PROJECT INFORMATION DOCUMENT (PID)

CONCEPT STAGE

Report No.: AB3926

Project Name / São Paulo Sustainable Rural Development Project
Region / LATIN AMERICA AND CARIBBEAN
Sector / General agriculture, fishing and forestry sector (70%); Agricultural extension and research (20%); Agricultural marketing and trade (5%); Agro-industry (5%)
Project ID / P108443
Borrower(s) / State of São Paulo
Implementing Agency
Environment Category / [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / September 25, 2008
Estimated Date of Appraisal Authorization / November 2008
Estimated Date of Board Approval / June 2009

1.  Key Development Issues

State and Agricultural Sector Overview.[1] The State of São Paulo (SoSP) is the economic powerhouse of Brazil. It has the largest state population (41 million) and is responsible for approximately one-third of national gross domestic product. With GDP totaling US$550 billion, São Paulo is the biggest economy in South America. The service and industrial sectors are the largest components of state GDP.[2] However economic opportunities have not been accessed by all, and in spite of its overall economic success, the SoSP still has about 5 million people living in poverty, among the highest number in the country. The SoSP has a Human Development Index ranging from 0.645 (the average level in North-Eastern states) to 0.919 (the average level in Germany).

Although small in comparison to other sectors, agriculture is vital to the State’s economy. Since the rapid urbanization of the state beginning in the 1950s, farmers have been supplying agricultural products for local consumers, food industries, other Brazilian states, as well as for export. Today the SoSP contributes nearly one-fourth of national agricultural output,[3] as it is a main producer of oranges (80%), peanuts (72%), and sugarcane (60%) as well as poultry meat (38%), potatoes (27%), tomatoes (22%), corn (12%), and beef (7%). Agriculture accounts for more than half of all economic activity in 60% of the 645 municipalities in the state. It is also significant in terms of total state employment (11%) and even more so in rural areas (over 80%).

The history of SoSP’s rural sector was marked by steady deforestation followed by a succession of agricultural booms based on industrial monocultures: first coffee, then cereals, cattle ranching, and more recently sugar cane and eucalyptus. Since the 1950s, the State also experienced rapid urbanization and rural exodus,[4] often leading to high urban unemployment, extreme poverty, and violence.

At present, the SoSP’s rural sector presents a two-faced profile, with large commercial farming operations on one hand, and small family-based farming on the other.[5] Out of a total of 325,000 agricultural units in the state, 272,000 are small family-based operations. Large commercial farming specializes primarily in commodities for exports, while small farmers typically make their income from milk, poultry, pork farming, a variety of fruits and vegetables, and/or coffee. The cultivation of rice, beans, and corn is also common among small farmers, mostly for subsistence. Progress in agricultural competitiveness has been highly concentrated; only a fraction of small farmers have been able to become more competitive, and a majority of them have not been able to integrate into supply chains and compete within state and national markets. Many small farmers additionally derive income through wage labor, which is not always a consistent source of income.[6] Nearly 40% of the 272,000 small farming families in the state live with less than two minimum wages per month;[7] and 68% of state municipalities, primarily located in the Western part of the SoSP where family agriculture is predominant, contribute only 5% of the state GDP. More recently, advances in sugarcane and eucalyptus plantations[8] repeat such disparities, as profits are achieved mostly by large-scale farmers.

Despite its impressive overall performance, São Paulo’s rural sector faces two main challenges related to family agriculture. Foremost is the low competitiveness of smallholder family agriculture. While small family farms are the primary means of agricultural production in the state, smallholder production participates less in marketed output. Factors inhibiting the competitiveness among family agriculture are complex and include: infrastructure shortages (i.e. transportation and communication); high transportation costs; limited access to credit; low levels of education;[9] weak producers organization and management capacity; lack of critical masses of standardized or well differentiated products to reach markets; lack of knowledge regarding market demands; inadequate public and private technical assistance services;[10] low municipal priority given to rural areas;[11] lack of leverage and negotiating power with larger agri-businesses along supply/value chains; and ineffective knowledge management and networking among stakeholders and institutions in the rural milieu.

The second challenge is the advanced level of environmental degradation in rural areas, which severely affects small farmers. The SoSP is largely covered with lateritic soils susceptible to erosion.[12] The successive agricultural booms and the intensification of agriculture in the State have historically occurred with insufficient care for soils and water. Poor land management practices have exacerbated erosion, leading to the sedimentation of reservoirs, headwater areas and springs, as well as fertility losses in many areas. Low income family farmers are disproportionately affected because of their lack of mobility and their inability to afford the additional costs of fertilizers. The increasingly poor environmental quality of their soil aggravates the socio-economic barriers faced by small farmers.

Government Strategy. Brazil’s state and federal governments have established a policy agenda that specifically supports increased competitiveness of small-scale farmers. The Government of São Paulo (GoSP) recognizes that family agriculture is critical to the state in terms of employment and fiscal revenue. The GoSP is undertaking special efforts to ensure that rural areas are more attractive for production and to help stabilize a consistent income for rural populations.[13] Increasing the competitiveness of small farmers is a critical component of this strategy, especially because this leads to higher and consistent income streams. Through this approach, the SoSP seeks to make agriculture competitiveness gains more equitable, especially for the poorest.

In line with this strategy, the State Secretariats of Agriculture (SAA) and Environment and Water Resources (SMA) have supported a number of initiatives to promote sustainable rural development, two of which have been carried out with Bank support. The São Paulo Land Management Project (2000-2007, IBRD US$55.0 million) helped local farmers adopt more sustainable land management practices, provide basic social services (water, roads, etc.), and strengthen rural extension services. An estimated 70,000 small-scale farming families benefited from activities under the project, which targeted areas that are both highly susceptible to erosion and characterized by high levels of poverty.[14] The SoSP is also currently implementing the Ecosystem Restoration of Riparian Forests Project (2005-2010, GEF US$7.75 million) which helps pilot activities that reverse land degradation processes and restore riparian forests. Combined, these operations have helped to: (i) improve living conditions in many rural areas in the SoSP; (ii) develop agricultural practices that prevent land degradation; and (iii) increase small farmers’ productivity. However, these efforts have insufficiently linked small farmers to markets, and they have not always led to increased incomes for small farmers.

In this context, the GoSP recognizes the need to take the next step forward with regards to its rural development strategy by focusing its interventions on the promotion of small farmers’ competitiveness. Under this new angle, the GoSP considers small farmers as important economic agents of the private sector which seek to strengthen their position in specific product chains and markets. The GoSP intends to do achieve this new focus through: (i) helping small farmers invest in market-driven business initiatives and strengthening producers’ associations; and (ii) strengthening public policies, extension services, and physical infrastructure.

The proposed project would support the GoSP’s two-pronged strategy. It would do so by introducing progressive steps to the previous approach, including: (i) prioritizing productive investments that demonstrate market viability; (ii) prioritizing greater participation of small producers in value chains and strengthening linkages with larger agri-business and industries; and (iii) using municipalities to foster synergies among public policies (i.e. transportation, agriculture, and sanitation), as well as between public and private investments.

2.  Proposed Objective

The project development objective is to help increase the competitiveness of family agriculture in priority areas of the SoSP while improving its environmental sustainability.

This would be achieved by assisting small-scale farmers to:

-  increase the productivity of their land and labor, and improve the quality of their products through enhanced production techniques;

-  engage more actively in supply/value chains, where there is a comparative advantage, by undertaking basic processing and marketing techniques and/or strengthening partnerships with larger private operators in these areas;

-  strengthen the organizational and managerial capacity of producers associations, as well as promote the emergence of new associations/cooperatives;

-  mainstream improved land and water management practices tested under the previous operations for more competitive production systems.

Ultimately, the project would aim to increase sales volumes (unit value x quantity) and incomes for participating small producers’ associations.

The project would also improve the public physical and institutional infrastructures to the extent needed to support the project development objective (i.e., policy framework and economic monitoring, extension services, environmental management, and rural roads).

The target population consists of an estimated 108,000 small farming families, which reside in 550 target municipalities primarily congregated in the western part of the SoSP.[15] The project would reach these families through their own producers’ associations. It would also benefit public institutions such as CATI,[16] SMA,[17] and municipalities to the extent that is needed to support the overall objective of sustainable competitiveness.

3.  Preliminary Project Description

The proposed lending instrument is a Specific Investment Loan of US$78 million over a five-year period. The total project cost is estimated to be US$130 million, including US$52 million of counterpart funding from the SoSP.

Component 1: Supporting Small Farmers’ Business Initiatives (estimated IBRD US$42 million). This component would provide support to small farmers’ business initiatives through the following sub-components:

(1.1) Implementing Small Business Investments (estimated IBRD US$35 million). This sub-component would finance selected business initiatives, submitted by producers’ associations, aimed at increasing their competitiveness for products with demonstrated market viability. Direct beneficiaries and contractual partners of the project would be small producers associations based on geography or products (cooperatives, micro-catchment committees, other forms of associations).[18] Criteria of eligibility would be used to signal the focus on competitiveness and environmental sustainability. Eligible proposals would have to demonstrate market viability, and preference would be given to initiatives using improved land management techniques (restoring soil fertility, reducing pollution).[19] The project would assist potential beneficiaries to develop their business initiatives (see sub-component 1.2). The selection would be done through a transparent and technical process involving representatives of SAA/CATI, SMA, agri-business practitioners, academics, and municipalities. The project would continue to provide technical assistance to beneficiaries (governance and organizational issues, financial management, technical, etc.) during the implementation phase, and it would carry out evaluations to monitor progress and performance.

Examples of activities that would receive support include: improved production techniques (e.g. use of plastic greenhouses in horticulture); standardization, storage, and marketing of products (e.g. milk and butter); strengthening supply agreements with agri-businesses (poultry, pork production); branding/marketing and processing of local products (e.g. acerola); certification of quality (e.g. green label for fruits and vegetables); agricultural and non-agricultural diversification (e.g. fish-farming, rural tourism, handicraft); support for the formation of new associations (aimed at joint purchasing, sharing of equipment, and/or joint commercialization). This sub-component would also include a window dedicated to supporting business initiatives developed by women and youth enterprises, indigenous communities, and other vulnerable groups. It would also help improve living conditions (sanitation, housing) of extremely poor families as a starting point for them to gradually engage in competitive agriculture.

This sub-component would disburse through the existing State Agri-business Expansion Fund (a legal entity under the Secretary of Agriculture following national procedures) or through the more common project-based disbursement system following Bank procedures.[20] Financial support from the project would be distributed as grants.[21]

(1.2) Strengthening Producers’ Associations (estimated IBRD US$7 million). This sub-component would help strengthen the capacity of producers’ associations with regards to organizational management and marketing. In particular, it would assist interested associations in the preparation of business proposals for funding under sub-component 1.1 (i.e. identify business opportunities, carry out feasibility assessments and financial and technical analysis, assist in negotiations with partners, etc.). It would also finance broader information and training programs on agricultural competitiveness in targeted municipalities and micro-catchments across the State in order to stimulate the emergence of business ideas from potential beneficiaries. Furthermore, through the exchange of information, the project would assist small farmers to identify more profitable opportunities in specific productive chains and/or end-markets. It would help small producers identify their comparative advantages on specific products and market niches. This training and assistance would be delivered by CATI (the state’s rural extension agency) or by other qualified service providers contracted by the project.

Component 2: Strengthening Institutional and Physical Infrastructure (est. IBRD US$30 million). This component would support a set of public functions and investments that are critical to increasing the competitiveness and sustainability of small farming.

(2.1) Policy Frameworks and Market Monitoring (estimated IBRD US$5 million). This sub-component would help mainstream competitive small-scale agriculture within the policy, regulatory, and planning frameworks at state and municipal levels. Specifically, the sub-component would finance studies and workshops to improve regulation and incentives systems (i.e. quality certification and labeling systems). It would also carry out studies and assessments relevant to state-level agricultural competitiveness (i.e. analysis of specific supply-chains, market studies) and set up an online agri-business information center. This sub-component would help identify opportunities in productive chains and end-markets, and adjust the project strategy on a regular basis.