vehicles; tractors; equipment;and consultancies and technical assistance. These disbursements would cover about25% of the project expenses.

3. SOEs would be used for works and expenses where full documentation isimpractical, such as:

(a) works executed by force account (feeder roads with a limit of20% of the total length of feeder roads improved or constructedunder the project and water supply systems);

(b) agricultural credit and credit for rural electrification,extended under rural credit conditions by BB, BEMG, CEEand BCRI./;

(c) project-financed operating costs of project management,monitoring and evaluation, EMATER-MG, EPAMIG, IEF, SUDECOOP,RURALMINAS, CAMIG, SEE, SEA and SETAS;

(d) costs for the baseline studies, marketing studies by EPAMIG,CAMIG and SETAS, community studies by SETAS and the curriculumstudies for SEE; and

1/ A glossary of abbreviations and acronyms is provided inside the frontcover of this report.

- 66- ANNEX 9Page 2 of 3

(e) consultancy services in project management and RURALMINASfor organizational improvement and in DER-MG for the assistancein the implementation of the maintenance plan for municipal roads.

SOE Procedure

4. The SOEs would be summarized on Application Form IC for the creditcomponent and on Form 1B for all other components. An annex showing monthlyexpenditures by each participating agency (Balancete) would be attached toForm 1B. These annexes would contain a basic breakdown of the totals on Form

1B as follows:

(a) personnel costs (salaries, wages and such);

(b) materials (material de consumo)-office supplies,gasoline, oil and such);

(c) general services (third party payments coveringutilities, short term contracts and such); and

(d) various operating expenses.

Reimbursement for permanent fixtures, equipment and installation would be madeon the basis of normal documentation.

5. Basic headings would be broken down in the same annex as to the costsper subregion, per location of work performed or expenses incurred (such ascosts of a regional office), cost per performed job (such as a specific road

section) and costs per group or types of beneficiaries, Adequate cross-referenceshould be made to the underlying documentation. Additional data required to

facilitate proper control may be worked out during implementation.

Internal Control by the Project

6. The executing agencies have established accounting systems, audited byinternal auditors, the auditor general of the State, independent auditors orfederal auditors, and maintain separate project accounts. A full-time managerwithin each executing agency would assist in keeping the accounts up to date andin maintaining separate accounts for each major job. An administrative unit inthe Project Coordination Unit (PCU) would consolidate the project accounts and

be responsible for the financial control of project expenditures.

7. The SOEs would be prepared monthly by the executing agencies andremitted to the PCU through the project managers. After counter-signing by theproject director, the SOEs would be sent to the Secretary of Planning for approvaland forwarding to the Bank. The basic documents of the SOEs would be retained by

the executing agencies. During this process, the statements would be controlledat the various levels by the responsible coordinators and actual expenses comparedwith the estimated expenses specified in the annual project budget and projectestimates specified in the convenios.

- 67 - ~~~~~ANNEX 9- 67 - Page3 of 3

8. The project manager in each executing agency would keep, in addition tothe basic accounting documents, a file containing copies of the most importantinternal control measures and instructions, such as:

(a) administrative and accounting procedures of the agency;

(b) indemnization rules, such as tariffs, per diems, and transportand lodging allowances applicable to personnel working forthe project;

(c) general control instructions, such as mileages allowed andtype of log books to be kept;

(d) contracts used as a basis for calculation of expenses, suchas rental contracts, public services (water and electricity)and tariffs; and

(e) special requirements under the project.

Auditing

9. The project accounts would be audited by the Inspetoria Geral de Finances(IGF) of the Ministry of Finance in Brasilia within six months after the end ofeach fiscal year. The IGF would be asked to include in its audit a specialstatement about proper execution of the SOE procedures by the executing agenciesand the PCU.

January 1980

- 68 - ANNEX 10

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Estimated Schedule of Bank Disbursements(US$ million)

Bank Quarter Disbursed Cumulative BalanceFiscal Year Ending during Quarter Amount Disbursed of Loan

1981 Sept. 30 0.0 0.0 63.0Dec. 31 0.5 0.5 62.5March 31 1.4 1.9 61.1June 30 1.4 3.3 59.7

1982 Sept. 30 1.6 4.9 58.1Dec. 31 1.8 6.7 56.1March 31 2.3 9.0 54.0June 30 2.8 11.8 51.2

1983 Sept. 3G 3.3 15.1 47.9Dec. 31 3.8 18.9 44.1March 31 3.9 22.8 40.2June 30 4.0 26.8 36.2

1984 Sept. 30 4.0 30.8 32.2Dec. 31 4.1 34.9 28.1March 31 4.2 39.1 23.9June 30 4.1 43.2 19.8

1985 Sept. 30 4.0 47.2 15.8Dec. 31 3.9 51.1 11.9March 31 3.6 54,7 8.3June 30 3.3 58.0 5.0

1986 Sept. 30 3.0 61.0 2.0Dec. 31 2.0 63.0 0.0

- 69 - ANNEX 11

BRAZ ILSTATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECTOrganization Chart

STATE COUNCI L

For the Development of Low-income ProducersSecretaries of Planning, Finance, Agriculture,Health, Education and Labor and Social Action

EVALUATION UNIT GENERAL COORDINATION Consultative

_____________________________________ _ _ * Technicalt iUniversity of Vi;osa State Secretariat of Planning Group'

EX ECUTIV E AGENCY

State Secretariat ofAgriculture

Project Coordination Unit

MONITORING PROJECT DIRECTOR ADMINIT

TECHNICAL ASSISTANCE UIUNIT

JI

REGIONAL COORDINATING OFFICES IMPLEMENTING AGENCIES

I Northeast - Rio Pardo de MinasII Vale Rio Doce - Diamantina Eleven Participating Institutions. ForIII Zona de Mata-Muriae Specification See Annex 2IV Sul de Minas - Formiga

I.I_ _ _ _ _ _ _ _ ________________________________

REGIONAL OFFICES

of the ImplementatingAgencies

VJ _- ------ T-------~~ ~1 r~~~~~----------- --__ __ _ __ -_ _--------

FARMER * Municipal LOCAL OFFICESMunicipal _ _ _ _ _ _ _ _ _

AND -- Consultative , o tCOMMUNITY a Gru fte ImplementingGroup

ASSOCIATIONS * . Agencies

FARMER GROUPS-FARMERS-SMALL NON-FARM ENTERPRISES

*Consisting of the l1 Project Managers of the Implementating Agencies World Bank - 21377

- 70 - ANNEX 12

Page 1

BRAZIL

STATE OF MINAS_.GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Implementation Schedule

COMPONENT/ACTIVITY PROJECT YEAR_ I II III IV V

CREDIT

On-Farm Credit- Provision of investment and seasonal credit.- Provision of rural electrification credit _

- Provision of investment and working capitalcredit to small scale non-farm enterprises

PRODUCTION SUPPORT

Land Titling Services- Promotion- Legalization of titles

Extension Activities- Improvement of communications with local offices- Office installations- Provision of extension services- Training of incremental staff- Retraining of staff- Training of farmers- Assistance to EPAMIG (research)- Assistance in marketing services- Assistance to SUDECOOP (farmer groups)

Agricultural Research- Establishment research team- Agricultural research- Farm management research- Agro-forestry research- Marketing survey- Marketing research- Publication of results

Land Reclamation- Establishment of operation centers- Location of extensionist staff- Provision of land reclamation services- Consultant services

Reforestation- Establishment of local offices- Establishment of nurseries- Provision of reforestation services- Provision of charcoal production techical

assistance- Assistance to agro-forestry research -

-. -.

- 71- ANNEX 12Page 2

COMPONENT/ACTIVITY PROJECT YEAR_ _ _ _ __I II III IV V

Marketing- Completion survey marketing situation for

small farmers- Construction of storage facilities- Establishment of retail stores- Training of technical officers- Consultant services - Continuous analyses marketing opportunities- On-farm storage research

Assistance to Cooperatives- Establishment of local offices- Administrative assistance to cooperatives- Assistance to farmer groups and pre-cooperatives ._.__- Training of coop personnel _

- Training of farmers- Establishment of new cooperatives _

SERVICES TO SMALL NON-FARM ENTERPRISES

- Training of incremental extensionists- Establishment of local offices.- Providing of technical assistance to small

enterprises -

- Market studies- Marketing Assistance _- Training of entrepreneurs .- Training of technical employees

PHYSICAL INFRASTRUCTURES

Feeder Roads- Consultant services- Upgrading project feeder roads- Construction new feeder roads- Upgrading state financed feeder roads within

project area- Preparing municip;al road maintenance program- Introduction municipal maintenance program- Training maintenance personnel .

Rural Electrification- Construction of trunklines- Construction of branchlines- Connection of farms

Telephone Communication- Establishment of radio-telephone posts

SOCTAL INFRASTRUCTURE

Education- Improving curriculum primary schools- Introductian improved curriculum _

- Training supervising personnel- Training farmers

] (Conti3u-L

- 72- ANNEX 12Page 3

COMPONENT/ACTIVITY PROJECT YEARI II III IV V

Education (Continued)

- Training cc rses school meal attendants- Upgrading buildings agricultural schools- Improvement agricultural school curriculum- Introduction improved curriculum in agr. schs. _

- Improved school meal provision

Health Services- Planning improvements in information, supervision

and supply system of SES- Introduction of accepted plans- Employment incremental medical staff- Employment auxillary staff rural health posts- Training supervising personnel- Trainir.n rural health attendants- Retraining rural health attendants- Retraining medical staff- Construction health centers- Construction health posts- Supply of equipment to centers and posts l

Sanitation Activities- Employment )f incremental staff in SES- Placement of sanitation installations- Construction of wate.r supply systems- Schistosomiasis control- Chagas control experiment

Community Centers- Selection of communities- Selection of type of center- Constructicn of centers = =

Community Development- Selection of Communities- Provision of development assistance _

- Evaluation of preliminary results

PROJECT MANAGETENT

Administration- Emplovment of staff- Establishment of regional offices- Consultant services l

Monitoring- Organization of monitoring system- Mcnitoring reports

Comoletion ReDorts

Evaluation- Baseline studies- Ongoing evaluatio.

- Post-evaluaticn

- 73 - NEX 13

Page I of 3

STAT oF MINAS GCRAIS

SECOND RLAIU, PEVELOPMT PROJECT

Rev Indinatore

For Monitoring the Progress in Pro-eot Exe ution

Prinoipl Objeotivee Key Indiostor - Responeible Agencels

ARIICUTURAL CREDIT

1. I-oroeed involvement of m-el farmer to the provision a) Nuober of lotte to bentfioisrite per oattgory, typo of Fiotoolel Ageote, EVATER-IC, P C Uof institutional credit, inore of the mount of uper- fam, end tub-rgionvised credit to maill femrm and of prnduction endproduotivity bl Amount of loens to be.eficiariee per O.tigory, type of Fineniel Agente, EMATUR-MG, P C U

farm, sob-region and -ctivity

c) Number of heco-rce con-idn-ed under the eubloan gretied Fiangni-l Ag-nts, ZMATER-bG, P C Uto begeficiarice per activity

d) Relation of project bencflciaricn attended to totl Finsoclal Ageote, EMATER-IC, P C Ufaere cttcsdcd cc to number of femere end -oot of

2 I-oree- partioipation of ooperative- in redit a) Amount of locs granted to ooperaticee Fin . iel Ag-ote, SUDECOOPpro-ielon

3. Improve-o-t of banking servioe. .) Ngober of newly neteblish bhek outlets Finanolel Agents

RIUAL ELECTRIFICATION CREDIT

I Enp.nsico of el1-trifi-tioo services in rural areas a) Numb-r of fe-m concctd per ategory and type of farn CGMTIG/DAEto eseift in innreasicg prodootivity, and ieprovinghit Iiving steodard b) Ro of truok end branch Iies conetrunted

c) Cost per Km of lioe, p-r farm connet ed

d) Cost per KVA-i.stalled end mtering inetalltion

e Average potertil of tran- taner in-tellcd per type of ftm

f) Average aount of I.g provided, and everage coet of io- Financial Agente/CEMIG/DAE/EMATER-h-hou-e wiring nod installatIons P C U

LAND-TITLING

I L glieatioo of land titlee to providc ecourity of lend a) Ngober of titles Iegaliced, per type of ferm RURALMINAStcnoro to the benefi iarise and so incentiv for gri-culctrel develop- ent b) Tot-l -ree 1cgeliad

c) Aver-ge operatio.el costs per title

IURAL ETERNION

Incretec of podu-tion end prodeotivity of low-inoo a) Nuhber of small iame eeeiet-d with eopervicd creditfamnre by di-secetinton of improvemet, o-ltivetion and teohnical ..- i-tan e, with a break-don similar toand farm ageont techniques that of CREDIT,

b) number of fem and eree teieterd per e- tensioniet

2 Motivation of fmoilies and on-enitniee to pertinipete a) Nueber of -onunitie- aetisted EMATR-IGin dovelop-.t activiti-s

b) number of .onitiee per -steos.ouiet

3. Improvement of the qoality end effectIveness of rural a) N-ober of new lon-l *gcn ies .etablished and number ofertension servio e new eetnenioniet employed EKATIR-MG

b) Number of entensioniets trind o traierd, days fotrei.ing.per ectesionisi. sod cots pcrnete...minis.tend costs Per trainig u

c) Percentage of tic rho eh teneloniet spend to fieldworkend attendance of all fa-mer

4 Ortcntetion of entension servie- tc 11 fmer_ Ratio of 11 f-mxr- attendedo n t-l frmere ttended

b) Noober of field day., attended of fnmo-s per field day,cod -crage coet per frmer-day (specified per -otivity)

A PTIVE RESEARCIR

Improve prodnotivity of rope, pasture end liveeto-k e) Number of ateff assigned to research of snail temproduotion prhblsm EPAMIG

b) Number of enperimetns nd demonstration plote underohbervation and pero-nteg of trials at the fm levelper type of fam

2. Improv on-farm torage a) Average ooete per oper-ient or demonatretion fiold EPAMIG/UNIVERSITY of VICOSA

b) Nubher of oc-fam trials ceder obhervetion

3. Agro-fo-retry c) Number of -eperiments nd area under ob-ervetion EPAMIG, 1EF

b) C.et per nopetinent

LAND RECLANATION

Inorease of preduction by ipnoving onder utilised *) Number of farnre attended per type of ftrm RUFALPIlNAS*wep lands

b) Averege percentage of 11 farm assisted

R) M rlaimed per frm type od improved pen activityregulstmou of main watern- es drainage, irrigation,flood protection or any cobination of thee.

d) H cultivated on reclaimed land per type of rop

2 Iprovemnt of efficiency of lead re-lation acitivity a) Av--ng cost and comber of machine hours pen hb required RURALMINASper motivity

b) Averge comber of effective hours of pr ent of totalavaIlable houre

- 74 - ANIEX 13Page 2 of 3

EHAZ IL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Kay Indicetone

For -onitor-io the Frogres- i Project REo..tito

Principal Objecti-es Kay Indicator Responsible Agenolfs

REFORESTATION

I Provision of fal end conesro tica wood to -smal a) N-oba of sell farmers plantiog sod area planted under IEF

fr-rs, isprose.e-t of erosion ontrol Iacresesa and the pro1ect per typ, of fa-i-cre*s. of all farmers inrPme

b) A-erage cot per be reforooted, ad av-rage not per 1000seedling provided

2 Improv--mt of te hnical essistan-a a) Ntober of new. -nresnie established and -erge disten-e of TEFferns assistsd ead the c-rstig providing seedlings

MAkKETING

I I=pro-ee-nt of inpot sopply to small farmers a) Per-entags of farmers atilieig improved or certified seeds CIATG/EMATER-MGper type of sssds

b) Anonal production aed de=ned in ths State of Mine Gsrais QAMIG/COSEMEG/EMATER-WCof ertified .sed. per type of seeds

N) nb-er of rtoil stores operativ in the pro) t ar-s, sd CAMIG/FMTER-MGarea serv d per stor, anuber of clients per stor

2 Increas d involvement of ll farer i th ) Portet f smal fa ttended pe boytag-post. reciving CAMsarketing str-tu-r Pre-tEF,AGF, or r-gla1r mkatet prices

b) Total rolure of aneval p-roha-es of prodie of sail fora t CAMIGP-r prodoct and in p-r ent of total prchases.

P3 Pernentage of prodoce -arketsd through o-opereniresooiete- CAMIG/SUOECOOP(per prodoct/aver-ge obtained)

d) Fa.mgate price in per ent of conner price per prod-ct end CAMIG/EMkTER-Mgin per ent of official mini-no price Isrel

3 Iprov-ent of torage facilities a) Farnrs improving on-farm storage fanilitias average torage FlNANCIAL AGENTS!EMATER-tEcapecity available end onstage son-ut of inn-annent

b) N-eber oAd capacity of publi store onstr-tted; average CAMIG/CASEbGtomatrtiton cost pe- ton capacity

c3 Totl voice stored and average durativo of storage per CAMIG/CASEMCproduct

ASSISTANCE TO COOPERATIvE SOCIETIES

InTease of mebersohip of P ti d f a) Nber nd average mebership of farr grops, pre-ooperatives SUOECOOP

nehers.hip p-rticipeti-n. Oti.ted

b) Perce-t of small farmer in nvvperetine membersiip SGOECOOP

P) Fornet of activ membership in cooperstie sd overege SUDECOOPonnoal voIce of neni..s provided by .oope .. ti-e per typeof mebher (0-lO ho, 10-50 ho, 50-SOO ho)

d) NSober of traning onroes given, -verage attend-ane and SUDECOOPcost p-r to-re

2 Increase of managerial strength of coop ratives a) Coot of adainiatration As percnt of val-e of total turnover SUDECOOP

b) NSober of manage-ot -orse, average ettenda .e and coats SUdECOOPper cu-

N) comba of staff officers assisting .ooperatins and costs SUDECOOPassistants per oop-ratin end as p-r-nt of rorai norno-er

SMALL NON-FARM EbKERPRISES

t Eapn ion of tenhnical assietan-e to small non-farm a) Ncobat of toni officers and entension officers operative SETAS

b) Ben finiarien attended per gro-p of producte, -on-etriol SETASactiniti s and services

2 In rease of incone end productivity of small eater- a) SNober of loans gra-tsd average mount of loan per gro-p SETAS/DCpre--ors and improvement of qoelity of products of activities, and per type of porpose (investment, orking

apital)

3 Improves fficiency of e -rension servio a) Nonbr of enterpri sea a.sistsd as perent of tvtal non- SETAS/CEAG/BDMGregistered and regitaered en-rpri..s

b) Ncober of ent-rpri.sea .c iving redit as percent of tot-i SETAS/CEAG/BDMGanointed and eniating enterprises

c) NSober of co-rs e given to ntr-pre n..r and -aployes, SETAS/CEAGr-te of ortend.nce and .average osts, per conta and Sypeof product

d) NSober of soterpriens and ars overd pr xt ens onist SETASand a-eptooce re

FEEDERRGADS

Improvement of year to-tl accsshibility no total a) bN=b- of o iproved and Km - td and bo r of DER-M

Prnuniti- for transport of prndue. iapots and delivery imPrvd to limb op the -icipalttis of the pro c atof publie servics with the state highway nystet

b) Average costs of improv-ment and .onstro.ton per Km DER-MG

2. Improvemnt of lenel of melttenancs of pr,ntipal reeds a) Km of roads mintained in c cordance w.ith projet denigmed DER-MG, Mnicipelittes

uAint--n te progr. p

h) Average maintanano cant per tm/I year IFS-MC Municipeiities

- 75 - ANNEX 13PaSe 3 of 3

ilAIZIL

STATE OF PUM GA ERAIS

SECObD RURAL DVELIDME PROJECT

Ken Indicator-

For Konitonico the Protees in Pro1Jct Elaconion

Pninoip.l Objentin-- Key Icdictto- Repon-ibie Agencies

TELEPNONE COMMUNICATION

1. Iprove tn of eo icnion to ensure b ttor delivery 03 Nosbor of tlephbcn post. .toblithed UAE, CEMICof poblie e-ile end peoJent activitine

b) A-verae coont of i.taceieiona end operetico p5t poet

EDUCATION

I Upgreding of th q-clity of docntiont serviceA and a) Uuebhr of schools pplyiog the itpanved corrioion it percent SHEstrogtheniog of the reations betwen edcetional cocci- of .11 echoolecolon, omnity ced. nd e11 farmrs itoreets

b) Averege echool attandenco por irede ia priegry sohoole SEE

c) Nobher of traicio c-.rae. for sthooi-teoher peobjective, and coat per co-rc* SEE

d) Nbuhor of chool tnechers tretned, nd coaet pot teacher SEE

o) Nuboer of egrinIturel *ohooil upgraded: avrge -ueber of SEEetodont pl ace and etodent, and f-eere. treiced

2. Iepro--rent of the ce.nrol odetoonronlon of lIE a) m iter of i.crenentl up-rviecry eteff for protcnt ctirites SEE

h) N-b-e of training connot for tchoicice of fEE, inspeotore, SLEEuhbool coordinators, specelitts and iibrgriets, rats of tten d-

neAnd ... n per a-tteodeec

NEALTN

fEpacsioo of primry hboith esrtie.. t the rurl population a C.onetruntion aud itprovetient of heaIth poets and health SEScenters, and costs of co.etruotiot ad imptornent per post

b) Averego coverage of tho rural population by the health posts, SES04th pricary hegith core, pre-catai control, poac--tet1 controli seez ioinlo, dental care

) P rcecc..o of per-o- . sing health -rvices a to ago, origin, SEEoti-e, freq.o..Y of rielts, poce.tage referrd to fry beltch

pot tno hcelth ceotor, cd fr- health ctte hospita1

2 Imprvement of the oenr-l edmiistratiot of NEE a) Retio of Population p-r mdical doctor ic the pro jct are SEE

b) Nber of coo perso--l e-,loy.d specified In hscith ttetdaoco. SEedectors, sopotui-er

c) Di.ase. incide.c. cod -ortality rote per type of disease.. SEEnoose of death, age .d origin

d) Nunbhr of health posts cith deficisnis in bho spplies f SEEoct month or 1-9-it

el Trainicg courss pro-idd to ht elth etten c, o mdicl dotos, SEEsupcrnieors and t-hnicooc of SES, itot of ottoda..c. sod cos tsper course cd p-o attendnce-

SANITATION

I Ipro-st of et- supply to dteoe.s iocid-no of N) Ntnber of eaton euppiy iYatellaciote per typa of inatSEltion SEStPLASSete born diseas, and sioe of co-eucity

b) Coets per inst bliatloc, hen ficiary faily nd costs per .pit. SES/PLASS

c) Oporation end naict..n.ce costs per eyetan SESI/AE

2 tepronement of living conditions to dtcreass iocidence a) Ntbher of *anit-ry inscal-iton placod nd everge cot po bESof -eter bore end other distase tnatellnionc

b) Ntbtr of houce. ureated in the Cha.gs-coont-o sope-imect SES

o) A-vereg costs per hoon financed by the project ted arerage SES/EtIATER-M-glue per house co-tribhtod by b teficteriss

d) tuhber of cootrol- of Sohistosoniaeis infection in V-reec lende SES

COMNTT CENEbRS

II prove_not of itf a.r.ctoe and intagretiot of dove- c) Sonber of coccunity conter- contsruction per typo of c.oter SETAS/ P C Ctop_nct acticities cod typo of -wnunity

b) Costs of con.tructio per a2 covered and cbe f s i P C Uoperative in the ceotec-

c) Cot ity partinipatioc in publi serices and project SiTAS/EMATER-Mactivitlee as percent of totel populetioc

d) Noale of c-n,ity sub-pm lecto ficacced by projoci -oitiy SETASfunds per -cn Dity and activity

n) Avorege Ioan aeount pot sub-proJoct per totivity, and per SETAS

PROJECT MiIffiEfEhT

1. Effctive projeot mininretio and tb-egrtnion ) enb toro n sff nd pppon tff rplyd, in P C UoB.I ic-inon co td per regional office

bh Average oporattonat monthly coets of contcrl and regional P C Uoffice, notel and percentage of project n.penses

c3 Tin ipse dotes of dent obtained, preperation of monitoring P C U-spcrte and feedhech to local o ffices

dl Itplnatntion.r-ts as rate of q-titise achivevd and E tecuciug Agencie, P C Uestiestod and cost ov-rr-ons per c-ponoc.t ad ebchpotot

2. Ti_ly evaluation of proj-ct strategy a) Tie dely of complecioc end divigieg of b.at.ine studios P C U

in doothsb) Tin dolay in pr-paraio of -Ica enlutcocporce in enthe P C C

-76 - ANNEX 14Page 1 of 2

BRAZIL

STATE OF MINAS GERAISSECOND RURAL DEVELOPMENT PROJECT

Agricultural Development

General

1. Rainfall distribution, topography, temperature and soil quality varyconsiderably between and within the project regions, and the farming systemshave been adapted to the ecological circumstances. In the Northeast, the averagesmall farm has 17.0 ha, with 1.8 ha cultivated, medium and large farms producecattle, cotton and forestry products while small farmers concentrate aroundvarzeas and cultivate subsistence crops and cotton. In the Vale Rio Doce, with2.5 ha cultivated on the average small farm of 25.9 ha, large farmers concentrateon subsistence crops and coffee. The average Zona da Mata small farm has 2.5 hacultivated, out of an average of 20.7 ha. This is predominantly a dairy regionwith steady development of rice, vegetable and fruit production; small livestock;and subsistence crops. In Sul de Minas, where the average small farm of 22.4 hacultivates 2.7 ha, large farmers produce coffee and cattle while small farmersconcentrate on subsistence crops, dairying and horticulture.

Farm and Crop Development

2. Project area small farmers make very little use of modern, efficienttechnology in their ,roduction activities and have not been exposed to newfarm management tech::iques. Basically, the need to reduce risks in productionand marketing constrain most management decisions of the small farmers. Thus,they commonly practice intercropping (especially of maize and beans) to reducethe risks of prolonged drought and to maximize rainy period output. Livestockproduction (broadly including beef and dairy cattle, pigs, poultry, rabbits,fish and bees) also attracts them as a way of reducing drought risks, hedgingagainst inflation, providing a ready reserve for emergencies, and making moreproductive use of available land. The project would directly address smallfarmer problems by offering a combination of on-farm and off-farm improvements.The former would be based on improved farm management techniques, which wouldresult in better timing of farm activities and use of improved seeds and plantingmaterial (particularly of corn, cotton and beans); application of more productivecultivation techniques; increased use of on-farm storage; diversification intocommercial crops such as garlic, bananas and tomatoes; inclusion of livestock,land reclamation and reforestation in farm plans; and, after the farmer becomessufficiently skilled in farm management, use of land rotation. Actual needsgoverning the introduction of each of these methods would be established in

cooperation with the research and extension staff for each ecological area. Off-farm improvements, aimed mainly at improved input supply and marketing, includemajor feeder road activities, communications and market information improvements,better retail outlets and expansion of storage facilities.

Farm Models

3. Based on differing ecological characteristics and a wide range of

technical and price data, 21 models were developed to illustrate the range offarm types and sizes among the target group. Of these, 17 were selected as mostrepresentative and grouped into two regions (Northeast-Vale Rio Doce and Zonada Mata-Sul de Minas). They are summarized in Table 1, and four examples are

- 77 - ANNEX 14Page 2Tof 2

given in Tables 2 through 5. The models should be considered as illustrationsof possible developments rather than determinants of a firm estimate of projectwide activities. The mix of crops must ultimately be adapted to specific regions(such as cotton and garlic in the Northeast) and to developing markets (such asvegetable and fruit crops for the metropolitan areas) and to new developments(such as reforestation). Farmers would probably adopt crop mixes more variablethan those shown in the models; the products included in the models are partiallyproxy crops, representing similar produce such as bananas for fruit products,tomatoes for vegetables and maize and beans for subsistence crops. Despite thesecaveats, the models are formulated and distributed in a way roughly approximatingthe actual target group position.

4. The project's effect on this group is reflected in the models. Allmodels assume conservative yield and material input projections based on testedfield results and experience from other projects. They include the estimatedeffects of an extended dry period every five years. They also include anallowance for fallow land. The project would aim to introduce small farmers tothe institutional credit system, whereafter they would become direct clients oflocal banks. The probable maximum required credit is shown as computed from farmmodel data:

Farm Plans with Farm Plans withFarm Plans Only Land Reclamation ReforestationNo. MVRs No. MVRs No. MVRs

0-10 ha 12,030 25 1,000 80 1,400 3610.1-50 ha 10,380 47 910 150 2,040 6550.1-100 ha 1,540 70 - - 700 160

Total/Average 23,950 36 1,910 113 4,140 63

For many of the small farmers in the 0-10 ha range, investment requirements wouldbe below the US$100 level. Although considered in the illustrative calculationsas subject to investment loans, they would usually, in practice, be included inworking capital loans, or shorter-term investment loans (e.g., well under the

applied 8 year term including 3 years of grace).

5. The models foresee some 63% of all non-electrification credit being used forinvestment and 37% for seasonal credit. Livestock activities, financed only aspart of a mixed crop-livestock plan to assure optimal use of land and investments,would require about 60% of this investment credit. Livestock purchases wouldconstitute about 40% of total livestock credit, with the remainder used for pastureimprovement, fencing, stable improvement and silage. Reforestation would require17% of total non-electrification investment credit; land reclamation, 7%; on-farm storage, 5%; and purchase of tools, equipment and other investments, 11%.Replacement of tools for soil tillage and all other operating costs are includedin operating expenses. As for labor requirements, the models used a daily wagerate of Cr$100, or US$2.36. Model farm families average five persons, who can

supply up to 650 man-days of labor per year. The heaviest seasonal laborrequirements are from August to January, with peak requirements being met byfamily labor or by hiring from the underemployed pool in the project area.The incremental labor requirements total 8,660 man-years in year 5 and 12,840man-years at full development. At full development, 90% of the incrementalman-years would be provided by family labor.

March 1980

- 78 -

BRAZIL Able 1STATE OF MINAS GERAIS Table

SECOND RUrAL DEVELOPMENT PROJECT

Summary of Illustrated Farm Models-(Cropped areas in Ha)_A/

Location Farmers Having 0-10 Ha. Farmers Havirng 10.1-50 Ha. Farmers Having 50.1-100 Ha.

Sub-areas T and 7T Model 1: (800) / Model 4: (2 ,5 0 0)* Model 7: (1,490)

Average Farm: Size 6 Ha. Average Fam: Size 25 Ha. Average Farm: Size 70 Hs.

Year 0 Year 10 Year 0 Year 10 Yeat 0 Year 10

I/ Nordeste Beans 4 0.3 0.4 Beans 0.7 1.0 Maize 3.0 3.8HaiR O 0.3 0.4 Maize 1.0 1.3 Rice 0.6 0.8

II/ Rio Doce Rice 0.15 0.2 Rice 0.3 0.4 Beans 1.3 1.5Manioc 0.2 0.2 manicc 0.4 0.4 Manioc 0.2 0.2Fallnw - 0.2 Fallow - 1.0 Banana 0.3 0.4Improved Paserre - 0.5 Natural Pasture 15.0 14.5 Fallow - 1.5Natural Pasture 3.5 3.0 Improved Pasture - 0.5 Natural Pasture 3.0 2.8

Improved Pasture - 0.2

Model 2: (2,735) Model 5: (687)Average Farm: Size 6 Ha. Average Farm: Size 25 Ha.

Year 0 Year 10 Year 0 Year 104/ 047/.

Beans 0.3 0.4 Beans - O.7 1.0Maize 0.3 0.4 Maize 1.0 1.3Rice 0.15 0.2 Rice 0.3 0.4Manioc 0.2 0.2 Manioc 0.4 0.4Fallow - 0.2 Falls. - 0.5Natural Pasture 3.5 3.5 Natural Pasture 8.0 8.0

Model 3 (2,570)* Model 6: (2,000)Average Farm: Size 5 Ha. Average Farm: Size 20 Ha.

Year 0 Year 10 Year 0 Year 10

Cotton 1.8 2.0 Cotton 4.0 4.0Rice 0.1 0.15 Maize 0.9 0.9Maize 0.4 0.5 Rice 0.2 0.3Beans 0.2 0.3 msan! 0..4 0.5Manioc 0.06 0.06 MamuiC 0.1 0.1Natural Pasture 1.5 1.5 Fallow - 1.5

Fallow - 0.2 Natural Pasture 8.0 3.0

Sub-areas TTT and IV Model 8: (1,500) Model 10: (4,200)Average Farm: Size 5 Ha. Average Fsrm: Size 25 Ha.

Year 0 Year 10 Year 0 Year 10

II./ Zona da Mata Beans 0.4 0.5 Beans £ 1.4 1.7Maize 1.0 1.2 Maize 3.0 4.0

I3/ Sul de Minas Rice 0.2 0.25 Rice 0.4 0.6Tomato 0.003 0.005 Tomato 0.003 0.005Fallow - 0.5 Fallow - 1.0Natural Pasture 2.5 2.4 Natural Pasture 15.0 14.5Improved Pasture - 0.1 Improved Pasture - 0.5

NOT INCLUDED.

Model 9: (4,374) Model 11: (894)Average Farm: Size 4 Ha. Average Farm: Size 20 Ha.

Year 0 Year 10 Year 0 Year 10

Beans 0.4 0.5 Beane- 0.4 0.8Maize 1.0 1.2 Maize 1.4 1.7Rice 0.2 0.25 Rice 0.3 0.4Tomato 0.003 0.005 Manioc 0.1 0.12Fallow - 0.5 Tomato 0.005 0.007Natural Fasture 1.5 1.5 Potato 0.05 0.07

Fallow - 1.5Natural Pasture 8.0 8.0

Forestry Model 12: (1,400) Model 13: (2,040) Model 14: (700)*Average Farm: Size 5 Ha. Average Farm: Size 25 Ha. Average Farm: lion 75 Ha.

Sub-areas included: Reforestation: 1 Ha. Reforestation: 2.5 Ha. Reforestation: 5.0 Ha.

Nordeste Year 0 Year 10 Year 0 Year 10 Year 0 Year 10Garlic 0.005 0.008 Garlic 0.01 0.015 Garlic 0.02 0.03

Zone da Mata Maize 0.3 0.35 Maize 1.6 2.0 Maize 5.0 6.0Rice 0.04 0.06 Rice 4 0.3 0.4 Rice / 1.1 1.3

Sul de Miens Beans 0.2 0.3 Beans - 1.4 1.5 Beans - 4.0 4.0Mamioc 0.08 0.08 Manioc 0.5 0.7 Manioc 1.4 1.6Forestry - 1.0 Forestry - 2.5 Forestry - 5.0Fallow - 0.5 Fallow - 1.5 Fallow - 1.5

Land Reclamation Model 15: (1,000)' Model 16: (910)Areas incl.ded: Average Farm: Size 6 Ha. Average Farm: Size 30 Ha.

Areas include: .Land Reclaimad: 3.0 Ha. Land Reclaimed: 3.3 Ha.Rio Pardo

(Nordeste) Year 0 Year 10 Year 0 Year 10Aibsm Rice (on varzeas) 0.15 2.0 Rice (on verzeas) 0.2 2.3

(Rio Doze) Beans 0.3 1.0 Maize 1.3 1.7Muriae Maize 0.3 0.4 Beans 0.6 1.0

(Zona da Mate) Manioc 0.2 0.2 Manioc 0.1 0.1Pouso Alegre Fallow - 0.2 Banana 0.3 0.4

(8uS de Mines) Fallow - 1.0

1/ In addition to these models, a model for Pig Production has been prepared.2/ The balance between farmaizo and the total of cropped area constituted the ma-used farm area.3/ Figures in parenthesis indicates approximate number of project participants. Landless tarmers assisted under the

project have similar crop patterns to those of land owners and are represented in these farm-models.4/ Intercropped with maize.

* Cropping Patterns, Financial Analysis, Debt Service and Cash Flow Projections are given in Anne. II. Table 2 for Model 3,Table 3 for Model 4, Table 4 for Model 14 and Table 5 for Model 15.

BgAZIL

0UT! OF 8MIN GDPAI8

SECOto RUML IUIFPIf PRIOJISCr

Ineor-Ouceut CozEficients ncr Ijectore

BEANS ISIIZE RICE IIA;9I C07ToN GARLIC 6ANIUIA TOIATO PO0TTO . YZ ILn7&gP- FIl1 F u ll1 Pee oFll Pre Pull P- Full Pre Full Pr. PFll Pr Foil Pr' Fell P- FillIte. elt Proi.et Dev. Pro-ect 1tD. Prject Dev. Project Dev. Projct D. Projlct D . Project Dn. PFml.t Dv. Pro.ect t De. Protect Dev.I...uti

Lbor n-/doy. 27- 31 31- 40 38- 47 45- 52 40- 86 70- 92 72 84 45- 54 58- 67 315 335 37 s0 380. 445 460.500 113 160Seede kg. 40 50 14- 16 17- 18 40- 50 60 - - 50-100 200- 300 400 400 - - 0.2 0.2 50 60Fertili-er kg - 150 50- 130 120- 200 - 150 - 100-150 - - 200 1000 400 1500 2500-2800 4500 600 2400PlantS 000 .n.tR - - - - - - 4.0 5.0 - - - - 2.0 2.0 - - - -I..ec.. tid.. kg - - 0.5-1 0.5-1 0.5 0.5-1 - - _ 28 - 3 0.5 2.0 3- 4 12- 18 3 35Ft.gi.ldee kg - - - - - - - - - - - 10 _ - 5- 7 15 5 18For-.ildee kg - _ - - _ _ _ I I I _ _ _ _ _ - _ _Dr-ft enll day 0.5 0.5 1-3.5 3.5-4 1 4.5-6.5 - 4.0 9.5 12.0 - 22 26 11 19 6 10Orgenic fteriller t - - - - - - - - - 15 20 20 20 20. 30 20 -Li-e kg

- 0- 600 2000 - 2000

Yield.

14 18-22 13.2 18.0 22-28 35De5 10.2 18.0kg. 400-550 600-780 900-1609 1400-2000 700-1500 1209-1950 500-700 900-1200 3000-3200 4000

In .. it 0.6 0.8

ANNEX 15Table 2Page 1 of 2

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Farm Model 3: Cropping Pattern.Financial Analysis, Debt Service

and Cash Flow Projections

Model N9 3 (see Annex 14, Table 1)

Subareas I and II

Farmer having 0 - 10 ha (number of participants 2,570)

A. Farm Development (in ha)

Before Y E A R SCrops Proj!ct 1 2 3 4 5

Cotton 1.8 1.8 1.8 2.0 2.0 2.0

Rice 0.1 0.1 0.12 0.12 0.15 0.15

Maize 0.4 0.4 0.4 0.5 0.5 0.5

Beans 1/ (0.2) (0.2) (0.2) (0.3) (0.3) (0.3)

Manioc 0.06 0.06 0.06 0.06 0.06 0.06

Non-utilized 2.64 2.62 2.60 2.30 2.27 2.27

FalIow - 0.2 0.2 0.2 - 0.2 0.2

Farm area 5.0 5.0 5.0 5.0 5.0 5.0

1/ Intercropped with maize.

- 81 -

BRAZIL

STATE OF MINAS GERAS.

SECOND RURAL DEVELOPMENT PROJECT ANNEX 15Table 2

Financial Analysis - Model No. 2 Page 2 of 2

(Cr$'000)

Years 0 1 2 3 4 5-19 20

A. Gross Income 0Crop sales 2/ 2.2 2.7 3.5 4.1 6.2 6.3 6.5-On-farm consumption- 6.9 6.9 9.1 9.2 9.5 9.5 9.5

Total 9.1 9.6 12.6 13.3 15.7 15.8 16.0

B. PodutiuotsInvestment - 2.3 - - - - -Operation

Family labor 4.4 4.4 4.8 5.2 5.9 3.9 5.9Other 4 0.6 1.1 1.4 1.6 1.7 1.7 1.7Taxes 0.1 0.1 0.1 0.1 0.2 0.2 0.2

Total 5.1 8.9 6.3 6.9 7.8 7.8 7.8

C. Net Benefit 4.0 0.7 6.3 6.4 7.9 8.0 8.2

D. Incremental Net Benefit - (4.7) 2.3 2.4 3.9 4.0 4.2

Financial Rate ofReturn: > 50%

1/ Includes residual value of investment.

2/ 180 kg of maize, 125-250 kg of rice, 120-180 kg of beans, 1500 kg of maniocand 300-600 lt of milk. Figures show how family consumption increases whenproduction increases.

3/ Cr$2.320 for crop production.

4/ Direct crops and livestock production costs.

5/ 2.5% of total sales.

Debt Service and Cash Flow Projection - Model No. 2

(Cr$'000)

Years 0 1 2 3 4 5 6 7 8 9-19 20

A. Cash Inflow

Net Sales 2.2 2.7 3.5 4.1 6.2 6.3 6.3 6.3 6.3 6.3 6.3Investment Loan- - 2.3 - - - - - - - -Short term loa2/ - 3.8 4.3 4.7 5.3 5.3 5.3 5.3 5.3 5.3 5.3

Total 2.2 8.8 7.8 8.8 11.5 11.6 11.6 11.6 11.6 11.6 11.6

B. Cash OutflowInvestment costs - 2.3 - - - - - - - - -Operating costs 0.7 1.2 1.5 1.7 1.9 1.9 1.9 1.9 1.9 1.9 1.9Interest short term loan - 0.8 1.0 1.1 1.2 1.2 1.2 1.2 1.2 1.2 1.2Interest investment loan - 0.6 0.6 0.6 0.6 0.5 0.4 0.3 0.2 - -Repayment short term loan - 3.8 4.3 4.7 5.3 5.3 5.3 5.3 5.3 5.3 5.3Repayment investment loan - - - - 0.5 0.4 0.4 0.5 0.5 - -

3/Total-3 0.7 8.7 7.4 8.1 9.5 9.3 9.2 9.2 9.1 8.4 8.4

C. Cash Balance-/ 1.5 0.1 0.4 0.7 2.0 2.3 2.4 2.4 2.5 3.2 3.2

D. Incremental Cash Balance - (1.4) (1.1) (0.8) 0.5 0.8 0.9 0.9 1.0 1.7 1.7

1/ Finance a 100% of total investment for crop and livestock production. See para 4 on page 2 of Annex 14.

2/ Finance about 70% of total production costs including family labor. Short term credit after the first year will not be financedunder the project.

3/ The debt service figures are in constant prices. These overstate cash outflow and understate cash balance since debt servicefigures are not corrected to offset inflation. The difficult cash flow situation projected for early years of the projectwould not likely occur in practice.

82- ANNEX 15

Table 3Page 1 of 2

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Farm Model 4: Cropping PatternFinancial Analysis, Debt Service

and Cash Flow Projections

Model NQ 4 (see Annex 14, Table 1)

Subareas I and II

Farmer having 10 - 50 ha (number of participants 2,500)

A. Farm Development (in ha)

Before Y E A R SCrops Project 1 2 3 4 5

Beans 1/ (0.7) (0.7) (0.7) (1.0) (1.0) (1.0)

Maize 1.0 1.0 1.2 1.2 1.3 1.3

Rice 0.3 0.3 0.3 0.4 0.4 0.4

Manioc 0.4 0.4 0.4 0.4 0.4 0.4

Natural Pasture 15.0 14.5 14.5 14.5 14.5 14.5

Improved Pasture - 0.5 0.5 0.5 0.5 0.5

Non-Utilized 8.3 7.3 7.1 6.7 6.6 6.6

Fallow - 1.0 1.0 -1.0 1.0 1.0

Farm area 25.0 25.0 25.0 25.0 25.0 25.0

1/ Intercropped with maize.

AM= 15

-83- Table3Page 2 of 2

3AZIL

sTATK OF MIS GERAIS

SKCOND RURM1 DEVEL0PHENM PROJ!CT

Financial Analysis - Model No. 4(Crc '000)

Years 0 1 2 3 4 5-19 20

A. Gross Income

Milk and cattle sales 6.0 6.0 6.5 9.0 50.0 41.0 105.6Crop sales 13.1 14.7 19.9 25.9 33.5 33.5 33.5On-farm consumptioniL 12.5 12.5 12.5 12.5 12.5 12.5 12.5

T o t a 1 31.6 33.2 38.9 47.4 96.0 87.0 151.6

B. Production Costs

Investment3/ - 46.3 - - - - -

OperationFamily Labor 17.0 19.1 22.9 27.1 30.4 31.9 31.9Other4/ 3.5 6.7 8.3 10.4 31.7 12.3 12.3Taxes5/ 0.5 0.5 0.7 0.9 2.1 1.9 3.5

T o t a 1 27.0 72.6 31.9 38.4 64.2 36.1 37.7

C. Net Benefit 4.6 (39.4) (7.0) 9.0 31.8 50.9 113.9

D. Incremental Net Benefit - (44.0) (11.6) 4.4 27.2 46.3 109.3

Financial Rate of Return: 40%

1/ Includes residual value of Investment and the value of Incremental herd.2/ 180 kg of beans, 180 kg of maize, 250 kg of rice. 1500 kg of manioc, 600 It. of milk.3/ Cr$5020 for crop production, Cr$41,250 for livestock production.4/ Direct crop and livestock production costs.51 2.5% of total sales.

Debt Service and Cash Flow - Model No. 4(Cr8 '000)

Years 0 1 2 3 4 5 6 7 R 4-1g 7n

A. Cash Inflow

Net sales 19.1 20.7 26.4 34.9 83.5 74.5 74.5 74.5 74.5 74.5 139.1Investment loanVl - 46.3 - - - - - - - - -Short term loan=! - 10.9 11.8 14.8 15.2 15.2 15.2 15.2 15.2 15.2 15.2

T o t a 1 19.1 77.9 38.2 49.7 98.7 89.7 89.7 89.7 89.7 89.7 154.3

B. Cash Outflow

Investment costs - 46.3 - - - - - - - - -

Operating costs 3.5 6.7 8.3 10.4 31.7 12.3 12.3 12.3 12.3 12.3 12.3

T o t a 1 3.5 53.0 8.3 10.4 31.7 12.3 12.3 12.3 12.3 12.3 12.3

C. Cash Flow BeforeDebt Service (A-B) 15.6 24.9 29.9 39.3 67.0 77.4 77.4 77.4 77.4 77.4 142.0

D. Debt Service

Interest abort termloan - 2.5 2.7 3.4 3.5 3.5 3.5 3.5 3.5 3.5 3.5Interest investmentloan - 13.0 13.0 13.0 13.0 10.4 7.8 5.2 2.6 - -Repayment short term loan - 10.9 11.8 14.8 15.2 15.2 15.2 15.2 15.2 15.2 15.2Repayment investment loan - - - - 9.3 9.3 9.3 9.3 9.3 - -

T o t a 1 Debt Service3/ - 26.4 27.5 31.2 41.0 38.4 35.8 33.2 30.6 18.7 18.7

E. Cash Balance (C-D)3- 15.6 (1.5) 2.4 8.1 26.0 39.0 41.6 44.2 46.8 58.7 123.3

P. Incremental Cash - (17.1) (13.2) (7.5) 10.4 23.4 26.0 28.6 31.2 43.1 107.7

1/ Finance 100% of total investment for crop and livestock production.2/ Finance about 70% of total production costs including family labor. Short term credit after the first year will not be financed

under the project.3/ The debt service figures are in constant prices. These overstate cash outflow and understate cash balance since debt service

figures are not corrected to offset inflation. The difficult cash flow situation projected for early years of the projectwould not likely to occur in ptiactice.

84 - ANNEX 15-84 - Table 4

Page 1 of 2

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Farm Model 14: Cropping Pattern,Financial Analysis, Debt Service

and Cash Flow Projectlons

Model N9 14 (see Annex 14, Table 1)

Subareas I, III and IV

Farmer having 50-100 ha (number of participants 700)

A. Farm Development (in ha)

Before Y E A R SCrops Pro,ect 1 2 3 4 5

Garlic .02 .02 .03 .03 .03 .03

Maize 5.0 5.0 5.5 5.5 6.0 6.0

Rice 1.1 1.1 1.1 1.3 1.3 1.3

Beans 1/ (4.0) (4.0) (4.0) (4.0) (4.0) (4.0)

Manioc 1.4 1.4 1.4 1.6 1.6 1.6

Forestry - 2.5 5.0 5.0 5.0 5.0

Pasturei 67.48 63.48 60.47 60.07 59.57 59.57Non-utilized

Fallow - 1.5 1.5 1.5 1.5 1.5

Farm area 75.0 75.0 75.0 75.0 75.0 75.0

1/ Intercropped with maize.

BRALZIL

STATE OF MNIBA GERAIS

SECONDO RURAL DBVBLOP1MNT FPOJECT

Finan.... Aayt -_jt4ods N. 14

(Cr5 '00)

Year. 0 1 2 3 4 5 6 7-19 20-"

A. Gros 1oos

Ch.rooal Sats. - - - - 217.0 435.8 451.8Crop Sal.. 2 100.6 106.5 128 3 154,7 173 5 177.9 177.9 177 9 177,9

Oe-fat,s ROn5U9I6OR - 9.5 9.5 9.5 9.5 9.5 9.3 11.3 11,3 15.5

Total 110.1 116.0 137.8 164.2 183.0 406.2 625.0 645.2

B. Predoetie CoSts

Iru-et-at 3 6.0 28,3 - - 10 0 - - -

OperationFseoly 4a.br 49.1 65.20 65.'0 60.2 61.0 59,5 62.5 65 1 65.1

Other -9,5 35.2 45.9 32.4 36.3 36.3 36.3 41.7 41.7

Ta....S 2.0 2.7 3.2 3.9 4 3 4.4 9.9 15.3 15.7

Total 61.5 138.9 142.4 101.5 105.6 110.2 108.7 122.1 122,5

C. Bet Benefit 48.6 (22.9) 4.6 62-7 77 4 77.2 297.5 502,9 522.7

D. InrOt net&l Net Ben..fit - (71 55 (44 0) i4.1 20.0 28 6 248 9 454 3 474.1

FimancIl1 Rets ofRetore 0507.

1' I.tludes resid.al -Ilue of 1nvetmeRt32/ IR0 kg eats., 250 kg rite, 180 kg beans, 1500 kg eanior. 15 . of wood eq.i-IeetI/ Cr57,705 f.t trop pr'd.ttioo in year 1, Cr$66,320 for forestry and oh.--I prod..tio..4/ Direct cest for crop and charcoal p,eduction.5/ 2 57. of total sales

Debt Servits and Cosh Flow Proiacttmo Moda1 No 14

(C rs $000)

Years 0 1 2 - 3 4 5 6 7 8 9-19 20

A. Cash inflow

Net sa:.I. / 100.4 106.5 129 3 154,7 173 3 177.9 394 9 613 6 613.6 613 6 1669-9

1-vst,ant loan 1- 41 7 32 6 - - 10 0 - - - - -

Shor t.-neon an - 51.4 54 1 61,4 64 0 71.0 64 0 64.0 64 0 64.0 64.0

Tot.l 100,6 1.99 6 215,0 216.1 237.0 250.9 410 9 677.6 677.6 677.6 1733.9

Tnvsat-ant costs - 36 0 28 5 - - 10.0 - - - - -Operating .. ta _1 _2.0 37.9 41 365 0, 4.7 46 2 57 0 17,0 57 0 96.5

Total 12.0 73 9 77,4 36.3 40 6 50.7 46 2 57,0 57 0 57.0 96.5

C. Cash Flw B.fo-eDebt Sarvi.e iA-B) 88.6 125 7 137,6 179 0 196 4 200.2 412.7 620.6 620.4 620 6 1637.4

yea 1o 11 12 13 14 15-19 20

D. DeLbt ServIce

Interest short tars Loan 11 a 12 4 14.1 14.7 16.3 '14. 7 14 7 1.4 7 14.7 14.7 14 7 14 7 14 7 14.7 14.7 14.7

lnt rest invetast loan It1 7 18 0 IRS0 10.0 25 6 23.6 19.7 17 2 14.2 10 2 4 9 2 0 1 5 0,0

R.poysent h-t t.m lo.n . 51.4 54 1 61.4 64,0 71l0 64 0 64 0 64.0 64 0 64.0 64 0 6440 64 0 64 0 64 0 64.0

R.pay.sent foosteent lose - - - - - 4.1 8,4 11,0 14 0 l9~1 10. 2 19 2 4 5.0 - - ..

Total Debt Service 3/ - 74.9 84.5 93.5 96.7 11.0,9 106,4 107.0 106.9 106,9 lOB 0 93 0 82.6 82.6 02 5 70,7 78.7 e

E, Caab Balan.. (C-DS 686 50.0 51.1 86 3 99.7 97,3 306.3 513 6 513.7 513.7 512 6 526 0 538.0 538 0 538. 1 541, l558 7o

F. Intt.asntal Cash - ~~~(37.0) (35.5) (.) 11.1 8,7 217 7 425.0 425.1 425 1. 424 0 430.2 449.4 449,4 649 453.3 1470 1

I..Inclde. 100% Onvestoot for -rpa p-od-ttio (including forest) end 107. of faily labor for forest plantation

2 FPi-... Abot 707. of total crop Prndovtion (aneept f-rstry) i-cloding family labor Short trn -cadit after the first yea il eoC be ft ventd under the proJect

3/ Debt -srtrs figure. a-a i ... nstant pri-a Th.e. -vrstate cas ootflou and -ndsratate cash b.l.ove et1r debt servI- figures are not co-eted to Off.ot Ryfjetion

- 86 - ANNEX 15

Table 5Page 1 of 2

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Farm Model 15: Cropping Pattern,Financial Analysis, Debt Service

and Cash Flow Projections

Model N9 15 (see Annex 14, Table 1)

Subareas I, II, III and IV

Farmer having 0 - 10 ha (number of participants 1,000)

A. Farm Development (in ha)

Before Y E A R SCrops Project 1 2 3 4 5

Rice 0.15 0.5 1.0 2.0 2.0 2.0

Beans 1/ (0.3) (0.3) (1.0) (1.0) (1.0) (1.0)

Maize 0.3 0.3 0.35 0.4 0.4 0.4

Manioc 0.2 0.2 0.2 0.2 0.2 0.2

Fallow - 0.2 0.2 0.2 0.2 0.2

Non-utilized 5.35 4.8 4.05 3.2 3.2 3.8

Farm area 6.0 6.0 6.0 6.0 6.0 6.0

1/ Intercroped with maize.

- 87 - ANNU 15

Page 2 of 2

BRAZIL

STATE OF MINAS GERIS

SECOND RURAL DEVELOPMENT PROJECT

Financial Analysis - Modal No. 15

(Cr$'000)

Years 0 1 2 3 4 5-9 10

A. Gross Income

Crop Sales 2.2 6.4 28.9 59.1 84.1 84.1 87.1 1/

On-farm consumption -/ 6.9 7.7 9.5 9.5 9.5 9.5 9.5

T o t a 1 9.1 14.1 38.4 68.7 93.6 93.6 96.6

B. Production Costs

Investment - - 10.3 19.0 - - _ _

OperationFamily labor 4.4 12.3 20.8 21.1 21.1 21.1 21.1

Other 4/ 0.6 1.0 3.2 5.3 5.3 5.3 5.3

Taxes 5/ 0.1 0.1 0.7 1.5 2.1 2.1 2.1

T o t a 1 5.1 23.7 43.7 27.9 28.5 28.5 28.5

C. Net Benefit 4.0 (9.6) (5.3) 40.8 65.1 65.1 68.1

D. Incremental Net Benefit - (13.0) (9.3) 36.8 61.1 61.1 64.1

Financial Rate ofReturn: > 50%

1/ Includes residual valuie of investment.

2/ 180 kg of maize, 135-250 kg of rice, 120-180 kg of beans, 1500 kg of manioc and 300-600 It of milk.Figures show how family consumption increases when production increases.

3/ Cr$2.340 for crops production. Cr$27.000 for land reclamation.

4/ Direct crops production costs.

5/ 2.5% of total sales.

Debt Service and Cash Flow Projection - Model N9 15(Cr$S 00°°)

Years 0 1 2 3 4 5 6 7 8 9 10

A. Cash Inflow

Net sales 11 2.2 6.4 28.9 59.1 84.1 84.1 84.1 84.1 84.1 84.1 84.1

Investment loan - - 10.3 19.0 - - - - - - - -

Short term loan - 9.3 16.8 18.4 18.4 18.4 18.4 18.4 18.4 18.4 18.4

T o t a 1 2.2 26.0 64.7 77.5 102.5 102.5 102.5 102.5 102.5 102.5 102.5

B. Cash Outflow

Investment costs - 10.3 19.0 - - - - - - -

Operating costs 0.7 1.1 3.9 6.8 7.4 7.4 7.4 7.4 7.4 7.4 7.4

T o t a 1 0.7 11.4 22.9 6.8 7.4 7.4 7.4 7.4 7.4 7.4 7.4

C. Cash Flow BeforeDebt Service (A-B) 1.5 14.6 41.8 70.7 95.1 95.1 95.1 95.1 95.1 95.1 95.1

D. Debt Service

Interest short term loan - 2.1 3.8 4.2 4.2 4.2 4.2 4.2 4.2 4.2

Interest investment loan - 2.9 8.2 8.2 8.2 7.6 6.0 4.3 2.7 1.1 -

Repayment short term loan - 9.3 16.8 18.4 18.4 18.4 18.4 18.4 18.4 18.4 -

Repayment investment loan - - - - 2.0 5.9 5.9 5.9 5.8 3.8 -

Total Debt Service - 14.3 28.8 30.8 32.8 36.1 34.5 32.8 31.1 27.5 -

E. Cash Balance after Debt Service (C-D)- 1.5 0.3 13.0 39.9 62.3 59.0 60.6 62.3 63.6 67.6 95.1

F. Incremental Cash Balance - (1.2) 11.5 38.4 60.8 57.5 59.1 60.8 62.1 66.1 93.6

1/ Finance a 100% of total investment for crops and livestock production.

2/ Finance about 707 of total production costs including family labor. Short tarm credit after the first year will not be financed under the

project.

3/ Debt service figures are in constant prices. These overstate cash outflow and understate cash balance after debt service since debt

service figures are not corrected to offset inflation. The difficult cash flow situation at the end of the first year of the project

would not likely occur in practice.

ANNEX 15- 88 - Table 6

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Estimated Farm Income of Project Participants

Subareas I and IT Estimated Farm Income Expected ParticipationBefore At Full of this type

Nordeste, Rio Doce Project Prol, Develop, Number- 7% of Total(US$ equivalent)

0-10 Ha

Model 1 463.0 718.2 1/ 800 2.7Model 2 191.3 439.4 2/ 2735 9.1Model 3 635.5 949.7 2/ 2570 8 6

10-50 Ha

Model 4 1065.4 2067 1 1/ 2500 8.3Model 5 746.5 1157,6 2/ 687 2 3Model 6 926.1 1271.0 2/ 2000 6 7

30-100 Ha

Model 7 2489,9 5053 2 1/ 1490 5,0

Subareas III and IV

Zouada Mata, Sul de Minas

0-10 Ha

Model 8 680.4 923,7 1/ 1500 5.0Model 9 538 6 652.0 2/ 4374 14 6

10-50 Ha

Model 10 2045.8 4016.1 1/ 4200 14 0Model 11 746.5 1157.6 2/ 894 3.0

Reforestation

Model 12 177 2 453,6 3/ 1400 4 7Model 13 1129.2 3583.7 3/ 2040 6.8Model 14 3486.9 13600.0 700 2.3

Land Reclamation

Model 15 302,4 2319.9 2/ 1000 3.3Model 16 812.7 3628.6 2/ 910 3.0

Swine Production

Model 17 n,a. 3867.2 2004/ 0.6Weighted Average/total 1004.6 2208.4 30000 100.0

1/ Reached in ten years.2/ Reached in five years3/ Reached in seven years4/ 50 producers in the strata 0-10 ha, 100 from 10-50 ha and 50 from 50-100 ha.

-89- ANNEX 15

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Financial Rates of Return for Project Farm Models(in percent)

Farmers having0-10 ha 10-50 ha 50-100 ha

Subareas I and II

NordesteRio Doce Model 1 : 31 Model 4 : 40 Model 7 : 37

Model 2 :>50 Model 5 :>50Models 1 to 5 Model 3 :>50 Model 6 :>50

Subareas III and IV

Zona da Mata Model 8 : 22 Model 10: 45 not includedSul de Minas Model 9 :750 Model 11:>50

Models 8 to lllJ

Reforestation

NordesteZona da Mata Model 12: 27 Model 13: 33 Model 14:>50Sul de Minas

Models 12 to 14

Land Reclamation

NordesteRio Doce Model 15:)50 Model 16:*50Zona da MataSul de Minas

Models 15 and 16

Swine Production

Model 17 if Model 17:>50

1/ Representing Swine production in different farm strata.

-~ 90 -ANNEX 16

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Economic Analysis of Non-Registered Small Non-Farm Enterprises

General

1. The non-registered small enterprises are the smallest producing non-farm units in the project area, with an average size of 2.2 employees, fixedinvestments of Cr$13,000 and annual sales of about Cr$60,000. They are diversein products and problems. They produce food products such as flour and sweets(25%), wood and bamboo products such as artwork, lumber and furniture (15%),fiber products such as blankets, clothing and wall hangings (16%), leather productEsuch as saddles and footwear (11%), clay, cement and non-metallic mineral productsfor building, storage and art (18%) metal products such as farm tools, includingrepair work (5%), and a variety of other products and services (10%). Their mainproblem is scarcity of credit. They also have problems in product quality,quality and availability of equipment and inputs, level of employee skills, work-place and storage facilities, and marketing. These enterprises exist in everylocale, and are probably under-counted in every survey. It is estimated thatabout 2,400 exist in the project area, 1,500 of these in the municipios directlyserved by the component. With the important exception of producers of art andhandicrafts, they serve a clientele primarily local (75%) and of low income.Being non-registered, they keep no records, pay no taxes and recruit unorganizedlabor from the local population. Finally, they recognize that in most cases theycan expand their production and income by making capital and human investments,and in many cases by organizing cooperative input supply and marketing arrangement!

Economic Analysis

2. Surveys of project area non-registered small enterprises allowed theestimation of models of typical enterprises and frequency of enterprises by type,Each model was assumed to represent a percentage of the 950 enterprises to receivecredit. It is estimated that enterprises would increase their net incomes by 60%to over 100%. Market prices were used for enterprise inputs and outputs sincealmost none of these goods are imported or exported by Brazil. Wages were set at50% of the market level to compensate for low productivity and underemployment.The incremental net benefits of the 950 enterprises to receive credit werematched against total incremental project costs (personnel, materials, services,training, consultancies and physical investments, adjusted upward to correctfor exchange rate distortion) over a period of 20 years. Financial rates of re-turn on the models range from 31% to over 100%, and the economic rate of return onthe entire component is 31%. This high rate results in part from not attributingany portion of project costs outside of the small enterpise component (roads,electrification, etc.) to small enterprise incremental net benefits.

- 91- AbEX 16

MRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOP2ENT PROJECT

Condensed Financial Position for Seleoted 8 m4J. Uon-m ZAter�riess in the ProJect Areo

Pottery Construction Manioc LeatherCaroenter Sawmill deaver Works Materials Mechaic Mills Confectioner Distiller Products

Employees (including owner) 1 2 1 5 3 1 4 1 4 5

Balance Sheets

Fixed investment 20.0 150.0 100.0 325.0 150.0 18.5 8.0 7.0 115.0 284.0

vJorking capital 4.0 103.9 31.1 660.0 127.5 100.3 17.0 39.6 468.0 606.0

Income Statements

Sales 36.0 162.0 48.0 1,038.0 180.0 216.0 108.0 96.0 720.0 960.0

Fixed Costs

Maintenance ofinvestments 1.0 7.5 5.0 16.2 7.5 0.9 0.4 0.4 5.8 14.2

Rent - - - - - - _ - - -

Total 1.0 7.5 5.0 16.2 7.5 0.9 0.4 0.4 5.8 14.2

Variable Costs

Salaries - 10.9 - 180.0 60.0 - - 168.0 108.0

Materials 3.6 90.0 28.8 - 67.5 90.7 14.0 36.0 180.0 480.0

Utilities, fuel - 3.0 2.4 480.0 - 9.6 3.0 3.6 120.0 12.0

lEntrepreneur's wage 13.1 13.1 13.1 45.0 30.0 31.2 36.0 13.1 56.o 27.0

Others not classified 0.4 - - - - - - - 60.0 6.0

Total 17.1 117.0 44.3 705.0 157.5 131.5 53.0 52.7 524.0 633.0

Total Costs 18.1 124.5 44.3 721.2 165.0 132.4 53.4 53.1 589.8 647.2

Net TonA- 17.9 37.5 (1.3) 316.8 15.0 83.6 54.6 42.9 130.2 312.8

% of sales 49.7 23.2 (2.7) 30.5 8.3 38.7 51.0 44.7 18.1 32.6

/ Includes all variable costs except entrepreneur's wage.2i/ Where mt specified in survey data, taken as equal to other employees' wages; if no other employees, wage set at shadow wage Cr$

5 0/day.

Part-time.Includes materials.

Source: Surveys by SETAS personnel, Mlovember 1979 and January 1980.

- 92 -

ANNEX 16BRAZIL Table 2

STATE OF MINAS GERAIS

SECONO RURAL DVVELOPM=NT PROJECT

Non-registered Small Enterprises

Financial Analysis - Model No. 4 - Sawmiller(Cr$'000)

Years O 1 2 3 4 5 6 7- 9 10 -/

A. Gross IncomeSales of Products 162.0 190.6 259.2 259.2 259.2 259.2 259.2 259.2 264.2Consumption of own products - 20.0 - - - - - - -

Total 162.0 210.6 259.2 259.2 259.2 259.2 259.2 259.2 264.2

B. Production.CostsBInvesductiment-- s - 50.0 - - - - - - -

OperationFamilW labor 29.2 30.0 26.1 26.1 26.1 26.1 26.1 26.1 26.1Other-- 93.0 147.5 175.9 175.9 175.9 175.9 175.9 175.9 175.9

Total 122.2 177.5 202.0 202.0 202.0 2n2,0 202.0 202.0 202.0

C. Net Benefit 39.8 (16.9) 57.2 57.2 57.2 57.2 57.2 57.2 62.2

D. Incremental Net Benefit - (56.7) 17.4 17.4 17.4 17.4 17.4 17.4 22.4

Financial Rate of Return: 31%

1/ Includes residual value of investment2/ Building and equipment3/ Wood, nails, glue, etc., electricity, water, hired labor

Debt Service and Cash Flow - Model No. 4

A. Cash InflowNet Sales 162 0 190.6 259.2 259.2 259.2 259.2 259.2 259.2 254.2Investment loan - 50.0 - - - - - - -

Short term loan - 54.5 28.4 - - - - -

Total 162.0 ji5.1 287.6 259.2 259.2 259.2 259.2 259.2 264.2

B. Cash OutflowInvestment Costs - 50.0 - - - - - - -

Operating costs 93.0 147.5 175.9 175.9 175.9 175.9 175.9 175.9 175.9Total 93.0 197.5 175.9 175.9 175.9 175.9 175.9 175.9 175.9

C. Cash Flow before DebtService (A-B) 69.0 137.6 111.7 83.3 83.3 83.3 83.3 83.3 83.3

D. Debt ServiceInterest: short term loan(12%) 6.5 5.3 1,0 - - - - -

Interest investment loan( C) - 6.0 6.6 3.4 - - - - -

Repayment: short term loan 26.5 44.6 16.1 - - - - -

Repayment: investment loan - - 29.2 28.4 - - - - -

Total Debt Service - 39.0 85.7 48.9 - - - _ _

E. Cash Balance after DebtService 69.0 98.6 26.0 34.4 83.3 83.3 83.3 83.3 88.3

F. Incremental Cash Balance - 29.6 (43.0) (34.6) 14.3 14.3 14.3 14.3 19.3

93 - ANNEX 16Table 3

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Estimated Family Income and Internal Rate of Return of Non-farm Producers

Estimated Income 2/ Expected Participation(US$ equivalent) Rate 3/

1/ Before At FullEnterprise Type - Project Proj. Devel. Number %

Model 1: Weaver 1769 2856 209 22

Model 2: Wood artisan 1803 2710 247 26

Model 3: Confectioner 1550 9090 256 27

Model 4: Sawmill 4517 6740 238 25

Average Income,-/ TotalParticipation 2406 5472 950 100

Expected Financial Rate of Return of Smiall Non-farm Enterprises

Enterprise Type Rate of Return (In percent)

Mrodel 1: Weaver >50

Model 2: Wood artisan > 50

Model 3: Confectioner > 50

Model 4: Sawmill > 50

1/ These are typical types intended to represent producers of other goods as well.2/ Includes products sales, consumption of own products and market value of

family labor.3/ Numbersinclude only enterprises receiving credit. Percentages represent

estimated proportions of each type, including producers of other goods havingsimilar financial characteristics.

4/ Weighted by proportion of each type in total.

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJSCT

Increontal Cost and Benefit Streams for Economic Analysis of Total Project(in efficiency prices and Cr illion)

r e a r a

1 2 3 4 5 6 7 8 i 10 U 12-19 201/

INCGREUTAL COSTS

Credit Administration 5.6 17.7 35.5 79.1 73.6 73.6 73.6 73.6 73.6 73.6 73.6 73.6 295.4

Land titling 8

.4 7.5 6.9 7.2 7.3 - - - - - - - -

Agricultural extension 103.6 101.7 101.3 94.1 94.0 87.7 72.1 50.1 25.1

Agricultural research 41.3 37.4 35.6 34.4 32.9 - - - - _ _ _

Land reclamation 30.6 36.6 19.9 22.4 27.7

Reforestation 20.3 16.2 19.5 23.5 24.8 - - - -

Marketing 5.8 61.3 60. 57.3 57.3 2.8 2.8 2.8 2.8

Cooperative society assistance 30.7 39.9 47.9 49.7 50.5 - - - -

Small non-farm enterprises 13.3 22.0 22.1 24.2 26.4 24.1 19.7 13.9 6.9 - - - -

Feeder roads 99.1 462.0 650.8 53 .6 19.0k' 27.3 35.6 42.8 47.4 49.5 49.5 49.5 142.7

Rural electrification 115.6 228.9 228.9 228.9 233.1 - - - - - - - -

Rural telephone conunication 34.1 30.3 - - - - - -

Ad inistration and aDnitoring 29.7 35.3 33.4 32.2 32.1 - - - - - - -

Evaluation 28.8 12.7 12.7 12.7 12.7 - - - - - - - -Exchange Rate Adjustment 70.3 136.8 154.9 139.3 73.7 17.8 16.4 13.8 10.5 6.2 6.2 6.2 25.1

Total 637.2 1246.3 1430.3 1335.6 765.1 233.3 220.2 197.0 169.3 129.3 129.3 129.3 463.2

INCREMENTAL EENzITS1s/

Agricultural production (48.1) (117.6) (127.3) (27.8) 174.8 626.1 1021.1 1263.5 1452.4 1619.5 1732.0 1733.7 6869.8Small non-farm enterprises (1.4) 1.0 8.1 18.0 30.9 48.4 49.6 50.2 50.2 50.2 50.2 50.2 149.8

Total (49.5) (116.6) (119.2) (9.8) 205.7 674.5 107n.7 1313.7 1502.6 1669.7 1782.2 1783.9 7019.6

NET INCREMENTAL BENEFITS (686.7) (1362.9) (1549.5) (1354.4) (559.4) 441.2 850.5 1116.7 1333.3 1540.4 1652.9 1654.6 6556.4

INTERNAL RATE OF RETURN 167.

1/ Includes values for years 20-24 discounted to year 20 at I./yr., so that net costs and benefits associated with those who enter the project in years 2-5may be counted for the full 20 years.

2I Includes physical contingencies, 80% of administration and maintenance costs, and 607 of evaluation coats, credit administration costs and program costs defined in p.42/ Costs decline as target group farmers no longer need extension services under the project. (See also Annex 7).4/ Includes subsidies of (Cr; million) 2.8 in year 1, 5.5 year 2, 9.2 year 3, 13.8 year 4, and 18.8 year 5.S Only permanent information service with reduced staff year 6-19; costs ascribable to project benefits end after 5th year of service to farmers entering project in

year 5.6/ Maintenance on 3,900km of feeder roads, years 4-20 (incl. construction in year 4); cost/km rises from US$50 to US$300 by year 7.7/ Includes tax revenues of 2.52 of farm sales and shadow wage of 50% market wage.

- 95 - ANNEX 18

BRAZIL

STATE OF MINAS GERAIS

SECOND RURAL DEVELOPMENT PROJECT

Related Documents Available in ProJect File

A. Supplementary Staff Working Papers

1. Project Area Summary Data2. Basic Costing Data3. Agricultural Development4. Agricultural Extension5. Agricultural Research6. Supply of improved seeds and planting material7. Land titling services8. Credit for agriculture9. Reforestation10. Land reclamation11. Marketing services12. Assistance to farmer associations13. Small non-agricultural enterprises14. Feederroads15. Electrification16. Telephone Communication17. Education18. Health and sanitation19. Community centers20. Community development21. Production estimates, marketing and prices22. Farm income and employment and detailed enterprise models23. Non-farm income and employment and detailed enterprise models24. Economic analysis25. Fiscal analysis26. Project organization and management27. Monitoring and evaluation28. Supervision Report First Rural Development Project,

dated December

B. Principal Documents

1. Governo do Estado de Minas GeraisProjeto do Programa de Assistencia de Produtores de Baixa RendaDecember 1979 ( 13 volumes)

2. Governo do Estado de Minas GeraisProposed Development Plan 1980-1985

(2 volumes)3. Governo do Estado de Minas Gerais

1979-1980 State Budget

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