Report No. 5007-PO Portugal Agricultural Sector Survey A Near-term Action Program for Agriculture Volume IV July 20, 1984 Regional Projects Department Europe, Middle East and North Africa Regional Office Agriculture 11 Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS March, 1983 - USt 1 Escudos (Esc) 94.00 Esc. 1.00 = USt.0106 December, 1983 USti l Escudos 130.00 WEIGHTS nD HEASURES (Metric System) ABBREVIATIONS BFN Banco de Fomento Nacional (National Development Bank) BOP Bank of Portugal CAP Common Agricultural Policy CCAM Caixa de Credito Agricola Mutuo (Agricultural Credit Cooperative) CGD Caixa Geral de Depositos (General Deposit Bank) DGHEA Direccao Geral de Hidraulica e Engenharia Agricola (General Directorate for Agricultural Water Rescurces and Engineering) DGRAH Direccao Geral de Recursos e Aproveitamentos Hidraulicos (General Directorate for Hydraulic Resources and Development) DRA Direccao Regional da Agricultura (Regional Agriculture Directorate) EEC (EC) European Economic Community EPAC Empresa Publica de Abastecimento de Cerais (State Enterprise for Grain Marketing) EUROSTAT Statistical Office of the European Communities FA Fundo de Abastecimento (Supply Fund) FAO Food and Agricultural Organization of the United Nations FFF Fundo de Fomento Forestal (Forestry Development Fund) FOR OFICIAL USE ONLY IAPO Instituto do Azeite e Productos Oleaginosos (Oil and Oilseeds Institute) IACA Associacao dos Industriais de Alimentos Compostos para Animais (Association of Animal Feed Manufacturers) IFADAP Instituto Financiero de Apoio ao Desenvolvimento da Agricultura e Pescas (Agriculture and Fisheries Development Fund) IGEF Instituto de Gestao e Estructuracao Fundiarias (Institute for Land Management and Reform) INE Instituto Nacional de Estatistica (National Statistical Institute) INIAER Instituto Nacional das Investigacoes Agricolas e Extensao Rural (National Institute of Agricultural Research and Extension) JNF Junta Nacional de Frutas (National Fruit Board) JNPP Junta Nacional de Productos Pecuarios (National Board for Livestock Products) JNV Junta Nacional de Vinhos (National Wine Board) MACP Ministerio da Agricultura, Comercio e Pescas (Ministry of Agriculture, Commerce and Fisheries) (Has been reorganized to become MAFA) MAFA Ministerio da Agricultura, Florestas e Alimentos (Ministry of Agriculture, Forestry and Food) PMA Plano de Mudanca da Agricultura (Agricultural Development Plan) PROCALFER Liming, Fertilization, and Fodder Crop Program RICA Rede de Informacao de Contabilidades Agricolas (Farm Accounts Information System) UCP Unidades Colectivas de Producao (Agricultural Production Collectives) USAID U.S. Agency for International Development ZIRA Zona de Intervencao da Reforma Agraria (Agrarian Reform Zone) IThis document has a restricted distribution and may be used by recipients only in the performance of their offlcial duties. Its contents may not otherwise be disclosed without World Bank authorization. PORTUGAL AGRICULTURAL SECTOR SURVEY A NEAR-TERM ACTION PROGRAM FOR AGRICULTURE Table of Contents (Volume IV) ANNEX 6 ; Agricultural Credit ANNEX 7 : Land Redistribution, Market Regulation, and Consolidation ANNEX 8 : The Irrigation Subsector 1/ ANNEX 9 : The Forestry Subsector ANNEX 10 Agriculture and the EEC ANNEX 11 : Agricultural Extension 1/ In English and Portuguese ANNEX 6 PORTUGAL AGRICULTURE SECTOR SURVEY AGRICULTURAL CREDIT Table of Contents Page No. SUMMARY INTRODUCTION ......................................................(i) I. CREDIT AND MONETARY POLICY .1 A. Credit Expansion .1 B. Credit Ceilings. 6 C. Interest Rates .10 D. Subsidized Credit .13 II. Institutional Framework of Agricultural credit . .18 A. General Background .18 B. Interest Rates .29 C. Special Credit Institutions .35 D. Commercial Banks .35 E. Funds and Economic Coordination Entities .36 F. IFADAP .36 G. Caixas de Credito Agricola Mutuo (CCAM's) .41 HC General Characteristics of the Agricultural Credit System .44 II. THE DEMAND FOR AGRICULTURAL CREDIT ....................... 47 A. A Framework for the Analyses .48 B3. Profitability Analysis of Typical Farming Systems 49 C. Concluding Observations and Implications for Policy .52 III. THE SUPPLY OF AGRICULTURAL CREDIT .55 A. Transactions Costs of Investment Lending for Portuguese Banks .55 B. Recommendations .58 IV. CONCLUDING REMARKS AND SUMMARY OF RECOMMENDATIONS .60 ANNEX 6 PORTUGAL AGRICULTURAL SECTOR STUDY AGRICULTURAL CREDIT SUMMARY 1. In spite of the density of the summary outlet network and of the availability of highly subsidized funds, the amount of institutional credit extended to agriculture has been meager and stagnant in recent years, and its coverage very limited in terms of the number and type of farmers reached. The agricultural sector receives about 4.5% of total credit to the economy (1982) compared to a contribution of about 12% to total GDP. It is estimated that only about 2% of all farmers were using institutional credit in 1980, with another 20% borrowing from informal sources. Whatever institutional credit is extended shows striking imbalances with regard to its term, purpose and location: in 1982, short-term credit represented about 70% of total subsidized credit extended, with less than 10,000 farmers borrowing for investment purposes (1.3% of total number of farmers); the livestock subsector received on average between 60 and 70% of institutional credit, while it accounts for less than half of the total agricultural GDP; two regions--Ribatejo e Oeste and Alentejo--account for more than 70% of total institutional credit. 2. Farmers can seek institutional credit from a variety of agencies which include: the nine domestic commercial banks, 1/ which have some 900 branch offices; the Caixa Geral de Deposito (CGD), a state-owned savings bank with 145 branch offices; the Banco de Fomento National (BFN), a state-owned development bank; and the system of Caixas de Credito Agricola Mutuo (CCAMs), made up of about 180 agricultural credit cooperatives. These various institutions follow, for their agricultural lending operations, standardized norms and procedures specified under the national System for Agricultural and Fisheries Credit (SIFAPE). The system is supervised and administered by the Instituto Financeiro de Apoio ao Desenvolvimento da Agricultura e Pesca (IFADAP), created in 1978. SIFAPE provides for the payment of substantial interest and investment subsidies for eligible activities. These subsidies, financed by the Central Bank, are directly disbursed by IFADAP to the financing institutions on behalf of the farmers. Small amounts of credit are also made available through various commodity-specific state marketing agencies and IFADAP itself, under specific government sponsored programs. 1/ The banks were nationalized in 1974. ANNEX 6 -2- Constraints 3. There are important structural constraints to the expansion of agricultural credit. In parts of the country, farms are small and fragmented and offer limited viable investment opportunities; in other areas there are unresolved land tenure problems which constrain onfarm investment opportunities; marketing systems are inadequate and there is a conspicuous lack of technology and extension. Without improved research and extension, measures to promote land consolidation and viable holdings, and improved marketing, better access to credit mnay prove only marginally useful. However, there are also serious institutional constraints pertaining to the credit system itself which require immediate attention, among which are the extremely bureaucratic loan subsidy approval process, in particular for medium- and long-term loans, and the interest rate and subsidy structure. 4. The agricultural credit system is very complex. Loan application preparation and approval involve the Ministry of Agriculture, the financing institutions, and IFADAP in time consuming and often redundant procedures. In addition to SIPAPE, there are also a number of other lines of credit, each with different terms and conditions. Loan applications for investment credit require a great deal of detailed information and most farmers must seek specialized assistance to complete the forms. In addition to being reviewed by the financing institution, each loan application has to be reviewed and approved by IFADAP if subsidies are to be granted. As a result, IFADAP itself has developed into a ponderous and costly bureaucracy. More than two-thirds of IFADAP's staff of 385 is at headquarters, in charge of the administration of the subsidy system and very little field supervision of the loans is undertaken after approval. These procedures result in delays of up to six months in loan approval, thus discouraging farmers' use of institutional credit. If the subsidies were to be removed or their approval mechanism simplified, it is difficult to see what useful purpose would be served by the continued existence of IFADAP with its present functions and structure. In any event, a simplification of loan approval procedures, currently envisaged by the government, is an absolute priority, as is a reappraisal of the future role, if any, of IFADAP and of its intervention mechanisms. 5. Questions about the future of IFADAP raise the further issue of whether important changes in the current institutional structure of the agricultural credit system are needed to bring about the necessary improvements in credit delivery, farm coverage and efficient use of credit. Currently, credit use in Portugal is not limited by the physical access of farmers to bank branches, nor by the availability of financial resources. Before contemplating major institutional changes, measures to encourage commercial banks to play a more active role in the financing of the sector and to strengthen the management and financial position of the CCAMs should be devised and implemented. Commercial Banks 6. Commercial banks are the largest source of agricultural credit in Portugal. At the end of 1982, their outstanding portfolio represented 72Z of all institutional credit to the sector. However, lending to agriculture ANNEX 6 -3- accounts for no more than 5% of their total portfolio. The agricultural lending operations of commercial banks have not been constrained by a lack of financial resources. Their deposits have grown more rapidly than their A-ending operations, which have been somewhat constrained by credit ceilings imposed by the Bank of Portugal. Although agricultural loans benefit from a favorable treatment vis-a-vis credit ceilings, commercial banks have not expanded significantly their agricultural operations. That can be attributed to a lack of effective credit demand and more profitable alternative use for loanable resources. As mentioned earlier, effective credit demand is constrained by a variety of factors. Moreover, long-term borrowing for on-farm investment is difficult in a situation of high inflation, with high interest rates (even after subsidies) changing the time profile of debt amortization. Also, the possibility of obtaining a high return on low risk financial instruments (up to 28% on term deposits and up to 35% on bonds issued by state enterprises) has diverted private savings away from riskier investments in agriculture. Commercial banks have themselves demonstrated some resistance to extend agricultural loans, in particular medium-term loans for investment purposes. The increasing shift towards more expensive term and migrants' deposits, and the periodic upward adjustments of administered interest rates has caused a continuous increase in the cost of commercial banks resources. Although lending rates have also been increased substantially, they have not kept up with the cost of resources and commercial banks' margin, cash flow and profitability have decreased over the last few years. As a result, they have concentrated their lending operations on the type of lending which has low transaction costs, that is, short-term commercial credit. This has been detrimental to agricultural credit for which transaction costs are relatively high and which is considered riskier. 7. Measures to encourage commercial banks to increase their agricultural lending operations should be implemented among which: (a) an increase in the margin available on agricultural loans, in particular on medium-term loans, to a level sufficient to cover loan processing costs and lending risks and to provide an adequate profitability; (b) a reduction in the bureaucratic procedures and red tape for the appraisal and approval of agricultural loans; and (c) the implementation of the guarantee scheme provided for in IFADAP's statutes and by the Decree No. 378/82 of April 16, 1982 to offer additional safeguards for commercial banks lending. The CCAMs 8. The Caixas de Credito Agricola Mutuo have recently emerged as a major source of institutional financing. They are local credit unions whose membership is restricted to residents (individuals or cooperatives) of the district (concelho) in which they are established. Legally recognized since 1914, CCAMs have shown a spectacular growth in deposits and activities during the last three years. From June 1981 to November 1983, loans to members increased by 430% from Esc 6,700 million to Esc 28,700 million and deposits by 675% from Esc 3,600 million to Esc 24,300 million. In 1980, CCAMs accounted for about 6% of total credit to agriculture; in 1982 for more than 21%; and for 1983, it is estimated that the proportion was still higher. The growth of CCAM operations has been the result of several factors including (a) the transfer in 1981 from the Caixa Geral de Deposito (CGD) to IFADAP of the ANNEX 6 -4- responsibility for their supervision and refinancing, with IFADAP's control and assistance being more permissive; and (b) the better rates of interest paid by CCAMs on deposits or charged on loans, due to the very favorable tax treatment enjoyed by CCAMs. Although there already exist some safeguards to ensure a minimum level of management efficiency and financial security for CCAM operations, a continuation of the present growth trend could be dangerous if more adequate measures are not rapidly implemented to forestall an overextension of their management and accounting capabilities. 9. The CCAMs could be developed into an effective tool to provide simple, low cost banking services based on detailed local knowledge and mutual responsibility. Currently, the most acute problem in the management of CCAMs is the recognized weakness of their accounting and financial marnagement practices. A law was adopted in November 1982 to standardize accounting practices and impose stricter financial discipline. It has not yet been implemented and the lack of trained staff, even in the largest and richest CCAMs, will be a major constraint to the strengthening of their management. The programs for the training of existing staff and the recruitment of competent managers should be rapidly defined and implemented. In addition, mechanisms for systematic supervision and regular auditing of CCAM operations and the financial position should be established. A law was adopted in July 1982 which provides for the creation of an apex institution, the Caixa Central de Credito Agricola Mutuo, which would supervise CCAM activities, manage their resources and provide technical assistance to the individual CCAM unions. This central body has not yet been established. Its creation should be one of the priorities of the government. Interest Rates 10. Since the mid-1970s, the Government has increased the use of subsidized interest rates as an instrument to increase and channel the flow of financial resources into the higher-yielding activities. As of September 1981, about 37% of the total institutional credit outstanding in all sectors of the economy carried subsidized interest rates. At the end of 1981, subsidized agricultural credit accounted for 81% of the total institutional credit outstanding in agriculture. As of March 1983, the nominal rate charged by commercial banks on agricultural loans ranged from 27% for 90-day money up to 30% for loans of five years and more. After subsidies, the interest rate paid by farmers on seasonal credit ranged from 21.5% to 25.0%, depending on the purpose of the loan, and from 17.5% to 25.0% for investment credit, withi the subsidy declining from the: first to the sixth year of the loan and becoming zero thereafter. This compares with a rate of inflation estimated at 25% for 1983. During the 1978-82 period, the interest rate subsidy on agricultural loans averaged about 6%. As a result, real interest rates on these loans have been negative more often than not. Although the system was designed to encourage only high priority activities through very selective credit subsidies, most short-term and investment activities are now benefitting from subsidized interest rates under SIFAPE. In 1982, the total amount of subsidies reached Esc 2,122 million (about $21.0 million) the equivalent of 5.1% of the total credit granted to the sector during the year. ANNEX 6 -5- 11. The current subsidy design clearly lacks the necessary selectivity and represents a sizeable burden on the government budget. The main justification for the current "decreasing subsidy" system for investment loans is to permit long-term borrowing under high inflationary conditions. This system is cumbersome and it would be preferable to remove the administrative complexities involved in processing medium-term loans by adopting constant subsidy rates. The appropriate levels for interest rates would remain an issue but there is a strong case for the elimination of subsidies for most short-term and investment activities. With current inflation rates, the removal of subsidies would, however, bring nominal interest rates to levels where long-term borrowing would be difficult. The best solution, of course, is to bring down the rate of inflation. Failing this, it would be necessary to explore the possibility of eliminating the inflation element from nominal rates through some form of indexation, with periodic adjustments of the loan balance being made. World Bank Role in Agricultural Credit 12. The World Bank has been involved in two agricultural projects which have major credit components in the form of lines of credit to refinance Participating Banking Institutions' (PBIs) credit activity. Both the Agricultural and Fisheries Credit Project (Ln 1603-PO) and the Tras-os-Montes Integrated Rural Development Project (Ln 2175-PO) have faced serious implementation and disbursement issues, many of which remain unresolved. Among the major problems are: (a) the overliquidity of the banking system so that banks have no need and no incentive to refinance small agricultural loans; (b) complicated coordination between IFADAP, the Ministry of Agriculture and the PBIs for investment project development and review which cause unacceptable delays and whicul increase PBI administrative costs; (c) rediscount interest rates which are higher than the cost of the PBIs' own funds such that their margins would be lower if they refinanced. A transactions cost analysis performed on three commercial banks indicates that PBI administrative costs for agricultural lending are roughly twice that of the bank's overall credit operations, and that measures to increase margins of refinanced loans would be justified; and (d) absence of budgetary arrangements to finance subsidies to support a lower interest rate and more interesting terms and conditions than is available under SIFAPE. These and other issues will be addressed during supervision of Ln 2175-PO and of the recently appraised TechniCdl Assistance Project, as well as in the course of sector dialogue. Remedial Measures 13. Early consideration should be given to strengthening the country's institutional agricultural credit system through (a) a reassessment of the role of IFADAP; (b) the simplification of loan appraisal and approval procedures; (c) the strengthening of CCAM management capabilities and the mechanisms for their supervision; and (d) a reform of the interest rate policies aimed at reducing the burden of the subsidies on the Treasury and providing adequate incentives to banking institutions to increase their agricultural lending. This last step should be associated with a comprehensive study of the Portuguese financial sector. In the meantime, the ANI.EX 6 -6- financing of onfarm investments under foreign-assisted projects could be channelled through individual banking institutions having a good network of branches in the project area and which have developed a good technical capability for the appraisal of onfarm investments and demonstrated their willingness to increase their lending operations to farmers. These banking institutions would then be given the full responsibility for implementing the project's credit comnponent. (0555E) -7 - (i, PORTUGAL AGRICULTURE SECTOR SURVEY AGRICULTURAL CREDIT INTRODUCTION The purpose of the annex is to offer information on constraints to the demand and supply of agricultural credit and to offer a strategy for Bank involvement in the alleviation of these constraints. To this end, the annex is divided into four parts. Part One discusses the macroeconomic and monetary policy context in which agricultural credit operates and which has affected past World Bank credit projects. Specifically, the following points will be discussed: (a) the effect of excessive credit expansion to the public sector and the problem of arrears; (b) credit ceilings and banks' excess liquidity; (c) rising interest rates and increasingly squeezed bank margins; and (d) the rising importance of interest rate subsidies in general and for agricultural credit in particular. The second section of Part One will present the institutional framework of agricultural credit, including general discussions of (i) the interest rate issue; (ii) the general characteristics of institutional participation and coverage; and (iii) the definition of agricultural credit policy. The Demand for Agricultural Credit is treated in Part Two. Of the two alternative frameworks available for this discussion (ie. a resource gap analysis or a profitability of farm models analysis) I have chosen the profitability analysis framework using three farm models from the Agricultural and Fisheries Credit Project and from the Tras-os-Montes Project to perform debt capacity and sensitivity analysis. The objective of the analyses is to demonstrate (a) the importance of risk and household claims on income in determining a farmers' ability profitably to use and repay credit given cash flows in bad years; and (b) that, because of these variables, the introduction of a new technology does not necessarily generate a demand for credit; indeed, slower incremental adoption of new technology without credit can be more profitable and less risky for some farmers given bad year cash flows. The issue of non-interest transaction costs of borrowing (red-tape, paperwork, etc., necessary to apply for a loan) as a determiniant of demand for credit will be discussed in a general way. Part Two concludes with a set of recommendations regarding how demand-side issues might be taken into account in future credit projects. Part Three presents constraints to the Supply of Agricultural Credit in a transaction costs framework. The issues of transaction costs for banks which have been encountered in past Bank projects are discussed. A transaction costs analysis using data from three Portuguese banks is -8- (ii) presented. Part Three concludes with a set of reco,...endations regarding possible strategies for alleviating transaction cost constraints to the supply of credit and recommendations regarding incentives to banks to refinance using World Bank credit lines. Part Four offers concluding remarks and a stumnary of earlier recommendations regarding a future Bank role and strategy with respect to agricultural credit. Specifically, the issue of '"hat is the role of Bank credit lines given (a) excess bank liquidity; (b) special preferences which already encourage banks to lend for agriculture; and (c) demand-side problems" is addressed. ANNEX 6 _ 9 - Page 1 PART ONE CREDIT AND MONETARY POLICY 1. The principle features of credit and monetary policy in Portugal in recent years have been (a) a rapid and unabated expansion of domestic and externally financed credit, including an increasing share of public sector and public enterprise borrowing; (b) a reliance on credit ceilings on domestic bank credit to the private sector as the main instrument of monetary control in an effort to control the economic effects of banks' excess liquidity; (c) significant adjustments in deposit rates and lending rates since 1975 in an effort to restore external balance; and (d) a dramatic increase in the share of preferential credit indicating an increasing dependence of economic activity on subsidized credit. A. Credit Expansion 2. An important feature of the Portuguese economy following the 1974 revolution and its nationalizations has been the increasing weight of the public sector in the economy. Public expenditure as a percentage of GDP rose from 22.71 in 1973 to 42.1% in 1981. while revenue rose from 24.1% in 1973 to 31.91 in 1981. A small lending capacity at the beginning of the 197C's has changed to an ever widening budgetary deficit and resulting borrowing requirement which reached 10.2% of GDP in 1981 (not including public enterprises). This imbalance is largely attributed to the extension of subsidies to public enterprises and to the general population and to a lack of control on civil service employment. The financing of the expanding Government deficit has also entailed a rapid growth of interest payments which were equivalent to 17.5% of general Government revenue in 1981. 3. This and other trends had caused domestic credit creation to increase at a rate of 37.4% in 1976 and 35.5% in 1977, with a corresponding 120.31 and 63.2% increase in credit to the public sector in those years. During 1978/79, as part of an effort to restore external balance, the Government embarked on an IMF-assisted stabilization effort. The growth of domestic credit was scaled down by 10 percentage points from over 35% in 1976/77. The very success of that effort which brought the current account of the balance of payments virtually back to equilibrium for the first time in five years, appears to have induced a reversal of policy. By early 1980 credit expansion had accelerated to nearly 30%, a rate which has been roughly maintained through the end of 1982, despite the ensuing dramatic deterioration in the external position and continuing high levels of inflation which reached 24Z in 1982 (Tables 1, 2, and 3). 4. Domestic credit to the public sector between 1980 and the end of 1982 rose at a rate approximately 10 percentage points higher than that of total domestic credit. The combined share of the public sector and the public sector enterprises in total net domestic credit has remained quite high in the last several years, at around 45Z, as the rapid growth of credit to the central Government has compensated for the slower expansion of domestic credit to the public enterprises. External financing to public enterprises, on the other hand, rose very rapidly (by a total of 123.3%) over these three years. By the -10 - ANNEX 6 Page 2 Table 1 Portugal: Selected Monetary Indicators, 1976-83 (Per cent change over previous year end-period) Monetary Aggt2gates Credit Aggregates Credit to Total Credit to Private Sector Emigrants' Domestic Public and Public Ml M2 Deposits Credit /a Sector /a Enterprises 1976 8.4. 16.8 ... 37.4 120.3 29.1 1977 11.6 23.1 ... 35.5 63.2 30.8 1978 14.6 28.0 135.8 24.5 39.3 21.4 1979 25.9 36.5 66.5 25.8 44.8 21.2 1980 22.1 34.8 72.2 28.2 35.5 26.1 1981 8.3 28.6 53.2 28.7 39.3 25.4 1980 March 28.5 36.6 62.6 29.2 42.3 25.7 June 24.3 34.4 62.2 28.2 42.3 23.7 September 24.0 35.2 71.5 27.7 34.5 24.8 December 22.1 34.8 72.2 28.2 35.5 26.0 1981 - March 21.1 36.5 69.3 29.6 39.7 26.5 June 22.4 37.5 71.1 30.2 32.3 29.6 September 18.4 35.0 58.4 32.6 43.6 29.3 December 8.3 28.6 53.2 28.7 39.3 25.4 1982 March 13.3 28.8 46.4 27.9 42.7 23.0 June 11.7 26.6 40.2 26.1 40.4 21.5 September 13.2 26.1 39.0 27.8 40.8 23.5 December 15.9 26.3 38.5 26.4 29.7 25.2 1983 Januarv 14.7 25.7 38.2 25.7 28.9 24.5 /a As of January 1980 comparison includes Esc 168.7 billion as counterpart of the cancellation of public debt resulting from revaluation of gold reserves. Source: Bank of Portugal. Date: 08/22/83. - 11 - ANNEX 6 Page 3 Table 2 Portugal; Overall Financing of Economic Activity, 1980-82 1. 1980 1981 1982 (in billions of Escudos; end of period) Total financing ta l^784.3 2L36.6 3,008.8 Domestic bank credit 1,414.8 1,820.3 2,300.4 External financ,ing /b 369.5 516.3 708.4 Public sector /a 424.7 592.9 784.7 Domestic bank credit 339.7 473.3 613.7 External financing /b 85.0 119.6 171.0 Private sector and public enterprises 1,359.6 1,743.7 2,224.0 Domestic bank credit 1,075.1 1,347.0 1,686.6 External financing /b 284.5 396.7 537.4 of which: Public enterprises 517.2 651.8 859.0 Domestic bank credit 282.7 320.4 384.6 External financing 234.5 331.4 474.4 (Percentage change) Total financing 30.8 31.0 28.8 Domestic bank credit 28.2 28.7 26.4 External financing 41.7 39.7 37.2 Public sector 35.2 39.6 32.3 Domestic bank credit 35.5 39.3 29.7 External financing 33.8 40.7 43.0 Private sector and public enterprises 29.5 28.3 27.5 Domestic bank credit 26.1 25.3 25.2 External financing 44.2 39.4 35.5 of which: Public enterprises 23.9 26.0 31.8 Domestic bank credit 13.7 13.3 20.0 External financing 38.8 41.3 43.2 /a Includes Esc 168.7 billion as counterpart of the cancellation of public debt resulting from revaluation of gold reserves. /b The stock figures for external debt are calculated by adding the flow of borrowing at average exchange rates to the stock at the end of each year beginning with December 1978. Source: Bank of Portugal. Date: 08/22/83. - 12 - ANNEX 6 Page 4 Table 3 Portugal: Monetary Expansion and Inflation, 1976-82 (per cent changes) Money /a Real GDP Velocity /b GDP Deflator (1) (2) (3) (4) 1976 15.0 6.9 8.1 16.3 1977 16.9 5.6 14.2 26.7 1978 19.0 3.2 5.1 21.9 1979 37.4 4.5 -7.2 22.0 1980 41.3 5.5 -14.1 15.7 1981 31.3 1.8 -8.3 18.3 1982 27.0 3.0 -4.7 23.8 /a Money is defined as M2, centered at mid-year. Ib Velocity is defined as nominal GDP divided by M2, appropriately centered. Sources: Bank of Portugal; and Ministry of Finance and Planning. Date; 08/22/83. - 13 - ANNEX 6 Page 5 end of 1982 the public sector enterprises accounted for 67% of total external credit outstanding in comparison with 24% for the central Government and 9% for the private sector (Table 2). 5. Because of these trends there have been signs of macroeconomic instability. The current account deficit in the balance of payments was an estimated US$3.3 billion in 1982 or 14.5% of GDP. External debt at end 1982 was US$13.5 billion -- of which US$4 billion was short term. The debt service burden in 1982 was 23% for medium- and long-term debt alone. A continuation of the present level of demand and inflation in Portugal is unsustainable and could eventually result in a serious disruption in trade competitiveness and production patterns if not contained. 6. Attempts to restrict foreign borrowing will aggravate domestic inflationary pressures, unless the Government can significantly reduce domestic demand through restrictive monetary and fiscal policy. Evidence of restrictions on budgetary allocations and disbursements has already been experienced in the Bank-financed Tras-os-Montes and Forestry projects and may adversely affect their implementation. Further, the new administration is to likely introduce additional austerity measures in the context of a stabilization program with the IMF. 7. Arrears have become a serious problem for public enterprises as their financial positions have deteriorated. The problem of arrears is pervasive as large arrears have accumulated on loans made between enterprises and on loans made by the banking system to the enterprises. With the currently high nominal interest rates, any amount outstanding can double in three years if neither interest nor principle is paid. Given budgetary constraints, the Central Government has not fulfilled some of its obligations for equity contributions. 8. In an upcoming survey, the Programs Department of the Bank will attempt to establish the aggregate flow of arrears in the public sector and to the banking system. Although no detailed data are available from the commercial banks, bad debts amounting to roughly US$2 billion are included in the monetary data. 9. The arrears of public sector enterprises to the banking system will be difficult to correct. Those to the Banco Nacional de Fomento (BFN), the Government-owned investment bank and implementing agent of a US$100 million bank loan for industrial development, alone amount to about US$130 million, or about 50% of all arrears to BFN. BFN has nonetheless continued to show the interest due from these non-performing loans as income, although, on a cash basis, it pays out significantly more interest on its own borrowing than it receives from its loan portfolio. Furthermore, the arrears to BFN are concentrated in three very weak companies which have very little prospect for recovery without major Government intervention in the form of equity, improved operations, and more liberal pricing policy. The following table presents available data from BFN on its arrears to various sectors. ANNEX 6 - 14 - Page 6 Table 4 Estimated Arrears (US$ Million, Exchange rate 100 Esc/l dollar) From Public Enterprises 130 From Overseas Territories 40 From Private Sector 80 10. In general, information on all arrears, including those for private individuals and companies is very difficult to quantify because of (a) the absence of a strong central auditing system; (b) the absence of standardized instructions on auditing practices and standards with respect to debt classifications; and (c) the lax standards practiced by bank auditors. For banks such as BFN which only do investment lending, arrears can be calculated, notwithstanding the fact that the loan may still be listed as an asset and accumulating interest despite its non-performance. For commercial banks, however, which are activ.! primrrily in short-term lending, their ability constantly to roll-over loans and make additional loans to pay the interest on defaulted loans, makes arrears particularly difficult to detect. Given the absence of standard auditing practices and the banks' desire to present as attractive a financial performance as possible, there is great reluctance to classify non-performing debts as "bad debts". Hence the exercise to estimate actual arrears in the banking system is a large task which the present mission did not undertake. B. Credit Ceilings 11. Since 1978, credit ceilings on bank credit have been adopted as an important monetary policy tool. In principle, these credit ceilings would primarily affect the domestic private sector, as public sector deficits are subtracted from an estimated total financing requirement, leaving as the residual the "permissible" credit expansion to the private sector, including the public sector enterprises. Public sector short-term borrowing abroad (84% of total short-term external debt) has been encouraged to allow it to escape domestic credit ceilings. 12. However, penalties for excess lending over the authorized ceilings have generally not been fully enforced and even if enforced they are not prohibitive. In theory, penalties involve non-interest bearing reserve requirements equivalent to 100% of the excess, up from a 30% requirement previously imposed. Banks have found it profitable to exceed their ceilings so long as bank lending rates remain substantially above the return on Treasury paper in the interbank bond market, the alternative investment outlet for idle bank liquidity. For example, through most of 1982, lending rates for over one year were about 26%, while the corresponding rate in the interbank bond market stood at arount 14.5% (Chart 1). This implies that removing the incentive to exceed credit ceilings would require an effective penalty reserve requirement of over 70%. At the same time, banks need not worry about temporary liquidity shortages, since they can always borrow on the interbank - 15 - ANNEX 6 Page 7 Chart 1 PORTUGAL AVERAGE BOND LENDING RATE AND RATE IN THE INTERBANK BOND MARKET, JANUARY 1981 - MARCH 1983 35 ! ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I 30... I ., Lending rate - - - - - - - - - - - - - - - - - 201 25 t… 1 15 .neon .on . .a.k,t . , .reX . 1981 1982 t583 - 16 - ANNEX 6 Page 8 Chart 2 PORTUGAL DISCOUNT RATE AND RATE IN THE INTERBANK MONEY MARKET, JANUARY 1981 - MARCH 1983 Pe, cent 25 20 Discount rare A 1r0>nk money marker tare 0 5 l 0 ,. ,1 1981 1982 1983 - 17 - ANNEX 6 Page 9 money market where rates are substantially below the Central Bank discount rate (Chart 2). Given this background it is understandable that banks have continued to exceed the ceilings. At January 1983 the end of period balance of excesses was equivalent to US$441 million, about 2.5% of the authorized ceiling. 13. The financial system in Portugal is relatively underdeveloped in that the range of financial instruments available are limited. The bond and stock markets are very thin, so that the banking system and various time deposits are the primary stores of savings. Recent monetary policy has led to substantial interest rate increases so that since March 1983 the nominal interest rate for term deposits of over one year is 282, and about 4%-62 higher than the inflation rate, depending on the estimate for inflation. This policy of generally positive interest rates has resulted in a relatively rapid pace of deposit growth, especially that of emigrant deposits (Table 1). As a result, there has been substantial excess liquidity in the banking system relative to authorized credit ceilings. This liquidity has been reflected in the drop of interest rates in the interbank market to a low of 4Z during 1981-82 while the borrowing rate was still at 262 and by the continuing substantial differential between the interbank market rate and the lending rate. 14. Implementation of the first World Bank Small and Medium Enterprises (SME) Project (Loan 1701-PO) and of the Agricultural and Fisheries Credit Project (Loan 1603-PO) was affected by the excess liquidity situation because banks were reluctant to refinance subloans under the projects. In January 1982, the Central Bank agreed to grant a special credit ceiling incentive to the participating banking institutions utilizing the Bank's credit lines whereby a Participating Banking Institution's (PBI) monthly credit ceiling is adjusted by a multiple of the amount of the credit line it used during the previous month. Thus, subloans refinanced under World Bank credit lines receive a higher weight than other preferential agricultural credit in the calculation of a bank's credit ceiling. While this incentive was effective in renewing PBI's interest in the SME Project, other problems continued to plague the Agricultural and Fisheries Credit Project. 15. Some implications of the foregoing discussion are: (a) that although credit ceilings would be expected to limit credit availability to the private sector, there has been widespread exceeding of the credit ceilings and there is no indication that the ceilings have been or are the cause of any credit rationing which may be occurring; (b) that the ceilings should not affect the flow of credit to the agriculture sector, as agricultural credit is counted as a preferential sector in the calculation of monthly credit ceilings for the banks. Therefore, the more preferential credit (including agriculture) made by a given bank, the higher its monthly ceiling will be relative to a bank which has not been as active in providing preferential credit; ANNEX 6 - 18 - Page 10 (c) if other institutional bottlenecks are removed, the special credit ceiling incentive offered for Bank credit lines can be an effective measure to encourage banks to refinance. The evidence of success of the incentive is that the first SME loan was committed by June 1982 and a second loan for US$40.3 million has recently been signed. Project officers give substantial credit to the incentive system for the improved commitment rate which previously had been very slow; (d) funds available through bank credit lines are rediscounted at the Bank of Portugal's usual rediscount rate which is 23%. Alternative sources of funds for the banks, the banks' own funds and funds from the interbank money market, are however much cheaper (Chart 2). This means that the margin available to the banks on refinanced loans is much lower than their margins would be if they used alternative sources. The Bank of Portugal argues that this fact is more than compensated for by the double weight given to refinanced loans in the calculation of the monthly credit ceilings. However, because exceeding credit ceilings is only lightly penalized, and agricultural loans are relatively small, the relative cost of bank and other funds may be an issue which should be discussed with commercial banks and the Bank of Portugal prior to the appraisal of any future credit project. It may be that a doubling of the weight given to refinanced loans would compensate for the higher cost of World Bank funds, especially if negotiations with the IMF result in a stricter enforcement of credit ceiling limits; and Ce) it should be recognized that these credit ceiling incentives do not interfere with the overall credit ceiling limits. The Bank credit lines are included in the overall country ceilings. The sum of the individual bank credit ceilings before calculation of incentives is set at a lower level than the country ceiling decided on by the central bank. The incentive operates to increase the ceiling for a bank with high involvement in rediscounted and preferential credit, sometimes at the expense of banks' ceilings which have been less involved. Thus the incentive should not be seen as interfering with a restrictive macroeconomic policy. C. Interest Rates 16. In 1977 and 1978, as monetary policy became geared toward improving the capital account balance, interest rate policy was increasingly adjusted to keep domestic rates competitive with those abroad and to secure adequate rewards for the holders of financial assets. The general structure of deposit rates has been substantially increased on six occasions since 1976 from 122 to 28% (Tables 5 and 6). The rate of exchange rate depreciation has reflected the need for trade competitiveness; however, not at the expense of the attractiveness of time deposits held in escudos. At the time of the March ANJNEX 6 - 19 - Page 1 1 Table 5 Portusal: Mxik= Interest Rates, 1976-83 1976 1977 1978 1981 1982 1983 As of As of As of As of As of As of Feb. 28 Aug. 26 dry 6 July 16 April 19 March 25 Rediscotmt rate 6.5 8-12 13-18 18-23 18-23 19-24 23-28 Deposit rates Sight deposits /a 1-4 1-4 1-4 1-4 1-4 1-4 1-4 Time deposits 15-90 days 4.5 5.0 6.0 8.0 10.0 11.0 15.5 90-180 days 6.5 7.5 9.0 12.0 14.0 15.0 19.5 180 days - 1 year 9.5 11.0 15.0 19.0 19.5 21.5 26.0 Over 1 year 10.5 12.0 16.0 20.0 21.0 23.0 28.0 Savirgs deposits /b 1st year 10.5 12.C 16.0 20.0 21.0 23.0 ... 2Ed year 10.75 12.25 16.25 20.25 21.25 23.25 3rd year 11.3 12.5 16.5 20.5 21.5 23.5 4th year 11.25 12.75 16.75 20.75 21.75 23.75 Over 4 years 11.5 13.0 17.0 21.0 22.0 24.0 ... Standard lending rates /c Up to 90 daJs 8.75 10.25 14.75 18.25 19-21 23.0 27.0 90-180 days 9.25 10.75 15.25 18.75 19.5-21.5 23.5 27.5 180 days-i year 10.5 12.0 16.5 20.0 20-22 24.0 28.0 1-2 years 11.25 12.75 17.0 20.5 20.5-22.5 24.5 28.5 2-5 years 12.25 13.75 17.75 21.25 21-23 25.0 29.0 Over 5 years 12.75-13.25 14.25-14.75 18.75 22.25 22-24 26.0 30.0 la Payable to individuals only. /b These savings deposits have special conditions. They can be wade regularly according to a previous plan, their future use beirx tied to specific purposes (see Port. 747/72, de 18 de Dezembro). They represent just aboe 0.01X of M2. /c lower rates prevail for preferred types of credit such as for agriculture, cKports, housing, and labor-intensive and ecporrt-riented investnents. The types of project which receive subsidies nave changed throut tize. An interest rate surchage is applied on loans for the purchase of consuver dawables. Source: Bank of Portugal, Annual ReDort. Date: 08/22/83. - 20 - ANNEX 6 Page 12 Table 6 Portugal: Interest Rate Term Structure, 1975-83 (in per cent) Dec. 19 July 1 Feb. 28 Aug. 26 May 6 July 16 April 20 March 25 1975 1976 1977 1977 1978 1981 1982 1983 Tine deposit rates 1. Up to 3 months 4.5 4.5 5.0 6.0 8.0 10.0 11.0 15.5 2. 3 to 6 nonths 6.5 6.5 7.5 9.0 12.0 14.0 15.0 19.5 3. 6 mcrths to 1 year 9.5 9.5 11.0 15.0 19.0 19.5 21.5 26.0 4. Over 1 year 10.5 10.5 12.0 16.0 20.0 21.0 23.0 28.0 Lendinz rates 1. Up to 3 mxnths 7.75 8.75 10.25 14.75 18.25 20.0 23.0 27.0 2. 3 to 6 months 8.25 9.25 10.75 15.25 18.75 20.5 23.5 27.5 3. 6 ninths to 1 year 9.5 10.5 12.0 16.5 20.0 21.0 24.0 28.0 4. 1 to 2 years 10.75 11.25 12.75 17.0 20.5 21.5 24.5 28.5 5. 2 to 5 years 11.75 12.25 13.75 17.75 21.25 22.0 25.0 29.0 6. Over 5 years 12.5 13.0 14.5 18.75 22.25 23.0 26.0 30.0 Differential lending rate - deposit rate 1. Up to 3 mcnths 3.25 4.25 5.25 8.75 10.25 10.0 12.0 11.5 2. 3 to 6 uuiths 1.75 2.75 3.25 6.25 6.75 6.5 8.5 8.0 3. 6 nmxths to 1 year 1.0 1.0 1.0 1.5 1.0 1.5 2.5 2.0 4. 1 to 2 years 0.25 0.75 0.75 1.0 0.5 0.5 1.5 0.5 5. 2 to 5 years 1.25 1.75 1.75 1.75 1.25 1.0 2.0 1.0 6. Over 5 years 2.0 2.5 2.5 2.75 2.25 2.0 3.0 2.0 Source: Bank of Portugal. Date: 08/22/83. - 21 - ANNEX 6 Page 13 1983 increase in the crawling peg rate from 0.75% to 1% per month, the interest rate structure was increased by a substantial 5% to compensate for the increased rate of depreciation and to maintain the dttractiveness of escudo time deposits for emigrants whose deposits account for 23% of the total. 17. Lending rates have also been increased substantially, however, they have not quite kept up with bank costs of funds. For example, as lending rates rose from a weighted average of 16.4% in 1978 to a weighted average of 19.1% in 1981, interest rates on deposits rose from 10.22 in 1978 to 14.3% in 1981. Thus, the margin to banks was reduced by about 1.4%. The margin was further reduced by a weighted average of about 0.7-1 point in the March 1983 measure in which deposit rates were increased across the board by 5 percentage points while lending rates were increased by only 4 percentage points. The Bank of Portugal's Annual Report for 1981 indicated that the interest margin/ loan turnover ratio as a result fell from 3.6% in 1978 to 0.9% in 1981 for the banking system as a whole. The report also records that the net income/loan turnover ratio on other sources of bank income has been rising from 0.7% in 1978 to 3.2% in 1981. The implications for the supply of credit to a sector such as agriculture with relatively high transactions costs, in light of already squeezed margins on credit operations are discussed in Part Three. 18. When the authorities announced the March 25, 1983 interest rate increase, they also introduced an interest capitalization scheme for medium- and long-term loans. Instead of paying an interest rate of 29-30% before subsidy, enterprises, including farmers, that are heavily indebted or locked into an investment project were offered an alternative of paying a 15% rate of interest and capitalizing the remaining interest due. If an enterprises chose this alternative it has to renounce the interest rate subsidies. For new loans it does not appear that this alternative is an option. 19. It should be noted that this capitalization scheme acsumes that the liquidity situation of the banks allows them to be accomodating. It could imply that some excess liquidity will be "soaked up" as banks will be paid less interest on some outstanding loans (which use this alternative) while the banks continue to pay higher deposit rates. D. Subsidized Credit 20. The Government has attempted to mitigate the effect of rising lending rates on demand for credit by providing subsidies on interest rates for borrowers in preferred sectors for selected activities. Between December 1979 and September 1982 the share of preferential credit to the private sector grew from 20% to 38%; in nominal terms it increased by 250% (Tables 7, 8 and 9). Although the effective rate of subsidy for agriculture, 6.5% percentage points, which makes the effective rate substantially negative in real terms, was second only to the subsidy, 5.5-13.25 percentage points (Table 10), for companies in financial difficulty, agriculture received only 2.4% of total credit in 1982 (4.5% if the agricultural share of investment credit is included) and only 6.6% (12.6% if the agricultural share of investment credit is included) of preferential credit. This compares to investment and housing which received 26% of total credit and 71% of total preferential credit. Agriculture's share of short-term, preferential credit has declined from 10.1% at December 1979 to 5.6% at September 1982, although in nominal terms the -22- ANNEX 6 Page 14 Table 7 PorbIal: Baidig Sysatn Crdit to the Public Soctor &iterprises and the Private Sector, 1979-82 1979 1980 1981 1982 Decemer Deceber J Sept cember March Jne (ClB r:e in billics of Ewacdos) Total credit 806.2 1,201.5 1,092.4 1,165.8 1,218.8 1,284.8 1,342.1 1,414.6 1,496.2 PrL.Fexwtial credit 163.5 329.1 386.2 416.8 446.8 478.0 510.5 538.2 570.2 1xiaulmture (16.6) (28.2) (29.3) (29.2) (29.7) (33.1) (33.6) (32.6) (32.2: Exwort (29.1) (37.5) (43.6) (48.3) (51.5) (51.0) (56.4) (57.8) (61.0 Investment (51.9) (139.7) (149.6) (159.3) (168.3) (180.3) (191.0) (202.2) (211.5 Rbusing (54.6) (109.5) (119.0) (134.2) (150.1) (165.6) (179.3) (193.7) (208.3 Other (11.3) (14.2) (44.7) (45.8) (47.3) (47.8) (50.2) (51.9) (57.2 NOM-pVCefererial credit 642.7 692.4 706.2 749.0 772.0 806.9 831.6 876.4 926.0 (As per cent of total) Total credit 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Preferential credit 20.2 32.2 35.4 35.8 36.7 37.3 38.0 38.0 38.1 Agriculture (2.1) (2.8) (2.7) (2.5) (2.4) (2.6) (2.5) (2.3) (2.2 Eqxort (3.6) (3.7) (4.0) (4.1) (4.2) (4.0) (4.2) (4.1) (4.1 Invesrmeit (6.4) (13.7) (13.7) (13.7) (13.8) (14.0) (14.2) (14.3) (14.1 Hbsxing (6.8) (10.7) (10.9) (11.5) (12.3) (12.9) (13.4) (13.7) (13.9 Other (1.4) (1.4) (4.1) (3.9) (3.9) (3.7) (3.7) (3.7) (3.8 tbn-preferential credit 79.8 67.8 64.6 64.2 63.3 62.8 62.0 62.0 61.9 Source: Bsk of Portugal, Boletim Trirestral. Date: 08/22183. - 23 - ANNEX 6 Page 15 Table 8 Portugal: Preferential Credits as a Proportion of Total Credit Granted by Commercial Banks and by Special Credit Institutions, 1979-82 (in per cent) Overall Banking Commercial Special Credit System Banks Institutions 1979 December 20.2 14.1 33.5 1980 March 20.9 14.4 34.1 June 23.3 14.3 40.9 September 24.7 15.5 42.4 December 32.2 16.6 61.8 1981 March 35.4 17.0 70.0 June 35.8 17.4 69.3 September 36.7 18.0 69.3 December 37.3 18.7 69.5 1982 March 38.0 19.7 69.1 June 38.0 20.0 67.9 September 38.1 20.4 66.6 Source: Bank of Portugal, Annual Report and Boletim Trimestral. Date: 08/22/83. - 24 - ANNEX 6 Page 16 Table 9 Portugal: Interest Rate Subsidies Granted by the Bank of Portugal, 1978-82 (in millions of Escudos) 1978 1979 1980 1981 1982 Total interest rate subsidies 2,024 5,609 8,102 10,627 12,272 Agriculture /a 641 1,233 1,317 1,305 1,739 Investment 357 2,285 1,865 2,910 2,970 Export 718 1,552 2,693 2,787 3,202 Housing ... 420 1,696 3,022 3,778 /a Bank of Portugal. Source: Bank of Portugal. Date: 08/22/83. - 25 - ANNEX 6 Page 17 Table 10 Portugal: Margins of Subsidy Granted by the Bank of Portugal, 1979-82 (in percentage points) 1979 1980 1981 1982 at end of period ----------- Agricultural /a 6.5 6.5 6.5 3.5-5.5 Construction of houses 2.0 2.0 2.0 2.0 Exports 2.5-6.75 2.5-6.75 2.5-6.75 3-7.5 Investments 1.5 /b 1.5 lb 2.8 lb Type I 1.5-10.5 Type II 1.5-5.5 Companies in financial difficulties 5.5-10.5 5.5-13.25 5.5-13.25 5.5-10.5 Housing 2.5-A.5 2.5-4.5 1.5-3.75 1.5-3.75 /a Short-term only. /b According to the general scheme of the incentive system for new investments in Industry and Fishing, entered into force in 1980, the margins of subsidies may vary between 2.8 and 16.0 considering the specific characteristics of the projects. Source: Bank of Portugal. Date: 08/22/83. - 26 - ANNEX 6 Page 18 amount increased from 17 billion to 30 billion Esc. It would appear that, relative to other sectors there are some constraints to the demand and supply for agricultural credit which are not being remedied by large outlays for interest rate subsidies. 21. According to a study carried out by the Bank of Portugal, compounding the problem of a relatively low allocation of credit to the sector, is the problem of diversion of credit resources registered as agricultural to other non-agricultural activity. This problem is aggravated by the high level of subsidy for agricultural credit, compared to other types of credit, especially for consumer loans. II. Institutional Framework of Agricultural Credit A. General Background 22. Portugal's system of agricultural credit is formed by a series of distinct institutions: commercial banks, state credit institutions (the Banco de Fomento Nacional, BFN, and the Caixa Geral de Deposito, CGD), cooperative credit banks (the Caixas de Credito Mutuos, CCAM's), Economic Coordination Organisms (the Juntas or Marketing Agencies), and the Instituto de Apoio ao Desenvolvimento da Agricultura e Pesca (IFADAP) attached to the Bank of Portugal, which was designed to coordinate the overall system and to set policy, but which has itself become involved in direct lending operations. The system is supposed to be systematized and coordinated by the Financing System for Agriculture and Fisheries (SIFAPE). SIFAPE, is a set of regulations which defines the terms and conditions under which IFADAP and the commercial banks operate with respect to agricultural credit. It also provides for the establishment of credit lines to refinance agricultural loans; it provides for the payment of interest rate subsidies, for the payment of ordinary investment subsidies, and for the establishment of a guarantee system. The Bank of Portugal pays all agricultural interest rate subsidies for SIFAPE through IFADAP, which in turn pays subsidies to the financial institution on behalf of the farmer. For specially subsidized operations such as the credit lines under the Tras-os-Montes Project (Loan 2175-PO) which receives 10 percentage points of subsidy greater than that allowed by SIFAPE, the Bank of Portugal pays subsidies through IFADAP up to the normal SIFAPE level and the Ministry of Finance pays the additional portion. 23. Although the system of subsidies was intended to encourage only high priority activities, under SIFAPE 27 categories of investment activity are eligible for subsidies and 97 categories of activities are eligible for short-term credit subsidies. Thus, virtually all agricultural credit is eligible for subsidies. There is clearly a problem of focus which should be addressed in upcoming sector dialogue. The appropriate focus, however, cannot be defined until an overall sector strategy and set of priorities are decided. 24. The general criteria by which loans are judged for their eligibility for interest rate subsidies are as follows: Type I: loans qualifying for the maximum interest rate subsidy. The criteria to qualify for this classification are (a) 75% or more of livestock feed is produced by the farm itself; and/or (b) 602 of investment costs are domestically produced and represent national value added; and (c) the period of recovery of foreign exchange expenditures is two years or less. -27 - AANNEX 6 Page 19 Type II: loans qualifying for a lower interest rate subsidy. The criteria to qualify for this classification are (a) more than 25% of feed requirements are covered by concentrates produced outside the farm; and/or (b) 50 to 60% of investment costs are domestically produced and represent national value added; and (c) the period of recovery of foreign exchange expenditures is two to four years. If projects do not fit the criteria of Type I and Ir loans, they receive no subsidy. The assessment of a project's eligibility for subsidies according to these criteria can involve much subjective judgement, which can differ from evaluator to evaluator. This has apparently been the basis for misunderstandings between IFADAP and the banks. A streamlining of the system should go a long way to resolve the problem of communication and confidence between the banks and IFADAP. 25. Table 11 indicates that livestock has received, on average, between about 60 to 70% of subsidized "campaign" (or production) credit from IFADAP since 1979. As for the term structure of agriculture lending it is preponderantly short-term. In terms of subsidized credit, short-term credit represented a 78% share in 1981 and an 87% share in 1982. Tables 13 and 14 indicate that medium-term credit of more than five years is less than 2% of total credit granted. Stated in terms of end of period balances, that share increases to about 15-17%, however, that may be indicative of credit repayment problems and a resulting reclassification of overdue debts. 26. In 1981, credit subsidized through IFADAP represented 83% of total end of period credit balances to the sector. That share, however, appears to have fallen to about 70% in 1982. 27. Tables 15, 16, and 17 indicate the pattern of institutional participation in agricultural credit. In 1982, it is estimated that commercial banks accounted for about 71% of total lending to the sector, about 94% of short-term lending and only about 30% of investment lending. The Government-owned special credit institutions, CGD and BFN, accounted for about 4.5% of total lending to the sector, and about 20% of investment credits. They are only slightly involved in short-term lending and, BFN is prohibited by its charter to do short-term lending. The CCAM's activity has grown significantly in recent years, and now their contribution to investment credit is more than that of CGD and BFN combined, and rivals the contribution made by commercial banks. Tables 18 and 19 show a bank by bank breakdown of operations presented to IFADAP for subsidies. Of part;cular note is the Banco de Pinto e Soto Mayor whose agricultural activity has doubled since 1980 and also of the CCAMs, whose independence from the CGD dates from 1980 and whose activity more than tripled between 1981 and 1982. The investment loans approved for subsidies, as a percentage of total loans presented, has been 14.6%, 54.0%. 39.0%, and 51.0%, respectively in 1979, 1980, 1981, and 1982. 28. Table 20 shows the geographical breakdown of short-term operations approved for subsidies from IFADAP. The two regions of Ribatejo Oeste and the Alentejo received 71% of all subsidized short-term credit, with Ribatejo Oeste alone receiving 50% of the total. The Tras-os-Montes Region received the least, 2% of total short-term subsidized credit. - 28 - ANNEX 6 Page 20 Table 11 Portugal: Loans Approved for Subsidies by IFADAP (From September 1, 1979 to December 31, 1982) Type of Credit 1979 1980 1981 1982 --- (Million Esc) IFADAP TOTAL 65.8 11,334.3 49,611.3 41,224.5 SHORT TERM /a - 6,451.6 39,040.7 35,517.5 Campaign - 4,374.6 30,665.6 24,756.8 Agriculture - 981.2 6,298.5 7,340.5 Forestry - - 373.8 194.6 Cattle Breeding - 3,203.3 21,551.4 15,131.2 Fisheries - 190.1 2,441.9 2,090.6 Processing Industries - 1,950.0 7,036.7 8,786.7 Storage - 120.5 279.5 511.7 Working Capital - 6.5 1,058.9 1,462.3 INVESTMENT /b - Mid- and Long-term 65.8 4,151.0 5,144.5 5,707.6 Agriculture 50.4 2,016.1 3,442.8 4,537.7 Fisheries 15.4 1,888.0 1,214.5 563.6 Agro-processing Industries - 246.9 462.5 606.3 Dairy Program of Entre-Douro - - 24.7 5,707.6 SPECIAL LOANS /c - _ 4,100.8 - IFADAP DIRECT LENDING /d - 731.6 1,325.3 528.5 /a Approved for subsidies. /b Approved in previous analysis and approved for subsidies up to December 31, 1982. /c Drought/Frost 80/81. /d Used funds. Source: IFADAP. Date: 08/22/83. -29- ANNEX 6 page 21 Table 12 Portugal: Agricultural Subsidized Credit for 1982 * (Thchare rate 78.5 E.c - USQl) Nb. of Operations Credit Granted Subsidies Grarted Average Loan Size Eac Million million Esr million million Esc fillion tz Investme Credit Agriculture 6,535 4,537.7 57.8 474.8 6.0 0.694 8,800 Agroiniustries 55 606.3 7.7 17.7 0.22 11.0 139,700 Fisheries 193 563.6 7.2 190.4 2.4 2.9 37,000 Iestment Credit Total 6,783 5,707.6 72.7 682.9 8.7 0.84 10,700 Nb. of Operatons Value of Credit Granted Subsidies Gra ted Eac Million million) Esc Million Millioci) Short-term Agriculture 17,023 7,340.5 93.5 329.6 4.2 0.43 5,500 Forestry 288 194.6 2.5 6.3 0.08 0.68 8,700 Livestoclk 17,268 15,131.2 192.7 699.5 8.9 0.88 11,200 Fisheries 218 2,090.6 26.6 67.8 0.86 9.5 120,700 Transformation 381 8,786.7 111.9 260.2 3.3 23.0 120,700 Storage 117 511.7 6.5 8.5 0.10 4.4 56,000 working Cital 123 1,462.3 18.6 59.6 0.76 11.9 151,100 Sort-ten Total 35,418 35,517.5 452.4 1,431.7 18.3 1.0 12700 * Figures my nt add exactly due to musdings. Soree 0E/22/P _e 08122/83 - 30- ANNEX 6 Page 22 Table 13 Distribution of Total Agricultural Credit Granted (cumulative) (in million Esc) Z of Total Less than More than Credit to 1 Year 1-5 Years 5 Years Total All Sectors 1979 46,425 98,198 2,057 146,680 10 (31.6) /a (66.9) (1.4) 1980 68,323 116,908 2,612 187,843 10.6 (36.4) (62.2) (1.4) 1981 76,329 206,633 5,563 288,525 12.9 (26.4) (71.6) (1.9) /a The numbers quoted in parentheses are percentages. Source: Banco do Portugal, Boletim Trimestral. Date: 08/22/83 Table 14 Distribution of Agricultural Credit (includes Agriculture, Fisheries, Forestry, and Livestock) Total of Commercial and Savings and Investment Banks X of Total Less /a More Credit X Increase than 1 to 5 than to all from Previous I Year Years 5 Years Total Sectors Year - (End of year balances in H Esc) -- ------- 1979 21,527 4,337 4,761 30,625 4.1 (70.3) (14.2) (15.5) 1980 25,285 5,933 6,412 37,630 3.9 22.8 (67.2) (15.8) (17.0) 1981 39,375 10,226 9,941 59,542 4.5 44.8 (66.1) (17.2) (16.7) 1982 40,001 13,003 10,645 63,649 4.5 n.a. April (62.8) (20.5) (16.7) /a Includes some 1 to 2-year credits which probably should be considered short-term; however, according to strict financial rules only credit of less than 1 year-are considered current assets, which would account for the Bank of Portugal's breakdown of credit. Source: Banco do Portugal, Boletin Trimestrial - Sept. 1982. Date: 08/22/83 - 31 - ANNEX 6 Page 23 Table 15 Portugal: Credit to Agriculture, by Institutions /a (End of period balances) (percentage) Funds of the Ministry Year Commercial Banks CGD /b CCAM Xc BFN /b of Agriculture 1969 85.5 1.8 9.2 0.05 3.4 1970 82.4 2.2 9.5 0 5.9 1971 83.5 2.3 9.5 0.02 4.7 1972 87.1 2.1 8.4 0.3 2.1 1973 90.0 1.6 6.0 0.1 2.3 1974 91.6 1.6 5.9 0.3 0.5 1975 92.6 1.3 4.3 0.5 1.3 1976 90.8 1.1 4.4 0.6 3.1 1977 89.6 1.6 4.9 1.0 2.9 1978 84.8 2.2 7.5 2.2 3.2 1982 71.5 2.5 21.0 2.2 3.0 /a Includes Agriculture, Forestry, Fisheries, and Livestock. lb The CGD and the BFN are classified separately as they are totally Government-owned banks and have always been. The commercial banks are, however, former private institutions which were nationalized in 1974. The commercial banks continue to operate with a fair amount of autonomy. /c Includes credit made with own resources as well as those obtained from CGD. There is no double counting, however, as funds used for refinancing loans are attributed to the CCAM's. Date: 08/22/83. ANNEX 6 Page 24 Table 16 Credit with a Term of less than one year to the Productive Agriculture Sector (end of period balances) (by institution, %) Years Commercial Banks C.G.D. CCAM 1969 95,7 0,4 3,9 1970 96,0 0 4,0 1971 95,9 0,2 3,9 1972 96,4 0,2 3,4 1973 97,5 0,1 2,4 1974 97,7 0 2,3 1975 98,3 0 1,7 1976 98,3 0 1,7 1977 97,8 0,2 2,0 1978 96,2 0,6 3,2 1982 94,5 0,5 5,0 Date: 08/22/83 - 33 - ANNEX 6 Page 25 Table 17 Portugal: Credit to Agriculture, /a With a Term Greater than One Year, by Institutions (End of period balances) (percentage) Funds of the Ministry Year Commercial Banks CGD CCAM BFN of Agriculture 1969 39.2 8.1 33.5 0.3 18.9 1970 11.6 13.3 38.3 0 36.8 1971 13.9 14.3 40.9 0.2 30.8 1972 29.7 13.8 39.3 2.3 14.9 1973 33.2 13.0 33.1 0.8 19.9 1974 39.3 15.5 37.1 2.8 5.2 1975 38.6 12.7 29.7 5.1 13.9 1976 26.9 10.1 27.5 5.8 29.7 1977 32.3 11.2 25.1 8.3 23.1 1978 32.6 10.0 27.2 12.4 L1.8 1982 /b 30.0 12.0 30.0 11.0 17.0 /a Includes Agriculture, Fisheries, Forestry, and Livestock. /b Estimated. Source: Banco de Portugal, Boletim Trimestral - Sept. 1982. Date; 08/22/83. - 34 - ANNEX 6 Page 26 Table 18 Portugal: Investment Credit (with a term greater than 1 year) Operations by Financial tnstitutions Presented to IFADAP for Subsidies (values in millions of Escudos) 1 9 7 9 1 9 8 0 1 9 8 1 1 9 8 2 Nb. Value Nb. Value Nb. Value Nb. Value BBI 23 34.2 183 830.9 239 980.6 169 473.7 BESCL 2 4.1 210 224.1 492 554.4 399 439.1 BFN 3 10.8 86 772.3 93 1,627.2 39 430.0 BFB 5 69.2 255 891.6 460 1,098.3 322 620.1 BNU 38 44.1 261 714.0 512 1,116.8 334 494.2 BPSM 10 6.5 234 483.5 458 684.4 704 1,005.7 BPA 30 80.6 353 1,229.7 567 956.3 483 830.5 ETA 11 15.4 231 765.9 548 1,079.1 334 438.7 CPP - - 39 66.5 94 298.5 54 124.1 UBP 13 35.9 157 329.2 273 707.4 133 186.9 CGD 78 23.9 1,574 1,385.5 1,982 3,027.0 1,841 2,691.5 CCAMs - - - 1,897 1,154.5 4,452 3,469.6 TOTAL 213 450.5 3,583 7,693.2 7,615 13,286.5 9,264 11,186.1 Note: These totals differ from these in Table 16 because some agricultural loans are presented which are not approved for subsidies from IFADAP. Source: IFADAP - DSLPC. Date: 08/22/83. 35 - ANNEX 6 Page 27 Table 19 Portugal: Investment Credit 1982 Operations Presented by Credit Institutions to IFADAP for Subsidies and by Sector of Activitv (values in millions of Escudos) Agriculture Fisheries Agroindustries Total Nb. Value Nb. Value Nb. Value Nb. Value BBI 157 302.1 11 170.3 1 1.3 169 473.7 BESCL 381 409.7 14 26.9 4 2.5 399 439.1 BFN 30 177.5 4 123.2 5 129.3 39 430.0 BFB 273 408.5 43 107.8 6 85.8 322 602.1 BNU 307 362.0 22 96.9 5 35.3 334 494.2 BPSM 668 819.1 30 117.8 6 68.8 704 1,005.7 BPA 399 485.2 79 292.6 5 52.7 '83 830.5 BTA 319 335.2 13 36.6 2 67.5 334 '38.7 CPP 55 125.9 -1 * -0.4 * 0 * -1.4 * 54 124.1 UBP 122 156.9 11 48.9 0 * -18.9 * 133 186.9 CGD 1,744 2,074.4 75 310.8 22 306.3 1,841 2,691.5 CCAMs 4,433 3,135.8 - - 19 333.8 4,452 3,469.6 TOTAL 8,888 8,792.3 301 1,330.8 75 1,063.0 9,264 11,186.1 * Cancelled loan requests. Source: IFADAP - DSPLC. Date: 08/22/83. Table 20 Portugal. Short-term Credit Operation. Approved /a for Subsidies by ReRion In vhich Credit 1. Uaed (from September 1980 to July 1982) Working Total S 11 0 R T - T B R N Transformation storage capital Short-term ARriculture Foreetry Livestock Fisheries Total Region. Nb. Value Nb. Value Nb. Value Nb. Value Nb. Value Nb. Value Nb. Value Nb. Value Nb; Value S.D. Minho 332 78.0 1 2.0 1,938 1,703.1 67 378.1 2.338 2,161.2 38 567.4 3 29.0 32 340.2 2,411 3,097.8 T. Manter 2,588 818.2 32 16.8 998 462.7 - - 3,608 1,297.7 150 3,591.7 14 36.4 17 219.5 3,789 5,145.3 B. Litoral 1,023 318.3 29 16.4 5,552 4,781.7 132 2,162.1 6,736 7,278.5 48 980.2 26 162.3 42 395.4 6,852 8,816.4 D. Interior 1,424 587.2 14 204.0 1.550 945.2 - - 2,988 1,736.4 23 733.0 It 128.7 24 136.6 3,046 2,734.7 R. Oecte 10,900 4,182.8 63 73.0 26,353 19,466.9 215 1,326.2 37,531 25,048.9 255 5,558.4 54 295.2 32 535.5 37,872 31,438.0 Alentejo 12,911 5,710.3 197 132.4 7,532 5,020.9 - - 20,640 10,863.6 83 1,489.5 - - 23 359.5 20,746 12,712.6 Algarve _1068 490.7 2 0.5 21161 1,424.5 46 23.5 3 277 1 939.2 8 126.4 1 4.0 4 36.3 3,290 2;107;9 TOTAL 30,246 12,185.5 338 445.1 46,074 33,805.0 460 3,889.9 77,118 50,325.3 605 13,048.6 109 655.6 174 2,023.0 78,006 66,052.7 /I Thim table repreaents all operation. approved for jubsidica between September 1980 and July 1982.' There are no figures from IFADAP of actually granted credit. /b A cumulative total of 1980, 1981, until July 1982. Sourcee DSLPC - Servtgo de Estudos e Estatistica. Dates 08/22/83. Go |N ANNEX 6 Page 29 B. Interest Rates 29. As explained in the previous section, during the last six years, five interest rate increases have been implemented. The maximum lending rate is now 30Z. All loans in Portugal are subject to a floating interest rate which is adjusted when the Bank of Portugal changes interest rate levels. Interest rates on long-term loans have generally been positive in real terms for unsubsidized credit; however, for subsidized agricultural credit, rates have been substantially negative. The most recent interest rate increase has changed that pattern. It should be noted, however, that although the rate to the borrower is negative in real terms, that the lenders have been able to protect their assets by the application of positive rates as indicated in the following table. Table 21 Portugal: Agricultural Lending Rate Compared to Inflation Rates Long-term Subsidy Effective Real Rate Real Rate Lending to Lending Inflation Paid by Received Rate Farmers Rate Ratc Farmers by Lenders =- (average) --…-- 1978 22.25 6.5 15.75 22.0 -6.25 0.25 1979 22.25 6.5 15.75 24.0 -8.25 -1.75 1980 21.25 6.5 15.75 17.0 -1.25 5.25 1981 24.00 6.5 17.50 20.0 -2.5 4.5 1982 April 26.0 6.5 19.50 25.0 -5.5 1.0 1983 May 30.0 5.5 24.5 22.0 +2.5 8.0 Source: Bank of Portugal. Date: 08/22/83 30. For agriculture, the interest rate structure, presented in Table 22, applies. For medium- and long-term loans a phased, subsidized interest rate is applied. 31. The phased interest rate system for medium- and long-term loans haq been an issue on which Bank supervision missions for the Agricultural and Fisheries Credit Project and the appraisal mission of the TrAs-os-Montes Project have focussed. It has been supposed that the reason farmers were reluctant to apply farm plans and to use investment credit, preferring regularly to roll over short-term credit, was due to the fact that during the credit disbursement/establishment period the farmer must pay a full, unsubsidized rate. The interest rate subsidy is paid immediately in the case of short-term credit. Also subsidies cease to be paid after the 6th year for investment credit, while they are paid each year for short-term credit. These differences can be critical if, for example, pasture, vineyard, or orchard establishment would require loan disbursement over a two to three years period. ANNEX 6 - 38 - Page 30 Table 22 Portugal: Interest Rates for Medium- and Long-term Loans (as cf March 25, 1983) Project Type Type I Type II Maximum Rate Maximum Rate Periods Subsidy Applied Subsidy Applied Credit Utilization / Establishment - 30.0% - 30.0% 1st Year After Credit Utilization/Establishment 12.5% 17.5% 9.5% 20.5% 2nd Year " 11.5% 18.5% 8.5% 21.5% 3rd Year 9.5% 20.5% 7.5% 22.5% 4th Year " 7.5% 22.5% 6.5% 23.5% 5th Year " 4.5% 25.5% 4.5% 25.5% 6th Year + following - 30.0% - 30.0% /a According to the Bank of Portugal's publications there are 3 classifications of loan periods: (a) up to 1 year, (b) 1 to 5 years; and (c) more than 5 years. In this report, all loans "up to 1 year" will be referred to as short-term and all others will be referred to as medium- and long-term. Source: Bank of Portugal Date: 08/22/83 Table 23 Portugal: Interest Rates for Short-term Loans (as of March 25, 1983) Type of Loan Type I TyPe II Max. Applied Max. Applied Terms Rate Subsidy Rate Rate Subsidy Rate Less than 90 days 27.0 5.5 21.5 27.0 3.5 23.5 90 days less than 180 days 27.5 5.5 22.0 27.5 3.5 24.0 180 days less than 365 days 28.0 5.5 22.5 28.0 3.5 24.5 365 days less than 24 mths 28.5 5.5 23.5 28.5 3.5 25.0 Source: Bank of Portugal Date: 08/22/83 39 - ANNEX 6 Page 31 32. The following table compares the effective rates of subsidy for, respectively, a 100 Esc loan with a nine-year term, a 100 Esc loan with a six-year term, and a short-term, one-year 100 Esc loan. For the longer term loans a grace period of two years is assumed. Table 24 9-Year Loan 6-Year Loan Short-Term 2 Years Grace 2 Years Grace Loan 1. Subsidy amount 34.1 17.5 5.5 2. Interest amount paid 151.1 117.4 22.5 3. Effective subsidy rate I - (I + 2) 18 % 13 % 19 % 4. Average effective subsidy on 30% interest rate (in percentage points) 5.4 3.9 5.7 33. The paradox of these calculations is that the effective subsidy rate for a nine-year loan is higher than for a six-year loan. The explanation given bv the Bank of Portugal is that a high level of subsidy is paid on a higher outstanding balance the longer the term of the loan. Once the effect of the subsidy declines the outstanding balance is also very small. Thus although the average interest rate is lower for the loan with a six-year term, the effective rate of subsidy is actually lower than for the nine-year loan. The calculations in Table 25 appear to bear-out this argument. 34. However, when one compares the effective interest subsidy on a medium-term loan with that of a short-term loan (line 4, Table 24) it makes perfect economic sense that the farmer prefers to roll-over short-term credit each year. The effective rate of subsidy on short-term loans is higher. In addition, the amount of paperwork required is much less than for an investment loan. 35. This situation, however, implies a high degree of transaction costs for the banking system. In terms of efficiency it would be preferable to remove the administrative complexities involved in applying for investment loans, including making the interest rate structure constant. Farmers tend to be confused by the phased system and do not understand the benefit of a higher effective interest rate subsidy associated with longer-term loans. 36. While the issue of the appropriate interest rate level and of the justification for subsidies is an important one, it is part of broader discussions between the Government and the IMF. Some recommendations in this regard are presented in Part Two. ANNEX 6 -40- Page 32 Table 25 Portugal: Calculations of Effective Subsidies on Agricultural Investment Loans Investment Loan 100 Esc 9-year term 2 years grace 1 2 3 4 5 6 7 8 9 Outstanding amount 100 100 100 85.7 71.4 57.1 42.8 28.5 14.5 Subsidy(Z) Average rate 7 0 0 0 12.5 11.5 9.5 7.5 4.5 0 5Z Subsidy amount 0 0 0 10.7 8.2 5.4 3.2 1.2 0 34.1 Interest Average rate (2) 30 30 30 17.5 18.5 20.5 22.5 25.5 30 24.97 Interest amount 30 30 30 14.9 13.2 11.7 9.6 7.3 4.4 151.1 Investment loan 100 Esc 6-year term 2years grace 1 2 3 4 5 6 Outstanding amount 100 100 100 75 50 25 Subsidy(%) Average rate 0 0 0 12.5 11.5 9.5 5.58 Subsidy amount 0 0 0 9.4 5.7 2.4 17.5 Interest Average rate (X) 30 30 30 17.5 18.5 20.5 24.4 Interest amount 30 30 30 13.1 9.2 5.1 117.4 Date: 08/22/83 - 41 - ANNEX 6 Page 33 37. Interest rate subsidies for agriculture are also available under the Industrial Investment Incentive Scheme (SIll). These subsidies can be used for qualifying agro-industrial projects, agricultural product processing projects, as well as for general industrial projects. The subsidy may vary from a maximum of 102 off the annual interest rate for the first year, depending on the points scored by the investment project for its productivity achievement, sector and regional location priorities. Over the following four years, this subsidy is reduced by 20% per annum. Agroindustrial investors can choose to borrow under the SIFAPE system through IFADAP or they can borrow directly from commercial banks and apply for SIll subsidies. Under SIlI, tax incentives are also available in addition to interest rate subsidies. This program has, however, not functioned well since its initiation. The following table compares the incentives available through the two systems. - 42 - ANNEX 6 Page 34 Table 26 Portugal: Comparison of SIFAPE and Sll Subsidies Maximum Rate Applied Subsidy Tvpe I SIFAPE/IFADAP Option 1 Credit Utilization 30.0 1st Year 17.5 12.5 2nd Year 18.5 L1.5 3rd Year 20.5 9.5 4th Year 22.5 7.5 5th Year 25.5 4.5 6th Year & following 30.0 - Option 2 --------------------- -30.0 with 50% of interest capitalized such that a flat rate of 15% is paid on the loan, and 15% is accrued to the loan balance. If this option is chosen, interest rate subsidies are foregone. Maximum, Most Preferential Most Preferential Subsidy …-(------…-- -__---- t%) - S I I I 1st Year 20.0 10.0 2nd Year 22.0 8.0 (202 less than previous year) 3rd Year 23.6 6.4 " 4th Year 25.3 5.0 " 5th Year 26.3 4.0 Average over 5 years .2.4 Date: 08/22/83. -43 - ANNEX 6 Page 35 38. A discussion of the various institutions which comprise the agricultural credit system follows: C. §peS1al Credit Institutions 39. The "Caixa Ceral de DeJositos" (Cencral Deposit Bank, CGD). The CGD, which has always been public, is involved inter alia with financing agricultural and industrial credit operations, including wine marketing, cereals production and livestock farmning. A large proportion of the loans by the CGD to the public sector, including corporate bodies, is also for the benefit of agriculture. The CGD has 145 branches and is the most important single source of credit to the agricultural and fisheries sector, particularly for medium and long-term loans. Up until 1978 CGD supervised and refinanced the credit operations of the Caixas de Credito Agricola Mutuo (CCAM's). COD has a sizable technical agricultural unit which in 1980, the time of the appraisal of the Tras-os-Montes Project, consisted of seven agronomists and two economists at headquarters level and agricultural staff at most of its regional branches. Its agricultural credit operations are decentralized so that credits up to the equivalent of esc. 5 million (about US$55,000) can be approved by the regional branches. 40. The resources of the CGD are drawn mainly from time and sight deposits; 50% of its deposits are term. Among the si,!ht deposits a distinction can be drawn between voluntary deposits from private resources and the compulsory deposits which certain official institutions such as the Social Security and other funds are obliged to make. 41. The Banco de Fomento Nacional (the National Development Bank, BFN). The BFN vas created in 1959 as a joint venture between the Government and the private scetor. It was nationalized in March 1975. It is a development finance company which can make mediurm- and long-term loans to agriculture and industry. However, agricultuiral financing is less than 2% of BFN's total loan portfolio. BFN's lenditig procedures are based on the guarantees presented by applicants and a reasonably good analysis of project producLivity. In March 1983 BFN had two agronomists, one veterinarian, and ont economist in charge of agricultural appraisal. All are located at headquarters in Lishon. There is practically no techinical supervision of loans disburs.-d. As BFN is the implementing agency for the second loan to Banrco de Fonenrlto Naional, details regarding its structure and operatiorns are available in R-port No. 3116--PO and in subsequent supervision reports. Ttv.! arrears siaLiltiorn ;Lt BEN is discussed in para. 9 of the present annex. D. Conu,rc i;ll B1anks 42. Counercial bank involvement in th- agricultural sector is relatively undeveloped. On average, only about 4.b% of the total commerrial bank lending has been for agriculture. Loans h;c.- traditionally been condiLional upon collateral requirements, mainly morei-.sn . (;enerally, commercial banks do not have agricultural technicians. Tho ir appraisal capacity for medium- and long-term loans is limited. she only exception is Banco de Pinto e Soto Mayor which has established an Agricult-rirl D:velopn,nertt Department with agricultural technicians of various levels to seek out agricultural business and to evaluate and appraise appropriate agriculLural investments. The Banco ANNEX 6 - 44 - Page 36 Portuguesa do Atlantico has plans to develop a staff devoted to agricultural business. In general, thowever, the attitude of commercial banks toward agriculture has been quite passive and oriented to larger or more well-to-do farmers who can offer adequate assets as loan security. The development needs of smaller scale farms with special development and technical assistance needs are not served, by the commercial banks given the existing situation in terms of margins and a lack of incentives. 43. Out of a total of 912 branches which exist in C3ntinental Portugal, the commercial banks hold about 745. Their distribution throughout the country is extensive. E. Funds and Economic Coordination Entities 44. Two important funds are the Fundo de Abastecimento (the Supply Fund, FA) and the Fundo de Fomento Forestal (Forestry Development Fund, FF). The FA is a compensation fund which receives its resources from taxation on petroleum products and pays subsidies on fertilizer and a few agricultural commodities. Its support to agricultural activities has been primarily in the form of subsidies. The FF provides loans and subsidies for forestry projects. The nature of these subsidies and the t-erms and conditions of loans from this fund could not be determined during the mission. 45. The main economic coordination entities (they are essentially marketing agencies) are the Junta Nacional de Frutas (the National Fruit Board, JNF) and, the Junta Nacional de Vinho (National Wine Board, JNV), the Instituto de Azeite e Productos Oleaginosos (Institute of Oil and Oil Products, IAPO) and the Instituto de Cerais (the Institute of Cereals, IC). These Boards play roles in the field of price support and marketing, but in addition, (particularly JNPP and JNF) they can provide financial assistance to the agricultural sector. Resources for such loans are apparently provided by commercial banks and the CGD with Junta guarantees. F. IFADAP 46. In 1977, at the time of appraisal of the Agricultural and Fisheries Credit Loan (Ln. 1603-PO) a Mexican consultant under contract with the Bank of Portugal, was reviewing the system of agricultural credit, and proposing organizational changes. The changes which he proposed, resulted in the abolition of several special and emergency agricultural funds and the establishment of IFADAP. 47. IFADAP is a public corporation set up by Law No. 14(78 of March 23, 1978. It is a legal entity with administrative and financial autonomy operating as an annex of the Bank of Portugal which, under the decree, supervises and audits its operations. 48. IFADAP's objective is to contribute to the expansion and improvement of crop, livestock, fisheries and forestry activities through (a) the refinancing of short-, medium- and long-teLM loans made by banking institutions; (b) the administration of subsidies and (c) the provision of guarantees to banking institutions for which normal loan collaterals are not available. - 45 ANNEX 6 Page 37 49. As an apex institution, IFADAP is responsible for the definition of lending policies, eligibility criteria and terms and conditions of loans made by participating banking institutions (PBIs) in the agricultural and fisheries sector. It was intended that IFADAP would conclude agreements with PBIs, extend lines of credit to them and supervise the conformity of loans with its lending program by requiring its approval of all loans made. It was also to provide guarantees to PBIs for loai.s to farming units which lack sufficient collateral. In practice, however, the guarantee system has not yret been brought into operation. 50. IFADAP's resources consist of an initial capital of Esc I billion (US$25 million) divided in 1,000 equal shares and primarily subscribed by CGD and commercial banks. This subscription capital has been complemented by grants from the Government budget, bond issues, operating earnings and multilateral and bilateral capital assistance. 51. IFADAP is managed by a committee of five members appointed by a joint decision of the Ministry of Agriculture, Forestry and Food (MAFF) and the Ministry of Finance and Planning upon recommendation of the Bank of Portugal. The President, formerly the Managing Director of the Bank of Angola, was more recently a Director of CGD. 52. IFADAP's Managing Committee is assisted by a consultative council whose members are representatives of MAFF, the Ministries of Finance and Planning and Commerce, banking institutions, unions (syndicates) of MAFF employees, workers and farmers and fishermen's organizations. 53. IFADAP's head office is in Lisbon. Under the Managing Committee there are four departments dealing respectively with administration and accounts, lending policies and research, technical supervision and finance. In addition, a legal adviser, internal auditor, training unit, managenient organization unit and computer unit are attached directly to the Managing Committee. In the field, regional offices have been opened in each of Portugal's 18 districts. The Bank of PorLugal has provided most of IFADAP's facilities and staff. 54. IFADAP has been given a very important role in financing the agricultural sector. The Bank takes a special interest in IFADAP as the Borrower under the first agricultural loan to Portugal following resumption of Bank lending in 1974. Under the Agricultural and Fisheries Credit Project (Ln. 1603-Pa) the establishment of IFADAP was seen as a first step in the restructuring of the agricultural credit system, "a major objective of which is the devolution of IFADAP's responsibilities to the banking institutions themselves once they have established an adequate capability for sound appraisal and supervision of lending operations." (SAR Ln. 1603-Pa, p. 6) It was intended that IFADAP would plan, regulate and supervise the flow of agricultural and fisheries credit to individual and collective users, in compliance with overall and agricultural credit and development policy determined by MAFF, the Ministry of Finance and Planning and the Bank of Portugal. The banking institutions would participate financially and act as the channel of distribution of this credit, while the Ministry of Agriculture's Regional Services of MAFF would provide appropriate technical assistance to farmers by helping them to prepare farm development plans. ANNEX 6 - 46 - Page 38 55. Under this loan, however, IFADAP has been adversely affected by several important policy issues, some of which have been largely outside its control. As a result, since signing of the loan in September 1978, only US$2.0 million out of a US$70.0 million credit has been disbursed for agricultural credits refinanced by commercial banks under the loan. In January 1983, IFADAP requested cancellation of US$55.0 million of the loan. The major issues affecting the loan have been as follows: (a) Unwillingness of commercial banks to refinance agricultural credits under the project thereby_frjeein more lendig resources and permitting an overall expansion of credit to the sector. At the time the project was appraised, there was a general shortage of loanable funds because of the current political uncertainty and unattractive deposit rates relative to the real expected returns on other investments. It was expected that the possibility of refinancing agricultural credit under the project would allow an expansion of credit to the sector, while reducing commercial banks' risks, as they would not be using their own funds, and allowing them to retain liquidity. A change in administration and a policy of attractive positive interest rates has altered the liquidity situation and most banks are now overliquid, especially in light of credit ceilings. In an attempt to give incentives to commercial banks (PBI's) to refinance under the project, a credit ceiling incentive was introduced whereby a PBI's monthly credit ceiling is adjusted by the amount of the credit line it used during the previous month. While this arrangement has greatly improved the performar.ce of the Small and Medium Scale Enterprises (SME) Project, which is similar in conception to Ln 1603-PO, it has not improved PB1 willingness to refinance under Ln. 1603-PO. The reasons for this unwillingness are: (i) the rediscount rate is higher than the cost of the PBI's own funds. Thus the margin to be earned by the banks if they use their own funds or those from the interbank money market is greater; (ii) industrial loans are considered to be less risky, more profitable and more easily supervised than agricultural loans; (iii) the technical assistance (both managment assistance to the enterprises as well as loan appraisal assistance to banks) offered by IAPMEI under the SME loan was more extensive and valued by the PBI's than that offered by IFADAP. IFADAP dependence on the Ministry of Agriculture for the technical appraisal of loans greatly complicated loan processing for the banks and led to delays. Delays within IFADAP in making determinations on interest subsidies discourage both the banks and the borrowers. Also, a well-established guarantee system is available through IAPMEI for SME, including agroindustrial loans. IFAI)AP's guarantee system has not yet been brought into operatiorn. The services available through IAPMEI directly reduces both administrative costs and default expenses to the PBI's while the delays, administrative complications, and paperwork in dealing with IFADAP tended to increase banks' administrative costs. (Table 27 compares the processing of agricultural loans through IFADAP with the processing of industrial and agroindustrial loans through IAPME1 in an effort to offer lessons for the future); and (iv) additional incentives to encourage commercial bank lending to agriculture have ANNEX 6 - 47 - Page 39 not been devised. The Mexican system after which IFADAP is fashioned has the following features which distinguish it from the Portuguese system: (a.) commercial banks are required to either use 10% of their deposits for agricultural loans or to deposit what has not been lent of that 10% into a very low interest paying reserve account. It is more profitable for the banks in Mexico to lend at least the 10% for agriculture, rather than to lose potential profits; (b.) the Mexican system includes a guarantee fund which insures the refinanced, as well as the non-refinanced, portion of the loan up to 80% of the loan amount; (c.) the Mexican system also includes some reimbursement for the cost of technical agricultural staff hired to support the banks' agriculture lending operations. (b) Land tenure-aroblems in the Alentejo region, which accounts for an important kart of total national agricultural production. The Alentejo was the scene of the 1974 agrarian revolution. As a result, the area is deeply affected by issues regarding land ownership, including the problem of commercial bank unwillingness to lend to the collectives, established after the revolution, either in general or through the Project. Even now, the l..,:d reform measures have not been resolved. Some expropriated land his been returned to previous owners on the basis of a point system which takes into consideration land quality, the presence of irrigation, etc. However, there is an appeals process which leaves total uncertainty with respect to any private land titles which are granted. As a result, commercial banks are unwilling to lend either to cooperatives or to many private farms because of lack of security. Thus, only about 50% of the land in the Alentejo is eligible to receive credit through the comnercial banks and, hence, through the Project. While land tenure problems affect commrercial bank willingness to lend in the Alentejo, fragmentation of farm hioldings and unviable scales of farm enterprises affect commercial bank willingness to lend in the North of Portugal. (c) Thephased interest rate system and inflexible credit terms. The current interest rate terms for credit discourage long-term borrowing and make it financially unfeasible for farmers to finance integrated farm plans. The interest rate system for investment credits (Table 22) is designed such that no interest rate subsidy is paid during the disbursetment period. For some medium-term loans, such as for pasture establishmnu:nt, this could take two or three years during, which the farmer must pay an unsubsidized 30% rate of interest. As a result farmers have tended to take out the cheaper, short-term loans and to renew them regularly each year. This has, however, resulted in inadequate farm planning and financial problems for the farmers. Under 1603-PO as well as under the Tras-os-Montes Project, the Bank has requested that a flat 14.5% interest rate be applied which the Government has recently established for both projects. Another problem has been that grace and amortization periods are usually applied according to fixed formulae regardless of the realities of a given enterprise. While capitalization of interest during grace periods, for example, is legally provided for, it is not generally applied. ANNEX 6 - 48 Page 40 Table 27 Portugal: Caiarison of Institutional Arrargenents Betieen the SMI and the Agricultural and Fisheries Credit Project Agricultural And Fisheries S?E Project Credit Project (Ln. 1701-PO) Ln. 1603PO Lessons Learned * The Instituto de Apoio as Pequenas * IFADAP depends on the iMinistry * LIA1 reduces the adunis- & Madias 8npresas Industrias of Agriculture (MACP) to trative costs to the baiks (IAWI) prepares projects, prepare projects. Tere are by preparing paperwork and including financial and econcmic ind;cations that MAP staff by doing quality control analysis, prepares loan appli- is not aluays available on a and recassmwding only cations and applicatimns for the tinely, as-needed basis. projects considered viable Sisteim de luentivos Indus- even without the SllI triales (SIII). Banks can also * Banks mist prepare a 45-page incentive. D 20 ho. Fa.'& 88,1 7,8 66,8 33,2 1, 2 68,3 30,5 50,2 49,8 5BETIA LITORAL: < 20 ha FaAms 81,9 28,7 58,7 41,3 1,5 67,5 31,0 42,2 57,8 -,20 ha FaAm6 87,1 23,5 58,7 47,3 2,5 60,5 30,0 47,6 52,4 SEIRA 7.!TERI OR: < 20 ha. Faom6 68,3 20,7 70,3 29, 7 1,9 72,6 25,5 38,7 61,3 = ?,20 ha FaAm& 88,5 7,0 73,5 26,5 3,4 7;,6 25,0 35,2 64,S UISATEJO E VEM7ET (20 ha Fa,a 32,0 9,8 68,5 31,5 2,4 63,4 29,2 32,2 67,8 * )0 ha Fiama 67,5 9,0 68,4 31,6 5, 7 62,0 32,3 23,7 7i,3 <20 ha F2Im 30,9 8,6 71,9 28,1 5,1 76,2 7S,7 33,6 66,4 ;'?0 ha Faw 6 44,5 4,3 74,5 25,5 9, 8 70,6 19,6 31,2 68,8 A1Gk;VE: <20 ha Fatmxap 39,7 12,0 72,2 27,3 u,8 78,2 ;5,0 33,3 66,7 )YZO ha a- e 59,4 6,4 79,8 22,! 4,? 7,1 J7,0 23,2 76,6 SOURCE: I.1J.E. - INQUERITO AS EXPLORACJJES AGRICOLAS, 1963. ARM 8 - 118- Talea6 Page I PFM Gwvenumit's Pronty Prom for Irrigation Project. Inebit Sdedule Mizistzy of Public Wak (DWWV 1963 1984 1985 1986 1987 1988 1989 Ta1 s: Eillionlcd (1983) Main Drainp Sys 320 1,180 1,100 550 3,15D Main Cowl, Pmp station 760 500 480 1,740 Replation Tribut. Valleys 300 350 650 Oth0 Main Works (not ca.enir rrgation) 1,710 820 40D 70 3,0OD Sibtotal 2,790 2,800 233 620 8 i40 MR=! ME CAVAYEIS Dun Azxlo '50 50 Main Supply Systein Acedo 240 230 470 Main Supply Systen Salsela. 15 15 10 40 Main supply Systin Bin6os 80 100 40 220 Subtotal 290 230 15 95 110 40 780 OA DA BEIM D sW MiS 410 220 - 440 725 755 740 3,290 Main Iffly Caul 30 360 360 300 350 300 250 1,950 Dmaie, iver Ieayl. 75 75 40 60 150 130 530 Other Waft 25 50 25 o00 Subtotal 440 680 485 805 1,135 1,205 1,120 5,87 ATAIDA SA0ERM Dan belidce 240 240 60 540 Dan 0JeleiteTuze} 100 220 460 470 210 1,460 Main Supply system 280 450 470 250 1,450 Dmtic Water T teat 120 250 250 170 790 Ccxiuult.auy 90 100 80 80 60 30 440 SubtatAl 330 840 I 060 1,260 950 240 4680 MML (Price loe 1983) 3,850 4.550 3890 280 2L195 1485 I 12D 19,810 cbservatian: am TAble 6, p. 2. Source: mission Me: Mud 1983 - 119 - AIM 8 Page 2 ACRCIJIU AL 9C~l9 ACaSs= sum Govemnmtal Priority Progea fo irrigation Projects Inetm Sd*dule Ministry of Agrictdture (D(A 1983 1984 1985 L986 1987 1988 1989 1990 1 Cc,~a:Million E:udos (198)- SummArea: 15,OOD ha Second. Distrib. Syten 52 223 221 227 239 240 197 1 Dainage aid PoEs 28 10 118 122 129 128 106 Subtotal 80 343 339 349 368 368 303 2 DE CAVlEZD1S Sdvm Area: 5,300 ha Distrib. ltok Rhae I 120 120 160 60 30 Distrib. NeWl k Phase II 130 170 100 Subtotal 120 120 160 190 200 100 WVA Dk EIM S5bem Area: 14,223 ha Diatrib. Nel ok M. (3,407 ha) 75 240 195 Diatrib. Iook F. (4,494 ha) 1 300 150 75 Diatrib. N1tzk C.F.B. (6,322 ha) 150 225 300 285 Drainage and Rods 30 96 138 120 120 120 120 114 Subtotal 105 336 483 420 420 420 420 399 3 SdM Azea: 7,(000 ha 11 Rydraiic aid Rural Seccxi Izzrastzuct~uzs Subtotal 216 428 428 428 1 mmL 305 799 1,198 1.,387 1,416 1,316 723 399 7 Gsewti: The pri awty cm prise: "39:.- Cwpletion of main works by 1986 aid coatinuous cution of secadaz infrastructure by 1989. MAWED DE CAUXEI06: Caqletion of iplazentationm Phase I (2,500 ha) by 1987. a)% DA EIR& CBURL-ion of the irrigitiou: Blodc Heimoa (3,407 ha) by 1985. AIW SOa : ofletion DA Be lidhe by 1985. If Hm* Cost Estutwn ad TDAtai Eq aditure Schedule. ANNEX 9 - 120 - PORTUGAL AGRICULTUFAL SECTOR SURVEY FORESTRY LJBSECTOR Table of Contents Page I_ Forest Resources . . . . . . . . . . . . . . . . . 1 IT. Forestry Institutions . . . . . . . . . . . . . . . 2 III. Forest Industries . . . . . . . . . . . . . . . . . 2 IV. Contribution to the Economy . . . . . . . . . . . . 3 V. Forest Development Program . . . . . . . . . . . . 4 VI. Development Constraints . . . . . . . . . . . . . . 5 VII. Recommendations . . . . . . . . . . . . . . . . . . 6 Table 1: Trade Balance in Forest Products, 1976-80 Table 2: Export Value of Principal Forest Products 1971-81 -121- ~~~~~ANNEX 9 - 121- PORTUGAL AGRICULTURAL SECTOR REVIEW Forestry Sub-Sector I! FOREST RESOURCES 1. According to the 1980 national forest inventory, forest and woodland in Portugal occupy approximately 2.97 million hectares, which constitutes 33.4% of the land area. Coniferous forest (notably Pinus pinaster) covers 1.37 million hectares, primarily in the northern and western regions of the country. Eucalyptus plantations (principally Eucalyptus globulus) occupies 0.22 million hectares and occurs mainly in the west. Cork oak (Quercus suber) covers 0.65 million hectares and is largely restricted to the southwest, while holm oak (Q. ilex) covers 0.55 million hectares and is restricted to the southeast. The balance of some 0.20 million hectares comprises various broad- leaved species and mixed forests scattered within the country. 2. A comparison of the results of the national forest inventory with the results of soil classification surveys shows that, with few minor exceptions, existing forest occurs on land that is unsuitable for agriculture. Field surveys indicate that there is approximately 3.5 million hectares of presently unproductive land, unsuited to agriculture, that could be afforested. 3. Only 2.5Z (75,000 ha) of existing forest is State owned. A further 8.7% (259,000 ha) is on communal land and 88.8% (2,634,000 ha) is on private land. Practically all eucalyptus and 78% of pine forest are in private ownership. By 1985, most state and communal areas available for forestry will have been planted and future afforestation will be restricted to privately- owned land. 4. Pine and eucalyptus forests are the principal sources of industrial wood. The potential of these areas to produce good yields of high quality timber is well illustrated by plantations established and managed by the State and the pulpmill companies. Much of the existing forest in individual private ownership, however, is unmanaged, has been subjected to extensive selective felling, has been seriously damaged by fire and represents a deteriorating asset. In consequence, cash returns to forest owners are low and their inter- est in forest development as a worthwhile economic activity is negligible. Oak forests are normally managed as open woodland in conjunction with agricul- ture (cultivation or livestock). The system effectively prevents natural regeneration and the forests have a preponderance of mature trees. l/ This review is based principally on A Strategy for the Development of the Forestry Sector (November 1982), which was prepared by FAO for the Govern- ment of Portugal under a unilateral trust fund agreement that formed part of the World Bank-financed Portugal Forestry Project (Loan 1853-PO). ANNEX 9 - 122- Page 2 FORESTRY INSTITUTIONS 5. The Ministry of Agriculture, Forests and Food (MAFF) has overall responsibility for development of the sub-sector. Its forestry executive is the Directorate General of Forests (DGF), which is responsible for afforesta- tion and management of state and comaunal forests and national enforcement of forest law. DGF also undertakes afforestation of private land, through crop- sharing agreements, with private land owners. It has a regional organization of forest divisions, but afforestation is undertaken by 11 brigades, each responsible for a forestry zone. All forestry planning is centralized in Lisbon. DGF's staff is small (approximately 170 graduates and 600 techni- cians) and its budget is low relative to development requirements. 6. Graduate training in forestry is provided at the University of Lisbon and the University Institute of Tras-os-HMontes and Alto Douro (IUTAD) at Vila Real. There is no Technical Training Institute for forestry in Portugal. All forest technicians are, in fact, holders of diplomas from Agricultural Technical Institutes. Responsibility for forest research rests primarily with the Forest Research Station, in Lisbon, which is part of National Agricultural Research and Extension Institute (INIAER). The Centre of Forest Studies, University of Lisbon, and the IUTAD at Vila Real also have forest research programs, however, often in collaboration with the industry. The Institute of Forest Products, Ministry of Trade, is directly concerned with the forest industry, but primarily with export of forest products and evaluation of export data. r 7. There are four major pulpmill companies, PORTUCEL (State-owned major- ity), CELBI (Swedish), CAIMA (British) and SOPORCEL (Portuguese), which have forestry divisions and the capacity for undertaking afforestation, forest management and exploitation. CELBI has been especially active in research on eucalyptus afforestation and management. t FOREST INDUSTRIES 8. The wood-based industries, ranked in order of their contribution to the national economy, in 1981, comprise pulp and paper (38%), cork products (34Z), sawmilling (15%), resin products (11), and wood-based panels (2%). The industries appear to be in balance with their supplies of raw materials, but no growth in capacity can be envisaged until increased wood supplies are available. They are generally characterized by small unit sizes, which do not benefit from the economies of scale that are enjoyed by their European compe- titors. 9. Wood requirements of the pulpmill industry, in 1981, were 2.2 millionEm3 (over bark) of eucalyptus andl1.4 million m3 (ob) of pine. Installed capacity was 923,000 tons and pulp production amounted to 824,000 tons. A seventh mill (SOPORCEL) will start production in 1985, which together with incremental expansion within the industry, will probably raise 1985 capacity to 1.2 million tons. Thereafter, further expansion will be directly dependent upon increased availability of raw material. 10. Portugal possesses 39% of the total world area of cork oak forest, produces 54% of world production of cork,,and satisfies 65% of the interna- tional demand for cork and its products. It has 809 manufacturing units with an annual production capacity of 200,000 tons and it is the world's largest ANNEX 9 - 123- Page 3 manufacturer of cork products. Cork production has been relatively stable over the past decade and no expansion can be foreseen because of limitations in raw material supply. 11. The sawmill industry comprises 1,200 mills, the unit size of which is generally very small. Only three mills have capacities of 35,000 m3/year. The existing industry, operating on single shifts, has an annual log require- ment of around 5.0 million m3 (ob). Annual production of sawn wood is approximately 2.0 million m3 of which roughly half is used domestically. Estimates of log supplies suggest that, in the absence of a major afforestation program, log supplies could fall to 2.2 million m3(ob)/year by the year 2011. The scope for early industrial growth, therefore, is negligible and development opportunities lie in the more efficient use of existing resources through structural change in the industry. 12. Resin collection from maritime pine (P. pinaster) is an important secondary forestry product and forms the basis of ar. industry of considerable importance in rural areas. It is estimated that 7,500 people are employed in tapping, collection and transport of resin to some 26 factories, employing 1,150 people. Approximately 95% of production is exported as rosin, turpen- tine and other products. Production in 1981 (rosin: 77.6 tons; turpentine: 13.5 tons; and other products: 7.7 tons) is representative of production over the past decade and further expansion would be dependent on future afforesta- tion. 13. The wood based panel industry is small but efficient and comprises seven particleboard mills (65,000 m3 capacity), two fiberboard mills (74,000Em3 capacity) and six plywood mills (38,000 m3 capacity). The plywood mills are principally dependent on imported tropical logs. Approximately 77Z of total panel production is used domestically. Raw material supplies are composed mainly of low quality wood and the prospects for long-term expansion appear good. 14. Sawmill residues are utilized fairly effectively Dy the ceramics, resin, pulp and panel industries. Forest residues are unquantified, but it is doubtful if their harvest for industrial use would be justified economically. CONTRIBUTION TO THE ECONOMY 15. The forestry sub-sector makes substantial contributions to the national economy. The import/export balances of the major forest products are summarized in Table 1. Forest-based industries reduce the national trade deficit through import substitution, particularly for sawn wood, pulp and paper products. Production of these items for the domestic market generates savings in foreign exchange, estimated at Esc. 19.0 billion (USt257 million) at 1980 prices. 16. In 1981, the total value of forest product exports amounted to Esc.£43 billion (US$640 million), which is 60% of agricultural exports and 20% of all national exports. Export values of the principal forest products are shown in Table 2. In the past decade, the unit values of the various products increased approximately five times, except cork, which increased ten-fold. 17. The value added contribution in the majority of forest industries is estimated to be around 40%. Total direct and indirect employment in forestry ANNEX 9 - 124 - Page 4 and forest industries in 1981, was around 120,000; the total number of people (workers and dependents) estimated to be directly dependent on the sub-sector is around 410,000. 18. The indirect benefits of forestry are signficant but less readily quantified. Forestry contributes to rural development by broadening the economic base, through employment and increased income, in which seasonal employment to farmers is of special importance. It establishes roads in hitherto inaccessible areas, providing access to markets and schools for isolated agricultural communities. Rural-based forest industries, in turn, generate additional service industries. 19. Properly managed forests have more immediate positive effects on agricultural and rural productivity. They restrict soil erosion, regulate and protect water supplies, prevent sedimentation of dam impoundment, contribute to the stability and amelioration of the micro-climates, and enhance amenity and recreational values. There exists considerable scope, in Portugal, for expanding the indirect values of forests through livestock production, wild- life management and hunting, fresh water fish farming and bee keeping. FOREST DEVELOPMENT PROGRAMS 20. Government investment in forestry is normally made through special development projects under PIDDACs (Public Investment Program of the Central Administration). Current projec:s, with an indication of expenditure in 1982, are as follows: (a) maintenance of forest plantations in State and communal land (Esc. 86.8 million); (b) establishment of forest roads in State and communal land (Esc. 32.1 million); (c) development of fresh water fisheries (Esc. 5.5 million); (d) development of apiculture in State and communal land (Esc. 2.0 million); (e) construction of the Lousa Training Centre--a residen- tial training centre in mechanized logging and forest machinery maintenance, for the Mediterranean region, built under a Norwegian bilateral aid scheme (Esc. 22.9 million); (f) FAO trust fund for the forestry sub-sector survey and initiation of forestry extension (Esc. 24.3 million); (g)Ereforestation of burned forests in State and communal land (Esc. 58.0 million); (h) World Bank-financed Forestry Project (Loan 1853-PO)--comprising afforestation of 150,000 ha, technical assistance and training in forestry extension, a pilot credit scheme for forest extraction equipment and establishment of a project coordination unit (Esc. 954.6 million); (i)Ereforestation of private forests, financed in part by the EEC (Esc. 36.0 million); and (j) range management in northern forest areas (800-1,000 ha), financed in part by a Dutch bilateral aid scheme (Eec. 20.0 million). 21. New development projects under consideration include the following. (a) Integrated development (afforestation, wildlife, range management, recreation and social development) of the Serra de Estrela (80,00OEha). Several other Government departments will be involved, together with OECD consultants. It will form part of an interna- tional scheme to test methods and provide the basis for preparation of a project manual; (b) An agro-forestry and wildlife development project for the Serra du Algave which may involve French bilateral aid; and (c) Afforestation of two watersheds in southern Portugal to protect water supplies to an existing and a projected dam impoundment. ANNEX 9 - 125- Page 5 DEVELOPMENT CONSTRAINTS 22. The major constraints to development of the forestry sub-sector are as under. Institutional 23. The forestry sub-sector has suffered from a lack of national appre- ciation of its importance, the scope and potential for its development, and the benefits to be derived from it. Forest development has been further constrained by the absence of well-defined official objectives and inadequate comiunication between public and private sectors. There has been no forest policy, no guidance for sector growth and no effective institutional mechanism through which to develop a coordinated, long-term development program. Existing Forest Ownership 24. The bulk of existing forest, and virtually all land suitable for afforestation, is in private ownership, which is characterized by highly fragmented small holdings. There are estimated to be at least 400,000 individual owners, north of the river Tejo, with an average holding of 2-3Eha. This fragmentation is a major obstacle to improved forest management, planned exploitation and reforestation. Land Availability for Afforestation 25. The problem of smalf, fragmented holdings affects land acquisition for afforestation even more acutely. It delays negotiations and renders effective planning for afforestation of sizeable blocks extremely difficult. There is an urgent need both for forestry extension, to promote small holders' interest and cooperation in forestry, and sociological studies, to anticipate difficulties arising from changes in the pattern of rural life that large- scale afforestation will involve and on which to base long-term planning to avoid them. Forest Fires 26. There has been an alarming increase in the incidence and extent of forest fires since 1968. The average annual area burned in 1975-79 is greater than the area afforested. The National Fire Service is responsible for forest fire fighting and DGF for fire prevention and detection. The existing organi- zation must be adequately staffed and equipped, field techniques require revi- sion, fire fighters require training, private pulpmill companies need to be fully integrated into the national fire detection and fighting grid, and a more systematic analysis of the cause and effects of forest fires s'.ould be instituted. Log Supply to Industry 27. Estimation of pine log availability is made difficult by the wide variation in density and quality of existing stands. It is doubtful, however, if the existing annual requirements of 5.0 million m3, for sawmills, and 2.0 million m3, for pulpmills, can be maintained, which adds urgency to the development of large-scale afforestation. ANNEX 9 - 126 - Page 6 28. Logging in private areas is not regulated by their management as a renewable resource. Log sales are negotiated directly, between industry and owners, or through contractors, who purchase, fell, and deliver logs to the mills. There are no long-term timber concessions. Although the price of pulpwood is regulated officially each year, the sawn log market is open. As a result, forest owners who are ignorant of existing price structures commonly receive less than a fair price for their sawlogs. 29. The introduction of better forest management, to improve potentially productive areas and replace under-productive areas, is essential to safeguard log supplies to industry over the next 30 years, until production from new plantations comes on stream. Unproductive and burned areas must be regener- ated first. The use of seeding rather than planting would reduce costs, but must involve use of selected seed, collected under qualified supervision, to improve the quality of stands. Cork Supply to Industry 30. Data on the structure and age classes of most of the cork oak forests is lacking, but there is evidence of preponderance of mature and over-mature stands. The position needs to be ascertained by a survey and a program of regeneration introduced, if future supplies of raw material are to be assured. Industrial Structure 31. The efficiency of the existing wood-based industry of Portugal is constrained by the small size of its individual production units. To date, its international competitiveness has been maintained by low-cost wood and labour. Costs of both materials and labour are expected to rise in the fore- seeable future and individual production units must increase their capacities, consistent with raw material availability, to obtain economies of scale. 32. A further constraint to competivity is the high cost of transport relative to cost of production. The problem is particularly acute among the 1,200 small sawmills that are scattered through the pine zone and competing for an increasingly scarce supply of logs on an open market. It adds further justification for transformation of existing mills into fewer, more strate- gically sited and more economically effective units. Costs of export, through charges for rail and port facilities, are also high relative to other wood- exporting countries and the problem requires investigation. RECOMMENDATIONS 33. The principal recommendations for development of forestry and the forest industries are as follows. Forest Sub-Sector Development 34. Government should commit itself, firmly and resolutely, to a properly planned program of action for development of the forest sub-sector, based on specific objectives. Motivation for development must initially be Govern- ment-promoted and its institutions must be strengthened to meet these new demands. ANNEX 9 - 127 - Page 7- 35. A permanent Inter-Ministerial Coordinating Commission for the forest sub-sector has been established by Government (May 1983) and a new forest policy has been accepted (July 1983). The Commission should give priority to: (a) Formulation and elaboration of further land use and forestry policies; (b) Preparation of specific development objectives designed to effect- ively double current rates of national afforestation to not less than 42,000 ha/year; and (c) Direction to ensure improved management of privately-owned forests, including cork oak. 36. Legislation will be required to faciliate consolidation of land into manageable units, establish minimum standards of land use, enforce adequate standards of forest management, and facilitate acquisition of land for fores- try. Institution Strengthening 37. Institutional adjustments will be needed within the forestry sub- sector; agencies must be provided with adequate staff, facilities and finance to enable them to meet their respective objectives. 38. DGF should create two specialized services: (a) An Afforestation Service, directly responsible to the General Director, and with specialized staff for negotiation of land for afforestation; and (b) A Technical Advisory (Extension) Service, linked to the national service, to promote the development of private forests and assist in the forma- tion of forestry cooperatives. 39. DGF should be directly responsible for forest fire control in areas that are designated for forest improvement, regeneration or afforestation. 40. The responsibilities and organization of the Institute for Forest Products should be expanded to enable it to stimulate, more effectively, the planned development of the wood-based industries and promote and monitor trade flows in wood-based products. 41. Forest research should be intensified and oriented to meet specific needs of the development strategy. It should be coordinated by the Coordinating Commission, which should investigate institutional needs of the various forest research organizations, relative to approved programs of research priorities. 42. DGF's Forest Inventory Division should be increased from five to nine inventory brigades. 43. At least one existing Technical Institute should be expanded to provide training courses for forestry technicians. ANNEX 9 - 128- Page 8 Sector Planning 44. An Economic Planning Unit should be established in the office of the General Director of DGF. It should initiate a series of special investiga- tions of immediate relevance to the forest development strategy, e.g., man- power requirements for forest development; tree age class distribution, stand quality, potential for improvement, and fire damage in privately owned pine plantations; and the scope for increased productivity and quality of cork oak through agro-forestry schemes. Industrial Development 45. Forest industries must maximize the value of current wood supply; no significant industrial investment opportunities appear likely before the period 1995-2000, because of restriction of raw material supplies. In the meantime, Government should: (a) Provide incentives to facilitate the rationalization and moderniza- tion of the existing industry; (b) Adopt wood distribution policies that will encourage expansion of existing pulpmills to take advantage of economies of scale; and (c) Encourage further integration of the pulp and paper industries. Forestry Cooperatives 46. DGF should undertake a major campaign to promote the establishment of viable cocperatives; it should provide technical support, assistance and guidance until they are operationally effective and credit-worthy through harvesting and marketing operations. The existing pilot credit scheme should be designed to provide continuity of access to credit in the long term for purchase of exploitation equipment, log transport and forest improvement oper- ations. Pricing Policy 47. Government should formulate a policy that is designed to increase the stumpage price of sawlogs and pulpwood, to ensure adequate incentive to private forest owners and the private sector to invest in afforestation and forest improvement. It must take account of the ability of the industry to be internationally competitive. Multiple Use 48. The ultimate objective of forest development is to maximize both social and economic benefits. Afforestation forms the nucleus around which the remainder of the sub-sector will develop. It must be integrated with local patterns of rural requirements and should include additional, specific interventions such as management of wildlife, protection of important water catchments, improved grazing, recreational development and provision of rural infrastructure. 2451E ANNEX 9 - 129 - Table 1 PORTUGAL TRADE BALANCE IN FOREST PRODUCTS, 1976-1980 6 (Esc. 106 CORK SAWNWOOD PULP RESIN TOTAL AND PRODUCTS PAPER EXPORT 1976 3 614 1 417 4 750 1 162 10 943 1977 5 495 2 492 4 975 1 148 14 110 1978 7 492 4 345 5 831 2 241 19 909 1979 11 288 8 481 9 049 2 770 31 588 1980 15 845 9 843 14 217 4 112 44 017 1981 16 273 8 057 18 298 5 183 47 811 IMPORT 1976 28 1 373 1 190 - 2 591 1977 25 2 941 2 614 5 580 1978 55 1 535. 2 308 . 3 898 1979 692 3 087 3 437 - 7 261 1980 1 388 6 032 5 132 _ 12 552 1981 1 149 7 995 6 689 15833 BALANCE 1976 +3 586 +44 +3 560 +1 162 +8 352 1977 +5 470 -449 +2 361 +1 148 +8 530 1978 +7 437 +2 810 +3 523 +2 241 +16 011 1979 +10 596 +5 394 +5 612 .2 770 +24 372 1980 +14-457 +3 811 +9 085 +4 112 +31 465 1981 +15 124 +62 +11 609 +5 183 +31 978 Source: I.P.F. Note: 1980 and 1981 data are provisional November 1982 PORTUGAL EXPORT VALUE OF PRINCIPAL FOREST PRODUCTS: 1971 TO 1981 FOB CURRENT PRICES values in units of 106: volumes in units of 103 PRODUCT 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 LOGS $ _ _ _ _ 70 79 148 694 1 334 1 316 787 t _ _ - 35 48 72 470 759 563 258 MADEIRA a) Sawnwood $3 653 648 986 1559 . 907 1 207 2 167 .3 182 5458 7 158 5910 m 441 448 613 562 351 491 603 . 762 1 055 1 024 884 b) Furniture $ 17 14 22 22 27 15 34 102 353 449 419 t .289 .264 ,487 .319 .254 - - - _ _ _ PAN ELS a) Fibreboards $ _ _ - _ 40 48 53 89 232 292 262 t _ _ _ _ 10 7 8 12 23 22. 17 b) Particleboard $ _ _ _ _ 63 74 90 278 640 628 679 t _ _ _ _ 13 17 13 40 75 52 53 PULP $ 1 327 1 807 1 980 2517 2 391 3 477 3 620 4 285 5726 9 816 12 429 t 292 436 456 354 261 353 313 305 347 437 459 PAPER $ 181 234 295 743 1 188 1 273 1 355 1 546 3323 4 481 5813 t 42 55 55 81 129 145 130 122 188 184 193 RESIN a) Rosin S 731 858 979 1 552 752 932 926 1 808 2 176 3 521 4 342 t 76 88 97 108 50 85 66 109 92 79 74 b) Turpentine and $ 84 182 134 305 198 230 217 433 594 591 841 other products t 13 22 23 24 14 25 18 25 20 13 20 CORK $ 1 801 2 181 2 985 3866 3 091 3 614 5 495 7 492 11 288 15 844 16 273 t 149 164 158 139 109 103 109 106 125 135 117 Source: I.P.F. and I.N.E. $ m ESCUDOS t . TON November 1982 1 r - 1.31 - PORTUGAL AGRICULTURAL SECTOR SURVEY ANNEX 10: Portuguese Agriculture and the EEC Table of Contents I. PRINCIPLES AND MECHANISMS OF THE EEC'S COMMON AGRICULTURAL POLICY . 1 A. The Treaty of Rome and the Origins of the CAP .......... ..... 2 B. Common Prices .......................... 3 C. Community Preference ........... ... ............................ 4 D. Common Financing ........................... 5 II. THE MAIN ISSUES FOR NEGOTIATION WITH PORTUGAL . ..................... 8 A. Transition Period ........ . ..... .... ..... 8 B. Temporary Derogations ........................................ . 9 C. National Aids ................................................. 10 D. Structural Policies ........................................... 10 E. Budget Contributions ................... ......... .. ............ 11 1II. ADAPTING THE PORTUGUESE FARM PRICE SUPPORT SYSTEM ..... ............ 11 A. EC Mechanisms . ................................................ 11 B. Operation of Intervention .. .................................. 12 C. The Portuguese System .......... ............................... 13 IV. IMPLICATIONS OF ACCESSION FOR PORTUGUESE TRADE ........ ............ 14 A. The Present Agricultural Trade Balance ... ..................... 14 B. Outlook for the Trade Balance ................................. 14 V. IMPLICATIONS OF THE CAP FOR THE PORTUGUESE BUDGET ........ o ........ 31 A. Payments .................. 31 B. Receipts . ..................................................... 33 VI. POTENTIAL BENEFITS FROM THE EC'S STRUCTURAL POLICIES FOR AGRICULTURE 36 A. Pre-Accession Aid ............................................. 36 B. Farm Modernization Plans ................. ..................... 38 C. Early Retirement Pensions ................. .................... 39 D. Vocational Training ........................................... 39 E. Aids to Less Favored Areas ....................... 3° F. Aids to Investment in Processing and Markets ....... ........... 41 G. Special Programs .............................................. 41 H. Land Consolidation ............................................ 42 I. Producer Groups ...................... ...... 42 J. Agricultural Advisory Services ................................ 43 K. Restructuring and Conversion of Vineyards ......... ............ 43 L. Collective Irrigation Works ................ ................... 44 H. Forestry Measures ............................................ 44 N. Improvement of Rural Amenities ............................... 44 Note: This annex does not reflect developments which have occured since March of 1983. - 132 - VII. ADAPTATION MEASURES THAT WILL BE NECESSARY ....................... 44 A. Timing ....................................................... 44 B. Dismantling of the State Trading Monopolies .................. 45 C. Organization of Producer Groups and Cooperatives .............. 48 D. Applied Research and Technical Assistance ..................... 54 E. Export Promotion ............................................. *o ... 55 F. Improvement of Physical Market Structures ........... o .......... 56 G. Improvement and Application of Quality Standards .............. 56 VIII. SUMMARY OF KEY ISSUES . ...... ...o....... . ....... ....... ............ . . . 57 A. The Future of CAP ...... . ................................ . ...... 57 B. Integrated Development Programs ..... o........................ 62 C. Policy Options for Portugal .. ................................. 67 Attachment I - Compatibility with EC Law of National Aids, Currently Paid in Portugal Attachment II - Parastatal Organizations Operating in the Agricultural Sector Attachment III - Maps: 1 - Less Favored Areas 2 - Mountain Areas 3 - Less Favored and Mountain Areas. (2184E p17) ANNEX 10 Page 1 - 133 - PORTUGAL AGRICULTURAL SECTOR SURVEY AGRICULTURE AND THE EEC I. PRINCIPLES AND MECHANISMS OF THE EC'S COMMON AGRICULTURAL POLICY (CAP) A. The Treaty of Rome and the Origins of the CAP 1. A customs union, common rules on competition, and a common agricultural policy were the three features of the common market for which the founders of the European Economic Community made most detailed provision. By comparison common transport and common social policies were no more than sketched out in the Treaty of Rome. A common regional policy was not adopted until more than fifteen years after its signature. A number of important economic and political factors prompted the decision to set up a common agricultural policy. Some 30Z of the working population of the six original member states were still engaged in agriculture, the majority in very small, often fragmented, family holdings. A long-established tradition of government assistance, through market price support and especially through protection against imports, was common to all the states but expressed itself in a wide range of mechanisms and prices. The need for continued support was not in doubt, but left in the hands of each member government separate systems would lead to competitive subsidization of production and severely inhibit the free movement of farm produce and of foodstuffs. Nor would it be easy to establish protection at the common frontier against third country imports. For the customs union to be fully effective, and a major potential source of distortion to intra-Community trade avoided, a uniform support policy for agriculture thus appeared essential. 2. Article 39 cf thI Treaty established aims for agricultural policy. "The objectives of the common agricultural policy shall be: (a) to increase agricultural productivity by promoting technical progress and b; ensuring the rational development of agricultural production and the optimum utilization of the factors of production, in particuler labor; (b) thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture; (c) to stabilize markets; (d) to assure the availability of supplies; and (e) to .nsure that supplies reach consumers at reasonable prices." It is evident that these objectives, particularly objectives (b) and (e), have not always been easy to reconcile. Furthermore the interpretation of such ter-s as "rational"', "optimum", *'fair" and "reasonable" can result in widely differing views of the objectives themselves. 3. Subsequent articles of the Treaty set guidelines for the market organizations for the principal agricultural products that came to be established during the initial twelve year transition period, up to 1970, prescribed by the Treaty. The organizations involved the adoption of a number of the features of some of the prevL3us national agricultural support systems, and the varying national levels of price support were gradually brought closer ANNEX 10 - 134 - Page 2 together to an agreed common level. Parallel to this the financing of the Community's budget, of which the major part was already directed towards the CAP, shifted from direct contributions from national treasuries to the Community's "own resources". These consist of levies and duties on agricultural imports, duties on industrial imports, and up to a 1% share of the value added tax (VAT) payable in each member state. 4. Thus by the time that the first enlargeme-t of the EC, to include Denmark, Ireland and the United Kingdom, took place in 1973, common market organizations had been established for all the principal agricultural products or groups of products, with the exception of mutton and lamb (sheepmeat) and potatoes, and the financing of the CAP through the Farm Fund was assured by the Community budget. The three new member governments had no choice but to accept the corpus of legal and institutional arrangements which had come to be known unofficially as the "three pillars" of the CAP: common prices, Community preference, and common financing. B. Common Prices Institutional Prices and Market Regimes 5. Common prices were originally expressed in units of account that were equivalent to the 1934 gold parity of the US dollar. The definition of the unit was revised after August 1971. Since the establishment of the European Monetary System (EMS) in 1979 prices have been expressed in European Currency Units (ECU). These so-called institutional prices for each of the market regimes are fixed once a year in the spring by the Council of Ministers of Agriculture on the basis of a proposal by the EC Commission. Broadly, they are fixed in such a way as to allow market prices for the main products within the Community to move freely within a bracket, whose maximum is normally set by the price at which imports may enter from third countries, and whose minimum is set by the floor price at which the authorities will purchase, and store for eventual re-sale or export, produce that is offered to them. The level of the threshold (minimum import) and intervention price is related to a target, guide or basic price which, in the view of Commission and Council, it is desirable that the producer price should attain in order that the objectives laid down in Article 39 may be met. The cif price of imports, normally lower than the uniform threshold price, is raised to threshold level by means of variable levies. On the other hand, in order to enable Community produce to compete on third country markets, refunds are granted on exports. With some variations in both import and intervention mechanisms for individual products, this system applies, broadly speaking, to cereals, milk products, beef and veal, sheepmeat, sugar (but see below) and wine. In 1981 these accounted for some 55X of final agricultural output of EC-10. 6. Target and intervention prices for sugar relate to white sugar of standard quality. Although a minimum price is set for beets, production of beet sugar is subject to national quotas, producers incurring a price penalty for deliveries of beets that exceed the equivalent of the quota. An annual import quota, at a preferential nil rate of levy, of 1.3 mn tons of cane sugar from the associated African, Caribbean and Pacific (ACP) states, for refining in the UK, is guaranteed by the Lomi Convention. There are also preferential imports from some French overseas territories and from India. -135- ~~~~~ANNEX 1.0 -135 - Page 3 7. Producers of egk,, poultry and pigmeat enjoy only protection against imports, and may obtain refunds on exports. There is no official intervention buying; aid may, however, be given for the temporary private storage of pigmeat in order to relieve an oversupplied market. 8. Support for the market for fruit and vegetables is mainly through protection against third country imports: duties, mostly seasonal; tariff quotas in the framework of bilateral trade agreements with countries of the Mediterranean littoral; and, for certain sensitive products, reference (minimum import) prices, which may also be seasonal. Intervention, in the form of market withdrawals of certain products at periods of exceptionally low prices, may only be. operated by recognized producer groups. The cost of compensating members of these groups and of disposing of the surplus produce (mainly by distillation) is a charge on the Community budget. 9. Certain products in which the Community is not self-sufficient enter at low or nil duty and without levy. To enable domestic production to compete with imports a production aid or premium is paid to producers to compensate them for the difference between the market and the target price. This type of deficiency payment is made for oilseeds, olive oil, hops, tobacco and cotton. Premia may also be paid on sheepmeat, as an alternative to intervention buying - an option so far only exercised in the UK. 10. Finally, a miscellaneous groups of products are supported by flat rate aids paid per unit of product or of surface. These include durum wheat (to which the normal cereal price support system also applies), dried fodder, flax and hemp, and silk-worms. In certain member countries an additional aid to beef production is provided by premia paid on beef-type calves and suckler COWS. 11. Agreement in the Council of Ministers on the annual adjustments to be made to the whole range of institutional prices is not reached without prolonged discussion and hard bargaining as to the extent to which support for each individual product, and for the weighted average of all products, ought to be increased. Article 39 provides one important basis for decisions. But, although the conflicting interests of farmers and consumers have tended traditionally to be resolved in favor of the former, the farm income criterion has in most years to be subordinated, at least to some extent, to the limitations both of the Community's capacity to export to third countries and of its budgetary resources. It will be evident that the pillar of common prices cannot be isolated from the pillars of Community preference and common financing. "Agri-monetary" Aspects 12. Before examining the condition of the other two pillars it is necessary to draw attention to the major weakness that has afflicted the first one almost since the day it was erected. Barely two years after the establishment in 1967 of a common price, denominated in units of account equivalent to US dollars, for cereals (and after only a few months of common prices for milk and beef) a major devaluation of the French franc marked the end of a decade of fixed and stable parities within the Community. Such a - 136 - ~~~~ANNEX 10 - 136 - Page 4 devaluation ipso facto raised the value in francs of the common inEtitutional prices by an equivalent percentage, an increase as welcome to farmers as it was potentially disturbing to consumers and to an anti-inflationary economic policy. It was therefore agreed that as far as institutional prices for cereals were concerned the devaluation should not be applied immediately but be spread over a period of three years. On the other hand, for milk and beef, an increase in the price incentives for which was at that time considered desirable, it would be immediate. However, in order to prevent French cereal producers from taking advantage of the export opportunities which a devaluation of the franc would logically afford them, it was also agreed to put a temporary tax on French exports of cereals to other member countries. This would be balanced by a temporary subsidy on any imports of cereals into France. Otherwise producers in other member countries would be inhibited from competing on the French market. Known as monetary compensatory amounts (MCAs) these border taxes and subsidies (which are also applicable in third country trade), introduced as a temporary measure, were to become, with successive changes in parities between member states' currencies, a constant factor of the Community's agricultural trade. Long before the period set for phasing out the original French MCAs had elapsed a revaluation of the Deutschemark had involved Germany in applying MCAs, with, in this case, the effect, cc verse to the French ones, of taxing imports and subsidizing exports. Subsequent parity changes by all member states led to the establishment of a closely regulated system of border adjustments which, after more than a decade of monetary instability, must be regarded as semi-permanent. At any given moment the so-called representative or "green" exchange rate used to convert institutional farm prices into national currencies may differ, in one or more member countries (sometimes it has been as many as seven), from the rate at which normal commercial transactions are conducted, necessitating the application of MCAs in agricultural trade. 13. A distinction has thus emerged between countries with strong currencies obliged to revalue them from time to time, and thus applying "positive" MCAs, and devaluing countries with weak currencies and applying "negative" MCAs. The extent to which green exchange rates are aligned to central ones depends formally on the consent of the Council of Ministers. In practice member governments enjoy considerable discretion as to both the frequency and extent of these realignments, which thus tend to become an instrument of national policy. Between 1976 and 1979, for instance, the downward float of sterling resulted in a large negative UK MCA that was maintained, to the detriment of British farmers, by the then Labour government as a weapon of counter-inflationary policy that reduced the cost of food imports. French and Italian governments, on the other hand, have usually seen the steady devaluation of their green currencies in line with central rates a means of compensating farmers for inflation. For both countries negative MCAs, acting as a subsidy on imports, have implications for the agricultural trade balance. Their removal acts as a stimulus to import saving/export promoting domestic production. By contrast, German governments, obliged at intervals to conform with market pressures to revalue the Deutschemark, have usually agreed only with reluctance to realignments of their green currency. Since they necessarily represent a reduction in the level of price support in national currency terms, green D-mark revaluations have been restricted to the occasion of agreed annual increases in institutional prices, the German -37 - ANNEX 10 Page 5 minister of agriculture insisting that in no case should the required revaluation cancel out, let alone exceed, the effect of the increase. At the same time as being protected from cuts in their product prices German farmers have enjoyed the benefits of a strong currency and a low inflation rate for the cost of their inputs. 14. The temporary introduction of MCAs was justified on the ground that sudden changes in the national currency values of institutional prices would distort trade and invalidate the principle of common prices. In the event their perpetuation, particularly that of positive MCAs, has tended to create far greater trade distortions. Failure to eliminate the positive German MCA, which acts as a subsidy on exports, has turned a traditionally food importing industrialized country into a major food exporter.-L The effect of the strengthening of sterling between 1979 and 1982 began to develop a similarly unaccustomed role, at least for certain products, for the UK. The economic logic of the revaluation of an undervalued currency in response to money market pressures, tending to reduce a trade surplus, is thus arbitrarily reversed by the green money system. Paradoxically, too, while maintaining the semblance of common institutional prices in ECU terms it tends to magnify the reality of the divergence between them in national currency terms. C. "CommunitX Preference" 15. Protection for producers from the competition of third country imports was from the outset a fundamental feature of the CAP. The variation in the nature and extent of this so-called "Community preference" will be evident from the brief description of the common regimes already given. In the case of products of which the Commtmity remains a large net importer, relatively low customs duties, in themselves insufficient to raise their price to a level at which they cease to compete with domestic production, have had to be compensated by deficiency-type payments. At the other end of the scale, as will be apparent from Table 1:1, the degree of protection against imports of dairy products, sugar and cereals is, even taking into account the caveat in Footnote 1/, very considerable. It would be less had it been possible to set the original common institutional prices for cereals closer to the level of support prevailing at that time in France, the lowest in the Community of Six. Instead, cereal prices had, for political reasons, to be fixed half way between the French and the traditionally very high German levels. The institutional prices for livestock products, as well as for sugar beets, had then to be derived from the high cereal price. I/ When exporting to a country with a negative MCA a country with a positive one has a double advantage since the extent of the export subsidy is represented by the sum of the two percentages. Both Italy and France have tended to be particularly disadvantaged under this arrangement by imports from Germany (and to some extent by those from the Netherlands and Belgium). - 138 - ANNEX 10 Page 6 16. The system established for agricultural imports, of which the variable levy based on a threshold price is an essential feature, was nevertheless seen by its authors as a liberal one. In the sense that duties, traditionally high in some member states, were nil or relatively low, quotas, formerly the basis of the German system, had been all but eliminated, and that imports could freely - if at a cost - cross the Community's common external frontier, this was a fair description. The extent of Community preference is, however, highly protectionist, having the aim not simply of ensuring the domestic producer a margin of advantage on his own market but also an income compatible with the objective of Article 39. Cunsequently, any preferential access given to imports under GATT or other treaty obligations, of, for instance, manufacturing beef, New Zealand butter and lamb, ACP sugar, or Mediterranean horticultural produce, is criticized by producer organizations as infringing the principle of Community preference. Even non-cereal sources of vegetable protein and starch, mainly used for animal feed, imported with nil or low duties bound in GATT and most of which cannot be produced within the EC, are seen as a threat to the principle to the extent that they compete with domestic cereals, and, in the case of oilseeds, with butter. Table 1.1 EC "Entry Price" as Percentage of Third Country Offer Price /a Selected Prodcuts, 1977/78-1979/80 Product 1977/78 1978/79 1979/8C Common wheat 216 193 163 Durum wheat 218 216 159 Husked rice 128 157 131 Maize 203 201 190 White sugar 255 276 131 Beef and veal /b 196 199 204 Pigmeat 137 155 152 Butter 388 403 411 Skimmed-milk powder /c 494 458 379 Olive oil /d 211 200 193 Oilseeds /d 153 161 185 /a Third country offer prices represent the annual average of, normally, the lowest third-country offer price used for the purposes of managing the agricultural markets. They do not necessarily represent the prices at which the Community could purchase on the world market if it had to buy substantially more of its supplies from third countries. Further it is to be noted that world market prices are often residual prices and are not the prices at which a large part of agricultural produce is traded internationally. /b Live animals. /c Spray. /d Target price as percentage of third country offer price. Source: The Agricultural Situation in the Community, 1980 Report. ANNE 10 - 139 - Page 7 D. Common Financing 17. The European Agricultural Guidance and Guarantee Fund (EAGGF), commonly known by its French acronym FEOGA, has, since the Community's own budgetary resources were established in 1970, made by far the largest call upon them. Although it has recently been the Commission's aim that annual agricultural expenditure should not increase at a greater rate than the increase in "own resources", and the proportion of the budget devoted to other Community policies (social, regional, overseas development, etc.) has slowly risen, FEOGA still accounts for some two thirds of the budget. Of this well over 90% (12,100 MECU in 1982) represents the cost to the Guarantee Section of the Fund of market support, including export refunds. The balance of expenditure (800 MECU in 1982), from the Guidance Section, consists of the Community's share of financing measures to improve the structures of production and marketing. 18. The predominance of agricultural expenditure in the budget has, over the years, resulted in a certain skewing, as between member states, of the net balance between payments and receipts. The financial advantage has tended to go to countries with an important farm sector and a large agricultural export trade to third countries such as the Netherlands, Denmark, Ireland, Belgium and France, giving a corresponding disadvantage to net importers with a smaller farm sector like Germany, the UK, and Italy (which, although it still has a relatively large agricultural labor force, is not self-sufficient in "northern" products attracting a high level of price support such as milk and cereals). Not only are net importers obliged to transfer to the common budget the agricultural levies and duties raised on their third country imports, but their receipts from FEOGA also tend to be relatively small, whether from export refunds, sales into intervention or the various forms of production grants. The well-publicized budgetary disadvantages suffered by the British have arisen from all these causes (although the recent large growth in national output of certain products, notably dairy products, cereals and sheepmeat, has tended to increase their claims on FEOGA). At the same time the traditional structure of the UK economy, with its particularly high third country imports of raw and semi-manufactured products, involves relatively large payments to Brussels of industrial duties levied at the common frontier. Finally, the incidence of VAT on imports (exports being exempt), adding appreciably to the total yield, up to 1% of which is a Community resource, constitutes a third source of budgetary disadvantage not necessarily shared by other member states. 19. The principle of common financing requires unequivocally that the levies, duties and share of VAT yield be treated as common, and not national, resources. Any notion of juste retour, in the sense that member states should be entitled to receive from the budget financial benefits exactly equivalent to the resources which they happen to have contributed, is firmly rejected. Soon after the Community's first enlargement, however, the UK's partners recognized that as potentially a large net contributor to the budget with at the same time the third lowest level of GDP per head in the Community of Nine, it might find itself in an "unacceptable situation". Once the derogations from full budget liability written into the initial five-year transition period had expired, such a situation rapidly developed, and, after much hard ANNEX 10 - 140 - Page 8 bargaining, special rebates, partly in the form of funds for regional development projects, were granted to the British in each of the years 1979-1982. Arrangements for 1983 remain to be settled. Thereafter an attempt will be made to negotiate an overall long-term solution. Whether or not this takes the form recently proposed by the EC Commission (described below in Section VIII), it would inevitably involve some watering down of the principle of "financial solidarity" on which the pillar of common financing is based. II. THE MAIN ISSUES FOR NEGOTIATION WITH PORTUGAL A. Transition Period 20. For the original six member states the Treaty of Rome laid down a twelve-year transition period for adoption of the common customs tariff CCCT), dismantling of industrial tariffs in intra-Community trade, and harmonization of agricultural support prices and measures. In the event the period was shortened to ten and a half years. For the first enlargement in 1973 a five-year period was considered sufficient, and in 1981, with the exception of a seven-year provision for tomatoes and peaches and products manufactured therefrom, Greece was also granted a five-year transition for agriculture. 21. In both cases of enlargement, where the levels of farm support prices differed appreciably between the Community and the new member country they were to be harmonized in a series of equal annual stages. Where, for any individual product, the difference was negligible, the Community price was to be adopted immediately on accession. A direct step to a Community price could also, if necessary, be taken, by agreement of the Council of Ministers, during the course of the transition period. The process of adjustment was achieved by the immediate formal adoption by the acceding state of prevailing Community institutional prices in national currency terms, but with the simultaneous application of so-called accession compensatory amounts (ACAs) at the frontier. Where national prices are lower than Community prices, these consist of a tax on exports and a subsidy on imports, and vice versa where they are higher. Any annual price increases adopted by the Council during a transition period naturally apply in new member countries as well as in the original ones. 22. Negotiation of the duration of a transition period for Portugal will be subject to two major constraints. In the first place, assuming that the Commission's present aim of securing the simultaneous accession of Spain and Portugal is achieved, it will probably wish for an identical length of transition period for both countries. Second, the products for which Portugal would evidently wish the shortest possible period of adaptation, such as wine and tomato paste, are the sensitive ones for which the Community will be seeking a relatively long one. Although there are precedents from the 1973 enlargement for according to acceding countries differential rates of adaptation for the same products, it might prove difficult for the Community to grant, for instance, a shorter period for Portuguese wine than for Spanish, which constitutes a much greater threat to producers in EC-10. On the other hand the Commission would be reluctant to extend beyond the agreed transition period any concessions which it might grant in order to soften the impact on the economy of depriving Portugal of cereals imported at the world price. ANNEX 10 - 141 - Page 9 23. It appears increasingly unlikely that for agriculture a transition period of five years, on the 1973 and 1981 models, will prove acceptable, even with, as in the Greek case, extensions for one or two sensitive products. A period duration of not less than ten years seems probable, with a possible extension to twelve years for sensitive products. Moreover, a two-stage transition for agriculture, may now be proposed by the EC Commission. Inspired tc some extent by the difficulties experienced by Greece in adapting immediately to the Community system, this envisages a preliminary stage, lasting from four to six years out of the ten-year period, during which the acceding country, while remaining in much the same trading relationship as before with the rest of the Community, would be free to adopt certain CAP regimes (in the case of Portugal virtually all of them) on a national basis only. This would enable prices to be aligned, subsidies dismantled, the necessary administrative changes to be undertaken, and a start made on the adaptation of production and marketing structures, without the additional economic pressures resulting from a simultaneous dismantling of external protection. The administration, the farm sector and the food industry would thus, it is supposed, be in better shape to confront the challenge of the more conventional transition period, of four to six years, that would follow. The idea, in many ways attractive, involves numerous problems of detail, which could probably be resolved, but carries the major risk that, without the spur of participation in the day to day operation of the CAP, the pracess of adaptation would be fatally slowed down by the inertia of the Portuguese administrative machine. B. Temporary Derogations 24. Acceding member states are normally granted a number of temporary derogations from Community legislation relating to the food and agriculture sector other than the regulations governing the various market regimes. In some cases the Treaty of Accession has allowed for these to extend beyond the transition period; in others the derogation has been subsequently extended by the Council of Ministers. 25. Although it will be necessary to adopt and apply directives on animal and plant and public health within the periods provided for by the derogations, the implications for trade of their non-application in the meantime are likely to be marginal. Any plant products already being exported to EC countries have in any case to conform to Community health standards. So do abattoirs exporting poultry meat. On the other hand even non-exporting general abattoirs are likely to be subject to common public health regulations by the time that Portugal becomes a member of the Community. Since no export surplus of red meat is to be expected, trade is unlikely to be inhibited by absence of conformity with the Community's foot-and-mouth regulations. On the other hand the persistence of African swine fever will prevent exports of pigmeat, except possibly to Spain, where it is also endemic, for the forseeable future. 26. The adoption of Community legislation such as that relating to the permissible use of additives in food, to the labelling of food and beverages, and to container sizes, will represent an important incentive to the food and drink industries to take advantage of the dismantling of the tariff barriers between Portugal and the rest of the Community by building up their export trade. Nevertheless some derogation from the immediate application of this considerable corpus of legislation will clearly be required. - 142 - ANNEX 10 Page 10 27. Unless action is taken by the Portuguese government prior to accession to repeal the legislation conferring on them certain exclusive trading rights, mainly relating to imports, derogations would have to be granted for the temporary continuation of the National Councils (Juntas) for wine, fruit and livestock products, and the parastatal bodies dealing in cereals, sugar and alcohol, and vegetable oils. As at present constituted all these bodies exercise powers that contravene the rules on competition set out in Articles 85 and 86 of the Treaty of Rome. Except in the case of alcohol, for which there is as yet no common market organization and over which state organizations still enjoy a limited form of monopoly in France and Italy, there are no grounds or precedents for the retention of such powers. The Commission is likely to insist that any derogation permitting their continued exercise during a transition period should be as brief as possible. The practical implications of this and the future role, if any, of the organizations concerned are considered below in Section III. C. National Aids 28. Article 92 of the Treaty defines what aids may be granted by member states. Broadly speaking as far as agriculture is concerned any national aids designed to promote production are incompatible with the Treaty. Consumer subsidies, too, are in principle forbidden. A recent inventory compiled by the Ministry of Agriculture'' catalogs some 70 aids and subsidies still operative in Portugal, of which 40 are known to be incompatible with Community law. Well over half are, directly or indirectly, consumer subsidies; a few are subsidies to trade and industry; and the rest subsidize producers in various ways. A detailed analysis is given at Appendix I. Although it has been the declared intention of the Portuguese government to phase out subsidies, especially food subsidies benefiting the consumer, and a start has been made, some derogation would have to be granted for those still in force at the moment of accession, and provision made for their elimination during the transition period. D. Structural Policies 29. The extent to which the Community's so-called structural directives (including that relating to mountain and hill farming in less favored areas) and the regulation on common measures to improve processing and marketing of agricultural produce can be beneficially applied in Portugal is discussed in Section VI. Two main points would seem to require negotiation before accession: the delimitation of the "less favored areas" (LFAs) within which certain special Community aids to farmers are available, and the maximum level of contribution from the Guidance Section of FEOGA towards the financing of projects under the structural legislation. Taking the criteria for LFAs as applied in Southern Italy and Greece it would seem that some 70 to 75% of the total land area of Portugal would qualify fo- LrA status. For most of the structural measures, too, Greece and Italy qualify for the maximum 50% rate of FEOGA contribution. There would therefore seem to be no difficulty in obtaining a similar concession for Portugal. 1/ Aiudas nacionais a agricultura. Sua compatibilidade com o Direito Comunitario. Ministerio da Agricultura, Comercio e Pescas, Gabinete de Planeamento para a Integra6@o Europeia, May 1982. - 143 - ANNEX 10 Page 1 1 E. Budget Contributions 30. In the case of the earlier enlargements all agricultural levies and duties and industrial duties, as well as the appropriate share of VAT yield, became immediately payable to the Community budget by the new member countries on accession. Where a VAT system has not yet been established, as in Greece, the third element of the contribution is related to GNP. The 1979 Treaty of Accession compensates Greece by means of a degressive annual rebate for the fact that it is only being introduced step by step to the full financial responsibilities of membership. The refund amounted in the first year of transition to 70Z of its contribution, declining to 50%, 30%, 20% and 10% in the second, third, fourth and fifth year respectively. For Portugal, were a two-stage transition to be decided on, all levies and duties would accrue during the first phase to the national treasury and not be remitted to the Community budget. Otherwise, or in a second stage, an arrangement similar to the Greek would probably be negotiated. III. ADAPTING THE PORTUGUESE FARM PRICE SUPPORT SYSTEM A. EC Mechanisms 31. Price support in the EC may be injected at a number of separate points. Levies and duties on third country imports are raised by customs in the normal way at points of entry at the common frontier. Payment for produce delivered to intervention store is normally made by the intervention agency to a wholesaler or first stage processer since few if any producers are in a position to deliver the stipulated minimum quantities of produce. The premium (deficiency payment) on oilseeds is paid to the crusher for passing on to the producer. In the case of other premia payment may be made direct to the producer or, if he chooses, via an officially recognized group of which he is a member. Grants from the Guidance Section of FEOGA are also paid direct to the beneficiary. Funds for operating the market withdrawal scheme for fruit and vegetables are channelled through recognized producer groups. The payment of the consumer subsidies for butter is normally effected by means of its sale by the intervention agency out of intervention store at the appropriate subsidized price to the various eligible categories of purchaser (hospitals, armed forces, baking and ice-cream industries, etc). The subsidies on skim, milk and skimmed milk powder for animal feed are paid to the dairies delivering them to the end users. Finally, export refunds are paid to the exporter by the intervention agency on receipt of documentary proof of delivery to the destination named on the export license. 32. Most of these mechanisms, except those for the payment of export refunds and of subsidies direct to producers, are catered frr, mutatis mutandis, under existing Portuguese price support arrangements. The Community ones will, however, tend to place a still greater burden on the administration and at the same time, failing some streamlining of intervention arrangements, constitute a still greater drag on the activities of traders and processers. - 144 - ANNEX 10 Page 12 B. Operation of Intervention 33. Member states are free to adopt administrative arrangements best suited to local conditions. In all cases the adminisLration of the CAP at national level is under the overall control of the Ministry of Agriculture (which may or may not also be the ministry responsible for fisheries, forestry and food policies). Intervention arrangements in the broad sense of the term (not only in the narrow sense of purchase and storage) may be put in the hands of a single agency dealing with all products, as in Belgium, Greece, Italy and the UK; a single agency with distinct divisions for each main product group, as in the German Federal Republic; a single agency operating in conjunctior. with statutory product boards, as in the Netherlands; a spec;al division of the Ministry of Agriculture, as in Denmark and Luxembourg; the appropriate product divisions of the Ministry itself as in Ireland; or in a number of separate agencies as in France, where, for historical reasons, these already existed before the creation of the EC. As a general rule the only support policy falling entirely outside the competence of these agencies is the collection of levies and duties, which remains in the hands of the customs authorities. 34. The existence of the various organizations referred to in para. 28 above suggests, at first sight, that the French model might be most appropriately adopted by Portugal. All have had an "intervention" role under national arrangements, whether as exclusive importers of the product under their control, as exclusive purchasers of national output, as purchasers and storers of intervention stocks, or as the channel for injecting subsidies, to the benefit of producers and of intermediate and final consumers, into the commercial system. Their possible future is discussed in Section VIII. An account of the structure and role of each organization will be found in Attachment II. The dubious value to agricultural production and marketing of much of their activity, and a marked tendency, over the years, to over- staffing, suggests that to perpetuate their existence might not be the most prudent manner of adapting the Portuguese system of agricultural support to the Community one. In order to make use of such expertise as exists it might be best to transfer those persons actually experienced in the mechanics of intervention at national level to a new central intervention agency that would be more lightly staffed, mainly by personnel from the Ministry of Agriculture already more familiar, through the negotiations for accession, with the working of the CAP. The scale of intervention buying is in any case likely to be modest. 35. Such an arrangement would also allow for the dismantling of the exclusive trading powers of the existing organizations (if this had not been achieved prior to accession) during the early part of the transition period independently of any involvement in administering the CAP. This is particularly necessary in the case of EPAC, the parastatal cereals marketing organization, the problem of whose disentanglement from the grain trade is discussed in Section VII. ANNEX 10 - 145 - Page 13 C. The Portuguese System 36. Price/income support to Portuguese producers is achieved by both so-called intervention prices, that are in effect guaranteed prices, and by subsidies to inputs. The subsidies, gradually reduced in number and level over the past two or three years, now relate only to mixed feed and to fuel and fertilizers. The latter varies according to the type of fertilizer, but currently averages between 40% and 60% of the true market price. The guaranteed price for cereals is channelled exclusively through EPAC in the case of wheat, but through other market agents and processers as well in the case of other cereals. Beef, pigmeat and sheepmeat price guarantees are paid at abattoir by the JNPP, which also channels the milk guarantee through the dairy cooperatives. Milk producers receive at the same time an additional subsidy per liter of milk mechanically milked and refrigerated on farm (or in communal parlors). 37. At one time Portuguese intervention prices for most products were below those in the EC. In recent years, however, with real support prices in Portugal increasing and those in the EC on a continuing downward trend, prices for cereals (other than rice), which lagged least behind, have now overtaken the EC's. This convergence of the two has occurred despite the deteriorating exchange rate between the escudo and the ECU. The milk price is substantially higher. Guaraniteed prices for rice, olive oil, beef, pigmeat and sheepmeat still remain below the EC level. For fruit and vegetables, the EC provides a measure of price support which has no counterpart in Portugal. 38. A switch to EC prices, were it to be immediate, would involve a number of balancing factors. The loss to the cereal producer of the subsidy on fertilizers would compound the disadvantage of suffering a drop in the level of support price. But he should, in an undersupplied market, be receiving more than the EC market support (intervention) price. The level of market prices in Portugal within the EC might therefore be little if at all inferior to the guaranteed prices paid to cereal producers under previous arrangements. I The beef producer might also expect to benefit from a market price that was above intervention level; this would more than compensate him for the loss of the mixed feed subsidy. The gain to the pig producer of the price switch, on the other hand, may scarcely compensate him for the loss of what is a much larger share of feed subsidy per unit of ouput. However, in all cases, a weak escudo would tend after accession to lead to devaluations which, barring the maintenance of an overvalued green rate, would push up EC support price levels in escudo terms. 1/ The proximity of the two support price levels for durum wheat combined with the subsidy per hectare payable in the EC could result in a net increase in price support for that cereal. ANNEX 10 - 146 - Page 14 IV. IMPLICATIONS OF ACCESSION FOR PORTUGUESE TRADE A. The Present Agricultural Trade Balance 39. It will be seen from Table 4.1 and 4.7 that during the four years 1978 to 1981, the most recent for which statistics are available, whereas the total value of imports of food, drink and tobacco rose by almost two and a half times, that of imports went up by only 87X. Even if the favorable balance regularly recorded for non-food (mainly forestry) products is taken into account, the trade gap more than quadrupled (see Table 4.12). 40. Tables 4.2, 4.3, 4.8, and 4.9 indicate a considerable consistency in the ranking by value of the principal imports and exports over the four-year period. Cereals, oilseeds and meals, other products used for animal feed, and sugar dominate the export tables. They also account for the largest deficits (Table 4.12), although the increasing exports of vegetable oils extracted by Portuguese crushers have to be set against the import bill for oilseeds. The main foreign currency earners heading the import table are wines, fortified and table, and tomato concentrate. B. Outlook for the Trade Balance 41. On the basis that 1980 and 1981, and particularly 1981, were, as drought years, likely to prove atypical, the Bank, in assessing the effects of EEC accession on the agricultural trade balance iv its 1982 Report,L' adopted 1979 as a base year. There seems no good reason to change this point of departure. Despite certain consistencies, noted above, that eventually emerged between the pattern of trade in 1980 and 1981 and the preceding two years, 1981 does indeed appear to have been in important respects exceptional. rmports of wheat were two thirds above their 1979 and 1980 level. This was clearly a reflection of the drought. So was a near doubling of the normal volume of barley and rice imports. Sorghum imports also doubled. Maize imports hardly increased during 1981 compared with 1980, but had already in 1980 risen by a quarter over their 1979 level. However, even more disturbing to the trade balance in 1981 than those volume increases (17% for all cereals taken together) was the effect on their value of an exceptionally strong US dollar (combined with a continuing weakening of the Escudo). Between 1980 and 1981 the total import value of cereals rose by just under two thirds. Early indications are that this trend was arrested in 1982, when the value of agricultural imports went up by no more than one percent, despite a volume increase of 6.72. But, thanks no doubt to more favorable production conditionE in Portugal, that increase was little more than half the increase recorded in 1981. 42. Report 4109-PO made some further assumptions: that the ratio of Portuguese to EC support prices will have shifted somewhat in favor of the EC price level by the time of accession (which must now be assumed to be not earlier than January 1, 1986); that all support price levels will move pafi passu with the rate of inflation; and that all subsidies to production and consumption would have been removed by accession. 1/ 4109-PO op. cit. ANNEX 10 - 147 - Page 15 43. The first of these three assumptions retains validity to the extent that any weakening of the escudo vis-a-vis the ECU is bound to increase the value of EC institutional prices in escudo terms. The second assumption was recognized at the time to be more convenient than realistic. In fact, while Portuguese support prices have tended to rise in real terms, those in the EC, as expressed in ECUs, have tended to lag behind inflation."' The 1983-84 EC price settlement, reached under the threat of acute budgetary constraints and deteriorating international trade relations, involved a real cut in prices of 4.4% (though of only 1.7% in national currency terms). The more favorable settlements of 1981-82 (minus 1.4% in ECU; plus 0.3% in national currency) and 1982-93 (minus 0.1%; plus 1.7%) seem unlikely to be repeated in the next two years. As far as the third assumption is concerned, a continuing downward trend in Portuguese subsidies is to be expected, if only for budgetary reasons. Fertilizer subsidies, if they were being applied at accession, would still constitute an indirect element of price advantage to Portuguese cereal growers over EC ones. So would the mixed feed subsidy to livestock producers. 44. By 1986 Portuguese support prices for milk and cereals may still be some 10 to 15% above EC level. However, since prices for cereals are, in a deficit market, likely to be somewhat above the EC (wholesale) intervention price, the net return to the producer may, even allowing for the removal of the subsidies on fertilizers, not be very different from that obtained from the present guaranteed intervention price. In the case of other livestock products, beef, pigmeat and sheepmeat, and of rice and olive oil, on the other hand, Portuguese prices are expected still to lag behind at the moment of accession, but the advantage to pigmeat, and to a lesser extent beef, producers of moving to the higher price level is likely to be eroded by the loss of the feed subsidy. As far as producer prices are concerned, therefore, no significant "once and for all" across the board increase resulting from the switch to the CAP can now be assumed to occur during the transition period. Taking into account the weightings of the products concerned in the total output of Portuguese agriculture, the price rises and price reductions are likely roughly to balance out. 45. The trade effect of adopting the CAP will, however, be somewhat different. The price of imports of leviable products, hitherto purchased CIF, will rise by the amount of the levy. This will apply particularly to maize, supplies of which from within the EEC will be limited. However, to the extent that imports of feed- and breadgrains are available within the EEC, the operation of Community preference will ensure that they can be imported at below threshold price; at what price level between threshold and intervention will depend on the state of supply of the northern EC market. Large intervention stocks of barley and wheat currently overhang that market. The 1/ Only in 1982-83 did the average price increase in ECUs almost match the average rate of inflation; it failed to do so by one tenth of a percentage point. But not only does the real value of ECU price increases vary from member country to member country, as one would expect, in inverse ratio to the local rate of inflation. The real value of increases is also affected by the extent to which green rate devaluations may push up, or revaluations diminish, common prices in national currency terms. ANNEX 10 - 148 - Page 16 Commission's proclaimed intention of gradually bringing the EC real support price down towards the lower US level may have some moderating effect on production, but, barring one or two poor harvests, market prices are not likely to rise because of any significant reduction in supply. 46. Table 3.3 of 4109-PO compared the trade balance for the base year 1979 with the estimated balance for 1986, at the beginning of a transition period, before application of the CAP had begun to have any effect, and for 1990, at what was assumed to be at, or approaching, the end of a transition period. As far as 1986 is concerned the assessment of an import demand of 1.93 M tons of uw'ze and sorghum, representing a reduction of 10% since 1979, now seems, in the light of the level of imports in 1980 and 1981, over optimistic. These averaged 2,773 M tons a year. Assuming non-recurrence of drought coupled with some effect on demand for imported concentrates due to the reduction or removal of the feed subsidy, a cut of between 10 and 15% in imports could still be envisaged. These might therefore amount to 2.43 M tons in 1986, rather than the 1.93 M tons originally estimated, thus adding, at constant prices, some 3,250 M Esc to the estimated import bill. This would raise the net deficit on plant products in 1986 to 31,150 M Esc; it seems unlikely to be less. 47. The estimated deficit for 1990, or, further on into the transition period, 1992, ' should perhaps also be revised upwards, mainly irL the light of a less rapid development in domestic cereals production than was incorporated in the earlier estimate. It could, however, be assumed that the additional grain imports involved would consist of Community supplies of feedwheat and barley, rather than of third country maize, and would be imported at a price towards the lower end of the range between the EC target and intervention price. For instance, at constant 1979 prices a 50% increase in the volume of imports of feedwheat and barley compared with those originally estimated would, at constant 1979 prices, lead to an additional deficit of 3,250 M Esc. The cost of maize imports of 1.3 M tons, of which 1.1 M tons would be the equivalent levy-paid 1979 price, and the balance from the Community at an estimated 80% of the target price,-z would be unchanged. &8. The prospect that the annual cost of importing feedgrains might reach almost 40% of the gross value of food imports by 1992, compared with under 30% in 1979 could prompt the Portuguese Government to negotiate the type of special rebate on all imported feedgrains that was accorded to Italy in the original Community. The argument for this is developed in Section VIII (para. 146). At a rate equivalent of, say, 7.5% of the maize levy (at 1979 prices) (or 6.50 ECU/ton)3! this would represent an import saving in 1992 of about 1,030 M Esc. 1/ Even in the event of a two-stage transition prices would have been harmonized well before 1992 and the second stage would already be in train. 2/ Because the EC is permanently deficitary in maize the market price tends to be closer to the target price than in the case of wheat and barley. 3/ The rebate originally granted to Italy in 1967 was more than 10 units of account, reduced after two years to 7.5 u.a. and remaining at or near that level throughout the seventies. ANNEX 10 - 149 - Page 17 49. There seems little reason to question the estimates for 1986 or 1990 made in Report 4109-PO for agricultural products other than feedgrains. As far as 1992 is concerned, the change in the trade balance for non-cereal products compared with 1990 would probably be marginal, any growth in the value of import-saving/export-promoting domestic production being largely offset by increased demand for the wider choice of imported food that is likely to be stimulated by transition to a common market. 50. The earlier estimates are presented in revised forms in Table 4.13. Once again the potential for non-edible products, including forestry products, to redress the unfavorable balance is striking. A 15% increase in net export value over their 1986 level has been estimated for these products in 1992. This is evidently arbitrary. Nor are estimates for food products in any sense projections. They are intended only to indicate a possible order of magnitude of the trade effects for Portugal of adopting the CAP. These would clearly be substantial. Table 4.1 - -50 - Principal Aariculturl buworts. 1978-1 nd tmtt t- far 19t1 Page 18 Prod.' Cts 197 1979 19U - 919 (H Sac) Livestack Products meats 1.187 2.230 1 S35 1 624 Live Aniael 222 327 *73 S08 Ihf 90a 988 1140 540 Piguet 46 831 173 266 Ca_eed flt 2 3 4 - Other 9 81 45 10 Dairy: 395 471 394 060 Powdered Milk 154 66 125 161 lutter el 10S 76 353 Chees 102 146 98 226 otter 58 131 95 120 Offels 322 409 490 458 Total Livestock Products 1.914 3.110 2.719 2.942 Pleat Products Fruit sd Vegetables: 668 960 1 73 2 400 oeed Potatoes 276 1W 16g T5T Polses 141 141 370 545 Tropicel Fruit 48 119 139 241 Live Plants 76 1O0 138 218 Other 127 192 358 263 Coffee Tes ad Spices 1.401 2.177 2.179 2.294 Sugsr 2 2.60 6.63 1 8.716 Ctresls: 14.756 22.159 25.991 4S.068 test 3,769 6,011 4.928 10.950 RUe 132 a8 - 231 Barley 338 370 133 824 Oats - 61 - - Heise 8.344 12,902 19.179 27,959 Rice 670 1,976 893 3,252 Sohum 1t473 697 749 1,694 Other 30 54 59 158 Flour. etc. 146 60 93 76 Halt 144 257 230 204 Seeds and Oilpees: 6 589 9.482 8 139 9.927 Crouadout 1.057 1.1S2 168 Safflower ' - 419 - 9I1 Copra 475 636 551 551 ustlower - 2.971 3.543 4,755 Says - 3.385 3.0S8 4.190 Other 5.057 Le 657 /a 772 £5 72 Oils sd fets 868 1 .000 676 270 Olive oil 298 203 1 - Psi. oil 471 643 527 143 Other 99 154 148 127 Othur 47 177 10 - Total Plaet Products 2S276 38.U81 45.593 611!75 eLtily Processed Products: 4.422 5.879 7.678 13.9U2 Prepred sad Cemasd Host 9 12 15 94 Sugar Products 10 44 53 48 Cocoa d Cboacolste 440 402 448 579 Cereal Producte 59 85 113 207 Fruit Pree 12 21 46 183 Other Preserved Foods 40 48 39 383 Alcoholic lvrages: Wioes 3 956 10 19 Spirits 675 720 398 1,076 Other 3 5 6 158 esidue for Animal Fee 2,481 2.623 4.639 9.401 Tobacco 690 963 1,911 1.394 Total Food Products sad revenaes 35.150 47.870 55.990 85.579 Noo4ood Products: 33e2 6.3Y 8.613 2.117 *ew nd Sew Titer 1.397 1.414 3.533 5.907 fdrked Titer SI 52 233 - Pi s £akss me Iseee 62 16 19 7 Rew sod orked Cork J6 467 1.217 1.040 papr Pst- 372 1,014 951 1.331 Nibs ad lsther 1.434 3,367 3.360 3.,32 la Distributiao aem tsttd. -151 - ANNEX 10 Page 19 Table 4.2 Food, Feed, Drink, and Tobacco Imports Ranked by Value /a 1978 1979 X of Z of M Esc Total /b M Esc Total/ Maize 8,344 26.7 Maize 12,902 27.1 Wheat 3,769 12.1 Wheat 6,011 12.6 Soya Ic 3,000 /d 9.6 Soya /c 3,385 7.1 Residues 2,471 7.9 Sunflower /c 2,971 6.2 Sugar 2,286 /e 7.3 Sugar 2,653 /e 5.6 sunflower Ic 2,057 /d 6.6 Residues /f 2,623 5.5 Sorghum 1,473 4.7 Rice 1,976 4.1 Beef 908 2.9 Beef 988 2.1 Tobacco 690 2.2 Tobacco 963 2.0 Spirits 675 2.2 Wine 956 2.0 Rice 670 2.2 Pigmeat 831 1.7 barley 338 1.1 Spirits 720 1.5 Offals 332 1.1 Sorghum 697 1.5 Olive Oil 298 1.0 Safflower /c 641 1.3 Seed Potatoes 276 0.9 Offals 409 0.8 Live Animals 222 0.7 Seed Potatoes 400 0.8 Milk Powder 154 0.5 Barley 370 0.8 Flour 146 0.5 Live Animals 327 0.7 Malt 144 0.5 Malt 257 0.5 Pulses 141 0.5 Olive Oil 203 0.4 Rye 132 0.4 Cheese 146 0.3 Cheese 102 0.3 Pulses 141 0.3 Butter 108 0.2 Total 28,628 91.9 Total 40,679 85.1 7a Excluding tropical products other than sugar. Individual items exceeding 100 M Esc in value. /b Total of temperate products plus cane sugar. /c Seeds and meal. /d Estimate. Ie Including sugar confectionery. / Aniimal, fisb, and vegetable residues for animal feed. (2179E) - 152 - ANNEX 10 Page 20 Table 4.3 Food, Feed, Drink, and Tobacco Imports Ranked by Value /a 1980 1981 Z of Z of M Esc Total lb M Esc Tot:a. /1 Maize 19,179 36.9 Maize 27,959 34.0 Sugar /c 6,684 12.8 Wheat 10,950 13.3 Wheat 4,928 9.5 Residues /a 9,401 11.4 Residues /d 4,639 8.9 Sugar /c 9,204 11.2 Sunflower /e 3,543 6.8 Sunflower /e 4,755 5.8 Soya /e 3,088 5.9 Soya /e 4,190 5.1 Tobacco 1,911 3.7 Rice 3,252 4.0 Beef 1,140 2.2 Sorghum 1,694 2.1 Rice 893 1.7 Tobacco 1,394 1.7 Seed Potatoes 868 1.7 Seed Potatoes 1,133 1.4 Oilseeds If 772 1.5 Spirits 1,076 1.3 Sorghum 749 1.4 Barley 824 1.0 Offals 490 0.9 Live Animals 808 1.0 Live Animals 473 0.9 Pulses 545 0.7 Spirits 398 0.8 Beef 540 0.7 Pulses 370 0.7 Offals 458 0.6 Malt 230 0.4 Butter 353 0.4 Barley 183 0.3 Pigmeat 266 0.3 Pigmeat 173 0.3 Rye 231 0.3 Live Plants 138 0.3 Cheese 226 0.3 Powdered Milk 125 0.2 Live Plants 218 0.3 Cereal Products 113 0.2 Cereal products 207 0.3 Malt 204 0.3 Safflower /e 191 0.2 Fruit Preserves 183 0.2 _Powdered Milk 161 0.2 Total 51,034 96.6 Total 80,423 98.4 7a Excluding tropical products other than sugar. Individual item; exceeding 100 M Esc in value. /b Total of temperate products plus cane sugar. /c Including sugar confectionery. /t Animal, fish, and vegetable residues for animal feed. Ie Seeds and meal. /i Unspecified, excluding soya and sunflower. Source;. Estatisticas Agricolas. (2179E) ANNEX 10 Page 21 - 153 - 2hble 4.4 laports of Cereals, Oilseeds, Meals, nimal, and Other Pesidues, 1975-81 Anijil & Barley, Oilseeds Vegetable Iieat Maize S Rye & Oats Meals Residues Tota I 000 '000 NO0 t'000 ooo '0 ' toisM Esc tons M Esc tons M Fsc taos M Esc tons M Esc tons M Esc M FeBc 1975 299 1,575 1,208 4,831 93 309 9 51 235 2,420 134 818 10,004 1976 222 1,021 1,196 4,681 291 1,057 6 29 333 3,016 146 982 10,784 1977 367 1,791 1,202 5,159 437 1,707 45 315 337 5,011 237 2,231 16,214 1978 637 3,769 1,673 8,334 327 1,473 73 470 436 6,589 253 2,481 23,116 1979 755 6,001 2,003 12,902 132 697 86 519 514 9,482 199 2,623 32,224 1980 506 4,928 2,535 19,179 86 749 21 183 495 8,139 340 4,639 37,817 1981 952 10,950 2,644 27,959 174 1,694 55 1,055 483 9,927 402 9401 60,986 Sotce: EstatCsticas Agricolas. (2079E) 14- ANNEX 10 Page 22 Table 4.5 Imports of Live Animals, Meat, Offals, and Milk Product, 1975-81 All Milk Meat /a Beef & Veal Pigmeat Offals Products Total -000 000 M Esc tons M Esc tons M Esc M Esc N Esc M Esc 1975 996 24 667 9 327 145 245 1,386 1976 1,883 35 1,013 15 819 235 379 2,497 1977 2,359 51 1,898 7 407 292 340 2,99 1 1978 1,196 20 908 3 46 322 395 1,913 1979 2,238 13 988 10 831 409 471 3,118 1980 1,850 11 1,140 2 173 490 394 2,734 1981 1,718 4 540 3 266 458 860 3,036 /a including live animals and meat products, but excluding offals. Source: Estatisticas Agricolas. (2079E) - 155 - ANNEX 10 Page 23 Table 4.6 Production, Imports, and Consumption of Principal Cereals Crops, 1975-81 1975 1976 1977 1978 1979 1980 1981 … ------------------ (M tons)---- … Wheat Production 601 686 224 260 248 430 315 Imports 299 222 367 637 559 506 952 Consumption Ia 825 871 542 857 757 887 1,117 /t Imports as X of Production 50 32 164 245 304 118 302 Imports as X of Consumption 36 25 68 74 70 57 85 Barley Production 40 86 116 39 44 54 41 Imports /c 9 - 31 49 61 21 55 Consumption /a 81 101 62 86 94 67 81 /t Imports as % of Production 23 - 27 126 139 39 134 Imports as % of Consumption 11 - 50 57 65 31 68 Maize Production 451 379 442 449 461 489 377 Imports 1,208 1,19b 1,202 1,673 2,003 2,535 2,644 Consumption /a 1,643 1,558 1,627 2,105 2,447 3,008 3,004 /E Imports as % of Production 268 316 272 373 434 518 701 Imports as I of Consumption 74 77 74 79 82 84 88 Rice Production 133 97 102 135 145 155 112 Imports 49 93 100 51 117 48 /d 91 /b Consumption /a 177 184 197 181 253 200 199 /I Imports as 2 of Production 37 96 98 38 81 31 81 Imports as Z of Consumption 28 51 51 28 46 24 46 /a Excluding quantities retained for seed. /J Estimate. Ic Net imports; some 7,000 tons are exported annually; in 1976 there was a net export of 8,500 tons. /d Net imports; 7,000 tons were exported. /e Net imports; 6,000 tons were exported. Source: Estatfsticas agricolas. (2179E) - 156 - ANNEX 10 Table 4.7 Page 24 Principal Agricultural Exporte, 197140 and Etimated for 1981 Products 1978 1979 1980 1981 Livestock products Live animls and Heat 31 42 49 42 Deiry Products: Powdered mitk 27 86 33 317 Cbeese ISI 237 133 287 Other 7 22 32 83 Offals ffIl 555 502 S51 Total Liveatock Products 657 941 749 1.28D Plant Products Fruit and Vegetables: Potatoes 149 79 78 58 Pulses 89 226 86 92 Frozen and Dehydrated Produce 247 42' 322 506 Citrus 5 14 - 16 5 Pig Paate 55 102 96 63 Almonds 323 322 130 163 Pine XErnels 53 142 109 - Chestnuts 236 198 232 Apples and Pears 21 44 89 Dried Fruit 4 1 1 - Other 126 92 225 494 Flour. etc. 142 137 246 264 Carob. 193 432 450 37 '2geteble Oils: Olive Oil 230 384 434 489 Sunflower - 206 150 123 Soybean 74 496 575 - Other 185 277 112 1,.46 Other 77 185 243 258 Total Plant Products 2.209 3.759 3.594 3.998 Mainly Processed :roducts P"pared and Canned Meat 12 41 399 383 Sugar 90 473 853 105 Cocoa. etc. 42 17 68 41 Cereal Products 84 141 245 172 Fruit and Vegetables: Olives 119 179 204 245 Tomato Concentrate 1.984 2.315 2,620 3,274 Peeled Tomatoes 24 22 12 12 Pruit Preserves 11 13 20 31 Fruit Juices is 25 27 61 Other Preserved Foods 26 78 281 365 Total Processed Products 2.407 3.374 4.729 4.689 Alcoholic Deversjes Ordinary Vine 3.077 3.540 4.079 5.144 Fortified Vine 3,722 5.786 7.138 7,477 Spirits 71 122 241 121 Other 53 129 505 217 Total Alcoholic Svrages 6.923 F 9,577 11,.963 12.959 Other 89 568 92 - Total Processed Products and Dberacee 9.419 13.519 16.784 17.648 Total Wood F-oducts and Suverages 12.285 18.219 21.127 22.926 Mon-Pood Products Raw Timber 384 925 1.014 631 Sawn Timber 2.626 4.675 6.002 5.060 Varked Timber 127 482 480 706 Charcoal. etc. 76 158 479 - Pine Ibcine and Essence. 2,104 3,090 3,935 4,876 Ua Cork 333 446 740 852 Processed Cork 867 1.137 1.567 1.262 Paper Paste 3.220 5.804 9,585 12.407 Rides *ad Leather 351 558 608 595 Total Non-Food Products 10.101 17.275 24.430 26.389 Source: Es *tticas Agricolas. C21791) ANNEX 10 - 157 - Page 25 Table 4.8 Food and Drink Exports Ranked by Value /a 1978 1979 X of Z of M Esc Total H Esc Total Fortified Wine 3,722 30.3 Fortified Wine 5,786 31.8 Urdinary Wine 3,077 25.0 Ordinary Wine 3,540 19.4 Tomato Concentrate 1,984 16.1 Tomato Concentrate 2,345 12.9 Nuts 612 5.0 Vegetable Oils /b 979 5.4 Offals 411 3.3 Nuts 662 3.6 Vegetable Oils /b 259 2.1 Offals 555 3.0 Frozen/Dehydrated Sugar 473 2.6 Fruits & Vegetables 247 2.0 Carobs 432 2.4 Olive Oil 230 1.9 Frozen/Dehydrated Garobs 192 1.6 Fruits & Vegetables 422 2.3 Cheese 181 1.5 Animal Residues 386 2.1 Potatoes 149 1.2 Olive Oil 384 2.1 Flour 142 1.2 Cheese 237 1.2 Olives 119 1.0 Pulses 226 1.2 Olives 179 1.0 Cereal Products 141 0.8 Flour 137 0.8 spiritS 122 0.7 _~ _~ Fig Paste 102 0.6 Total 11,325 92.2 Total 17,018 93.9 /a Individual items exceeding 100 M Esc in value. /b Excluding olive oil. Source. Estatisticas Agricolas. (217WE) ANNEX 10 - 158 - Page 26 Table 4.9 Food and DZrink Exports Ranked by Value /a 1980 1981 Z of % of M Esc Total_ M Esc Tota l Fortified Wine 7,138 33.8 Fortified Wine 7,477 32.6 Ordinary Wine 4,079 19.3 Ordinary Wine 5,144 22.4 Tomato Concentrate 2,620 12.4 Tomato Concentrate 3,274 14.3 Sugar 853 4.0 Vegetable Oil /b 1,446 6.3 Other Alcoholic Offals 551 2.4 Beverages 746 3.5 Frozen/Dehydrated Soybean Oil 575 2.7 Fruits & Vegetables 506 2.3 Offals 502 2.4 Olive Oil 489 2.1 Nuts 471 2.2 Nuts 400 /c 1.7 Carobs 450 2.1 Prepared & Canned Meat 383 1.7 Olive Oil 434 2.1 Other Alcoholic Prepared & Canned Meat 399 1.9 Beverages 338 1.5 Frozen/Dehydrated Powdered Milk 317 1.4 Fruits & Vegetables 322 1.5 Cheese 287 1.3 Flour 246 1.2 Flour 264 1.2 Cereal Products 245 1.2 Olives 245 1.1 Spirits 241 1.1 Cereal Products 172 0.7 Olives 204 1.0 Almonds 163 0.7 Sunflower Oil 150 0.7 Sunflower Oil 123 0.5 Cheese 133 0.6 Spirits 121 0.5 - __- Sugar 105 0.5 Total 19,567 93.7 Total 21,637 95.2 /a Individual items exceeding 100 M Esc in value. /b Undefined; excluding olive oil and sunflower oil. Ic Estimate. Source: Estatfsticas Agricolas. (2179E) ANNEX 10 - 159 - Page 27 Table 4.10 Production, and Trade of Wines and Spirits, 1975-81 1975 1976 1977 1978 1979 1980 1981 - --… …------ - ('000 tons) /a --- Production Table Wine 8,136 8,446 5,895 5,678 13,199 9,200 Fortified Wine 450 509 578 475 547 580 Other /b 187 298 114 209 332 255 Imports Table Wine - - - - 60 - - Brandy, etc. - - 2 2 1 - 4 Whisky - 1 1 2 3 3 8 Exports Table t'ine 164 184 115 113 135 88 68 Fortified Wine 39 137 108 52 53 61 56 Other /c 5 2 2 1 1 1 1 ----- -------------- (N Esc) ---- ------ Imports Table Wine 2 4 4 3 956 10 19 Brandy, etc. 9 12 66 525 468 9 225 /c Whisky 54 104 87 150 252 362 851 Ac Total Imports 65 117 157 678 1,676 381 1,095 Exports Table Wine 3,206 3,425 2,273 6,806 3,580 4,079 5,144 Fortified Wine 1,552 1,581 2,100 3,722 5,786 7,138 /,477 Other /c 127 60 83 77 142 460 121 Total Exports 4,885 5,066 4,456 10,605 9,508 11,559 12,742 Trade Balance +4,820 +4,949 +4,299 +9,927 +7,832 +11,178 .11,647 /c /a 1 ton equals approximately 1,000 liters. lb Includes wine for distilling, "American" wine and must. /c Brandy and vermouth. /d Estimate. Source: Estatfsticas Agrfcolas. (2179E) - 160 - ANNEX 10 Page 28 Table 4. 11 Exports of Fruits and Vegetables, 1976-81 1976 1977 1978 1979 1980 1981 ------------------- (M Esc) ------ …------------ Fruit Citrus 3 3 5 14 16 5 Fig Paste 24 19 55 102 95 63 Almonds 133 350 324 322 130 163 Pine Kernels 51 72 53 142 109 - Chestnuts 58 82 236 198 232 - Apples 8 22 20 32 42 - Pears - 1 - 12 47 - Other 8 11 13 52 64 434 /a Total 285 560 706 874 735 665 Vegetables Frozen 9 19 38 80 79 78 llehydratea 102 1D6 209 341 288 420 Lul ives 2 4 3 - - - Pulses 63 56 89 226 86 112 Potatoes 39 21 149 79 78 58 union s/Gar lic 14 8 8 9 18 - Pimentoes - - - 13 - - Other 23 19 19 29 46 51 Total 252 263 515 777 595 719 Canned Fruit and Vegetables /b 113 136 2;!0 334 380 497 Total Fruit and Vegetables 650 959 1,441 1,985 1,710 1,881 7a DIetail not available. /b Excluding tomato paste. Source: Estatisticas AgrScolas. (2179E) - 161 - ANNEX 10 Page 29 Table 4.12 Balance of Each of the Principal Sectors of Agricultural Trade, 1978-81 1978 1979 1980 1981 -------------- (M Esc) Livestock Products -1,254 -Z,140 -1,586 -1,373 cereals /a -14,879 -22,420 -25,936 -45,119 Vegetable Oils -379 +363 +595 +1,788 oilseeds and Meals -6,396 -9,050 -7,688 -9,890 Sugar /a -2,247 -2,180 -5,831 -9,099 Fruit and Vegetables /a +3,257 +3,645 +3,216 +3,060 Seeds /b -276 -400 -868 -1,133 Animal and Vegetable Residues /c -2,481 -2,623 -4,639 -9,401 Coffee, Tea and Spices -1,401 -2,177 -2,179 -2,294 Cocoa and Chocolate -398 -385 -380 -538 Tobacco -690 -963 -1,911 -1 ,394 Wine, Beer and Spirits +6,242 +7,896 +11,549 +11,706 Non-Food Products +6,726 +10,941 +15,617 +14,272 other (balancing item) +105 +600 +381 +240 Total -10,618 -18,893 -19,660 -49,415 /a Includes processed products. /b Includes seed potatoes. /c Mainly for animal feed. source; Estat sticas Agricolas. (217YE) - 162 - ANNEX 10 Page 30 Table 4. 13 Balance of Each of the Principal Sectors of Agricultural Trade, 1979 and Estimates for 1986 and 1992 at Constant 1979 Prices 1979 1986 1992 -Ec--- (- Ec) Cereals, Oilseeds, etc. -34,093 -36,690 -50,850 /a Vegetable Oils +363 +3,500 +4,000 Sugar -2,180 -2,500 -8 ,000 Wines +8,410 +10,000 +14,350 /b Beers, Spirits, etc. -512 -800 -i,000 Tomato Concentrate +2,345 +2,400 +3,350 Fruit ana Vegetables +1,300 +3,000 +5,000 /b Tobacco -963 -1,000 -1,000 Coftee, Tea and Spices -2,177 -2,300 -2,500 Cocoa and Chocolate -385 -450 -600 Other Plant Products 4198 +200 +400 Total Plant Products -27,694 -27,640 -36,350 Live Animals, etc. -302 -300 -600 Meat and Offals -1,710 -500 -2,500 Dairy Products, etc. -128 -200 -400 Total Livestock Products -2,140 -1,000 -2,500 Total Food Products /c -29 ,789 -28,640 -40,35 0 Timber +4,725 +5,000 +5,750 /d Furniture +316 +600 +690 /d Pioe Resin, etc. +2,782 +4,500 +5,175 /d Cork +10,313 +12,000 +13,800 /d Paper Paste +5,823 +10,000 +11,500 /d Paper and Board +980 +1 ,000 +1,150 /d Skins, etc. -2,809 -3,500 -3,000 Plants and Flowers -67 -50 +500 Total Non-Edible +22,063 +29,550 +35,565 Total Agricultural and Forestry Products -7,726 +910 -4,785 /a No reduction of the deficit from a rebate on feedgrain imports has been allowed for. /b Midway between maximum and minimum previously estimated for 1992. /c Plus tobacco. fa 115% of 1986 balance. Source. Table 3.3 of 4109-PO, p. 34, as amended. (2179E) ANNEX 10 - 163 - Page 31 V. IMPLICATIONS OF THE CAP FOR THE PORTUGUESE BUDGET A. Payments 51. As already noted in discussing the terms to be negotiated for a transition period, a two-stage transition could involve the retention by the Portuguese treasury during its first stage of the agricultural levies and duties and industrial duties that would otherwise be payable into the common budget. During the second stage (or during a single stage transition) these would have to be paid over in full from day one. In the case of duties Portugal would only be required to make over the equivalent of those chargeable under the CCT, retaining the difference if any between the duty chargeable under the Portuguese tariff and the CCT duty until the difference had been eliminated step by step as laid down by the terms of accession. The percentage contribution of VAT yield (or, until VAT had been introduced, the contribution relating to GNP) would also have to be paid over in full, but, on the Greek precedent, Portugal would be likely to receive an annual rebate to the value of a gradually declining :;ercentage of this payment. Agricultural Levies 52. As a major importer of agricultural and food products Portugal could incur a heavy liability in variable levies on third country imports, particularly of cereals. Acceptance of the CAP will not only involve the additional foreign exchange cost of importing at EC instead rf "world" prices. To the extent that imports continue to come from third countries the ievy content of their price, remitted to Brussels, will also constitute a charge on the national budget. The 8.9 million tons of maize imported from the US between 1978 and 1981 would, for instance, have incurred levies (taking the average levy for each year converted at the average rate of exchange between the ECU and the escudo) amounting, over four years, to a total of almost 47,000 million Esc. Of the imports ranked in order of importance in Tables 4.2 and 4.3, maize, at the top of the list, will, as we noted in Section IV, be the one most difficult to replace from increased domestic output or from within the Community. It will therefore continue to attract a substantial volume of import levies, whereas, however much they may remain a burden on the trade balance, many of the other import items will either, like oilseeds, bear low or nil rates of duty or, like wheat, barley, beef and dairy products, be obtainable from within the enlarged Community. B. Receipts FEOGA Guarantee Section 53. Receipts are of two kinds. Payments received for operating intervention arrangements will vary from year to year according to the volume of intervention buying that is necessary. The market organizations for most of the main groups of products provide for some degree of public purchase of produce at a price below that at which the produce can find a purchaser on the open market. Where this facility is not available other "intervention" measures may be taken, aid to the private storage of pigmeat, for instance, or to the distillation of table wine, to relieve the market. The Community ANNEX 10 - 164 - Page 32 reimburses member states for such aids and for any losses on the re-sale of intervention stocks. These may therefore be left out of account in any consideration of the net budgetary effects of accession. Since storage costs are reimbursed on a flat Late basis, however, member states with above average costs, especially interest charges, may find themselves out of pocket in that respect. 54. Other receipts represent a net budgetary inflow, although they too will vary from year to year according to the volume of output of the produce concerned. They consist of the refunds on exports to third countries; the aids that are directly related to planted area or processed quantities of crops or to the headage of livestock; and the subsdidies to consumers, human and animal, of dairy products. 55. Since the level of an export refund is governed, broadly speaking, by the difference between the EC market price and the "world" market price of the product in question at the time of export, the value of refunds as well as the volume of exports will affect receipts from that source. The EC/world price difference is also influenced by the strength or weakness of the dollar in relation to the ECU, and the value of the refund to the exporter by the rate of exchange between his national currency and the ECU. Within the Community the proportion of Portuguese agricultural and food exports to third countries seems unlikely to expand significantly. Table 5.1 indicates the average level of refunds granted over the past five years (thus covering fluctuating values of the dollar) on those products for which Portugal at present exports rather modest quantities to non-EC countries. Pigmeat has been included since there appears to be a potential market in the former colonies that would not be inhibited by animal health regulations. But even allowing for the availability of export refunds, they will never constitute an important source of receipts from the Community budget. 56. The volume of net receipts arising from the other forms of price support is somewhat more promising. These, and their current (1982/83) rates, are listed at Table 5.2. The aids for processing a wide range of fruit, including tomatoes and citrus, and vegetables and to the marketing of citrus in other member countries (so-called "penetration premium") should represent a particular source of budget rec.;pts for Portugal. Since 1982 the Council of Ministers has also allocated an annual lump sum of 120 M ECU for distribution to small scale milk producers in the form of a direct income supplement. Should this principle, of compensating the small producer for the price restraint that will be increasingly forced on the dairy sector in face of mounting surpluses of milk, be extended, over time and in scale of expenditure, Portuguese producers would obviously be well to the front of the queue of deserving beneficiaries. 57. Finally, one other possible source of budget receipts, albeit likely to be a highly variable one from year to year, is that arising from the maintenance of an overvalued "green" rate of the escudo compared with its central rate. This would give rise to the payment of monetary compensatory amounts (MCAs) in the form of a tax on imports from other member states into Portugal of the main products for which intervention (and therefore MCAs) apply, and in the form of a levy on exports to other member states. While the ANNEX 10 - 165 - Page 33 cost of the import tax MCA is borne by the exporting state, the export levy MCA may be retained by the national treasury. In the case of third country trade, however, the financing of MCAs falls entirely on the Community budget. To the extent, therefore, that Portugal is likely to remain a net importer of products to which MCAs are applicable (notably cereals and sugar) the maintenance of a negative MCA would result in a budgetary inflow, whether from FEOGA Guarantee Section in the case of third country trade or from the individual exporter in the case of trade within the Community. The non-budgetary implications of agri-monetary policy for Portugal are discussed in Section VIII. Table 5.1 EC: Average Annual Export Refuids for Selected Products, 1978-82 1978 1979 1980 1981 1982 Product Unit ECU Esc ECU Esc ECU Esc ECU Esc EIJC Esc Table wine (red) /a degree/hl 0.79 43.6 0.79 52.9 0.80 55.6 1.05 71.9 1.45 113.1 Olive Oil 100 kg 29.01 1,621 4.3 288 11.7 814 22.75 1,558 16.47 1,285 Abaxids 100 kg 9.67 540 9.67 648 9.67 673 9.98 684 20.00 1,560 Table Grapes 10 kg 6.0 335 5.2 348 5.92 394 5.92 405 6.28 490 Apples 100 kg - - 9.72 651 11.91 792 12.00 822 12.00 936 Chickens /b 100 kg 23.8 1,330 26.6 1,182 19.25 1,281 13.9 952 17.6 1,373 Eggs (hen) 100 kg 19.3 1,078 24.1 1,615 20.3 1,351 14.33 982 15.2 1,186 Pizeat (fresh) /c 100 kg 16.9 944 39.9 2,673 24.33 1,619 21.42 1,467 16.4 1,279 Pigzeat (smked or dried) /c 100 kg 18.6 1,039 31.3 2,097 32.0 2,130 47.0 3,219 47.0 3,666 Sausages /d 100 kg 20.7 1,156 30.2 2,023 30.0 1,997 30.0 2,945 30.0 2,340 /a Nbt less thn 9.50 or exceeding 150 alchool content. /; Plucked and eviscerated. /c Ham aid cuts (bone-in). t5 Liver sasage. Soxwce: Calculated from EC CoLmnssion data. AM= 10 - 166 - Page 34 Table 5.2 EC: Rates of Aid for Selected Products. 1982-83 Aid per unit Unit ECU auc a- Calves head /b 32.00 2,496 Suckler cows head 35.00 /c 2,391 Compensatory allowances under Directive 75/268 for certain livestock livestock 20.30 (-in) 1,584 unit Id 97.00 (max) 7,567 Skimmed milk powder for calf feed le ton 660.00 51,484 Butter (consumer subsidy) ton 450.00 /f 35,103 School milk and cheese (consumer subsidy): - whole milk kg 30.16 /I 2,353 - semi-skim kg 17.40 /I 1,357 - skim kg 7.47 /j 583 - cheese kg /h 30.16 2,353 Peas and beans: - for human consumption ton 60.00 4,681 - for animal feed ton 8.50 663 Flax ha 335.02 26,134 Hemp ha 304.26 23,734 Silkworms box 100.00 7,801 Processed frui- frroduction aid): 100 kg - Tomato concentrate 45.53 3,552 (9.878) /i (771) - Whole peeled and whole frozen tomatoes 13.58 /; 1,059 (16.516) (1,288) - Non-whole ditto 6.65 519 (10.295) (793) - Tomato flake. 160.00 12,481 (12.452) (971) - Tomato juice /k 10.08 786 (10.295) (803) - Peaches in syrup 22.7 1,771 (35.65) (2,781) - Williams pears in syrup 23.44 1,828 (34.536) (2,694) - Sweet cherries in syrup 34.46 2,688 (77.788) (6,068) - Morello cherries in syrup 30.31 2,364 (87.39) (6,817) /a Average exchange rate for 1982. Xb Calves of beef type. /c Member states may increase the amount of the aid to 40.00 ECU (3,210 Eac) out of their own budget. In Ireland the Co iunity share of the aid is 35.00 ECU (2,730 Each Jd Bulls, cows, and other bovine animals over 2 years 1.00 LU. Bovine animals from 6 months to 2 years 0.60 LU. Sheep and goats 0.15 LU. /e The calf milk replacer must contain at least 60% of amp. /f Member states may increase the aid from their own budget. I Local authorities are required to contribute 3.77, 2.175 and 0.93375 ECU/kg (294, 197, and 73 Ecs/kg). respectively. /h Kg of whole milk equivalent. /i Figures in brack-ctz denote minimum price per 100 kg of raw material to be psid to the producer in order that the processor may qualify for the aid. Fi For San Harzano variety; 13.58 (12.452) 1,059 (971 Eac) for Rona and similar varieties. Lk For juice with dried extract content of 5% or more, but less than 7%. Higher rates of aid apply to juice with higher rates of dried extract content. Source: Official Journal of the EC, 1982, various numbers. ANNEX 10 - 167 - Page 35 FEOGA Guidance Section 58. The so-called "socio-structural" legislation of the Community may involve payments out of the Community budget. But in each case these are subject either to an absolute ceiling or to the provision of counterpart funds from the national treasury (and in many cases, where investment is concerned, from the individual beneficiary). For member countries with a very low per capita CDP the FEOGA contribution may reach a maximum of 50X. The principal measures are: (i) Directive 72/159 on the modernization of farms. This involves the drawing up of development plans for holdings capable of achieving a certain level of income in relation to incomes outside agriculture in the same region. (ii) Directive 72/160 on the cessation of farming, which involves the payment of early retirement pensions to farmers willing to sell or lease their land for the enlargement of other holdings. (iii) Directive 72/161, on socio-economic guidance and vocational training, provides for advisory and re-training facilities for those wishing to transfer out of agriculture. (iv) Directive 75/268 on agriculture in less favored areas (LFAs). Aids for farm modernization may be higher in these areas than under Directive 72/159. So-called compensatory allowances (to compensate for the permanent natural handicaps of such areas) may be paid on an annual headage basis for certain types of livestock. (v) Regulation 355/77 provides for investment aid to enterprises participating in recognized national programs (so-called "common measures") for improving conditions for processing and marketing of agricultural products. 59. Other measures which may provide a precedent for similar special ones to be applied in Portugal include irrigation programs in Southern Italy, aids to infrastructure in rural areas of France and Italy, to restructuring vineyards in France, to forestry in France, Italy and Greece, to developing agricultural advisory services in Italy, and, still at the proposal stage, integrated development programs (IDPs) in Italy. Some of these are discussed in greater detail in the next section. European Regional Development Fund (ERDF) 60. This has so far not contributed directly to agricultural development projects, but will do so in the event of the adoption of IDPs. As far as the non-agricultural aspects of the ERDF's financing of regional development is concerned, broad agreement has already been reached at the present stage of negotiations about Portuguese eligibility for aid. The much greater lack of tension between the central and regional administrations than in the case of agriculture has also facilitated the conclusion of financing agreements in the case of pre-accession aid. ANNEX 10 - 168 - Page 36 European Social Fund 61. The activities of this Fund have not so far had much direct influence on the agricultural sector. It will, however, like the Regional Fund, be involved in the financing of IDPs. To the extent that it provides facilities for industrial training, the Social Fund may assist outmigration from agriculture and thus contribute to an increase in its labor productivity. Any budgetary transfers in favor of agriculture are likely to remain modest. VI. POTENTIAL BENEFITS FROM THE EC'S STRUCTURAL POLICIES FOR AGRICULTURE A. Pre-accession Aid 62. Of the 125 M ECU of non-reimbursable pre-accession aid granted to Portugal by the EC in December 1980, some 23 M ECU have been allocated to agricultural projects in continental Portugal."' The program for agriculture, which has undergone several revisions, has three distinct objectives: the improvement of market organization, of productivity, and of farm structure. The estimated rate of EC participation varies a good deal from project to project (from 102 to, in a few cases, around 80Z), but seems likely to average about a third. Of about 30 projects originally envisaged 9 have now, two years later, been formally submitted to the EC Commission for its approval. Although the delay was due initially to the sluggishness of the Portuguese decision making process -- intensified in this case by the lack of rapport between Lisbon and the regional directorates for agriculture -- practical obstacles such as the varying exchange rate between the escudo and the ECU. shortcomings in the actual presentation of projects, especially of their financing aspects, and translation delays have also played their part. Drafts have had to shuttle to and from between Lisbon and Brussels until the proposals could be presented in their final form to the division of Directorate-General I (for External Affairs) of the Commission dealing with the enlargement negotiations. While the financing part of a proposal is considered by representatives of all the member states in an ad hoc working group of the Council of Ministers, its technical aspects and compaLibility with the Commission's standpoint on the agricultural aspects of the accession negotiations are appraised by the appropriate divisions of D-G VI (for Agriculture). Queries may have to be referred back to Lisbon. Once final agreement is eiven by the Commission (i.e. by the college of 14 Commissioners) a financing agreement is drawn up with the Portuguese Government. The whole procedure may take up to 18 months, but, even given a not too sensitive project and a well prepared dossier, a year is about the minimum time required. More than half the projects envisaged remain to be formally submitted, and the urgency of doing so is evident. 63. Table 6.1 lists the projects submitted to the Commission, and the Commission's decision, where already taken. The RICA (Riseau d'Information Comptable Agricole, or Farm Accounts Data Network -- FADN), which establishes farm income data for a stratified sample of farms throughout the Community, and the beef from maize silage project appear to be the only projects to have reached the stage of implementation. 1/ 20.38 MECU (million ECU in EC shorthand) to be administered through the Ministry of Agriculture and 2.93 MECU for improvements to irrigation through the Ministry of Public Works. It does not include the Community's aid to the eradication of African swine fever, which is being separately financed. ANNEX 10 - 169 - Page 37 Table 6.1: Pre-accession projects submitted to the EC Commission Aid Granted State of Project or Proposed Contract (MECU) A. Improvement of market organization 1. RICA 0.844 in hand 2. SIMA (market reporting) 0.650 3. Drying and storage of cereals (EPAC) 0.550 B. Improvement of productivity 1. LModernization of dairy/livestock holdings in Entre Douro e Minho 2.118 2. Horticultural production and marketing in Algarve 0.980 3. Livestock improvement and meat production from forage in Ribatejo-Oeste 0.647 4. Beef from maize silage project 0.165 in hand 5. Dairy farm improvement in Beira Litoral 0.300 C. Improvement of farm structure and complementary measures 1. Rehabilitation of vineyards and vine stocks; establishment of cadaster 0.141 6.395 Source: MACP and EC Commission. 64. As far as the rest of the pre-accession aid is concerned, the forestry projects originally envisaged have been severely cut in the light of the assistance already being received from the World Bank. Projects which aim at the improvement of marketing and production structures are likely to include (but no final definitive submissions to the EC Commission seem to have been made), on the marketing side, the establishment of five national abattoirs (3.215 MECU). Under improvements to productivity there are projects involving horticulture and citrus production and marketing in Ribatejo-Oeste and Entri-Douro e Minho, livestock production in the Mira irrigation zone, and, in Entre-Douro e Minho, a second beef/forage project. But all these draft projects are likely to require extensive revision, first in Lisbon, then in Brussels. The Commission will also be asked to provide a substantial amount of pre-accession aid towards the Government's more recently conceived support program far regional agrarian development (known by its French acronym PADAR - Programme d'Appui du Diveloppement Agraire Rigional). This is largely aimed at providing in each of the seven regions more effective extension services. These would include teams of trained extension workers -- - 170 - ANNEX 10 Page 38 notoriously lacking under present administrative arrangements -- in direct and daily contact with farmers. A need for some 1,000 such middle grade ticnicos, about one per 700 holdings, has been estimated. The Portuguese authorities evidently intend, in submitting this program to the Commission to take as their model the 1979 Regulation which provides aid for developing advisory services in Italy. B. Farm Modernization Plans 65. Directive 72/159 sets out the terms under which farmers may receive aids towards carrying out approved development plans designed to raise the income from their holdings to a prescribed minimum level within a prescribed number of years; the nature and maximum levels of such aids; and the proportion of the aid granted which may be recovered from FEOGA (Guidance Section). Development plans may be approved for single holdings or for two or more holdings operated jointly under some form of legal association. 66. There are also certain areas in which member states have discretionary powers to give aids from national treasuries, over and above the maxima laid down for development plans. These include installation aids to young farmers (Article 8); aids towards farm accounting costs (Article 11); starting up aids to producer groups (Article 12); and, most important, aids for erecting or improving farm buildings, for re-siting farmsteads, and for land improvement (Article 14). The 1981 amending Directive (81/528) also authorizes the granting by member states of transitional aids to farmers unable to achieve the minimum income target required and not yet eligible for early retirement annuities under Directive 72/160 (available to farmers retiring between the ages of 55 and 65 and reallocating their land for purposes of structural improvement). Finally, special aids may be given in areas where a minimum level of population and amount of farming is essential to conserving the countryside. 67. There are a number of more general options open to member states. These include accepting development plans whose income objective is no more than 90% of the local comparable earned income outside agriculture; some latitude in determining comparable income and what constitutes an adequate return on capital; the choice of allocating permissible aids in the form of soft loans at subsidised interest rates, of cash grants, or of a combination of the two; where loans are concerned, extending to 20 years or reducing to 10 years the normal 15-year repayment period; and, in certain circumstances and regions, raising the maximum interest subsidy on soft loans above 5%, or lowering the minimum rate payable to below 2X. Member states are also free to allocate less than the maximum levels of aid laid down in the Directive. 68. The terms of Directive 72/159, agreed by the Council of Ministers in 1972 after many months of discussion, are strongly influenced by concepts and circumstances prevailing in the northern part of the Community, especially in Germany, whose major financial contribution to the EC budget ensured it a powerful voice in the discussion. Consequently, the directive has proved largely inapplicable in Italy, and is likely to prove so in Portugal, whose Government will find difficulty in providing the necessary counterpart funds to-finance the basic scheme, let alone take advantage of the various - 171 - ~~~~ANNEX 10 - 171 - Page 39 additional options open to member states. In any case in the agriculturally backward areas of Portugal, as in those of Italy, the number of farmers capable of presenting and carrying through a development plan that will raise their income to 90% (or 70% in LFAs) of that earned locally outside agriculture is likely to be rather limited. C. Early Retirement Pensions 69. Directive 72/160 provides Community finance towards the payment of pensions to farmers who retire between .kc age of 55 and the age at which they would normally receive a state old age pension and who sell or let their land for the purpose of enlarging another agricultural holding. Experience has shown that this Directive too has little application in Italy. Traditionally, farmers do not retire; they work until prevented from doing so by physical incapacity. Those younger men or women who take work in other sectors often continue as part-time farmers. If their new jobs oblige them to migrate and there are no female or elderly relations to look after the family holding it may be allowed to go to fallow. The ownership of land as a hedge against inflation or recession is a discouragement to selling, and tenancy laws heavily weighted in favor of the tenant a discouragement to letting. It would seem likely that similar constraints would affect the application of Directive 160 in Portugal, especially in those areas of minifundia where its objectives would be most relevant. D. Vocational Training 70. Directive 72/161 provides Guidance Section finance for informing farmers of the possibilities open to them under the Community's structural policies, as well as some aid to professional training and to re-training for employment outside agriculture. E. Aids to Less Favored Areas 71. Farmers in areas officially designated as "less favored" may enjoy special benefits. Holdings for which development plans are approved are entitled to higher rates of aid, whether in the form of interest subsidy on soft loans or of direct grants (Article 8). Moreover, on completion of his plan, the beneficiary may continue to derive up to half his income from non-agricultural activities (Article 10), instead of a maximum of 20% under 72/159; the income from agriculture per labour unit must be equal to not less than 70% of the local comparable income outside agriculture rather than to the full comparable income laid down under 72/159. Livestock farmers may receive annual headage payments for certain classes of stock, so-called "compensatory allowances", compensating them for the altitude, slope and/or difficult climate of their holdings (Articles 5 to 7). Conditions other than natural handicaps may, if existing simultaneously, result in the designation of an area as less favoured, thus making farms within them eligible for special benefits (Article 3). These are: the presence of infertile land mainly suitable for extensive livestock farms; below average results "as regards the main indices characterising the economic situation"; and a low or dwindling population mainly dependent on agricultural activity. -172 - ANNEX 10 Page 40 72. Member states enjoy considerable latitude as to the extent of aids given. In the case of development plans a minimum and maximum additional aid to the investment is prescribed. The granting of compensatory allowances is entirely at the discretion of a member government, within a minlum of 20 ECU and a maximum of 97 ECU per livestock unit, with a ceiling of 97 ECU per hectare of total forage area of the holding. Dairy cows are only eligible "where dairy products form an important part of farming activity", and in the case of areas designated because of the danger of depopulation there are special limitations on their eligibility. As far as livestock, other than cattle, sheep and goats, on mountain and hill farms is concerned, an allowance, not exceeding 50 ECU per hectare, is calculated on the basis of the area tarmed, less the area required for feeding livestock, any land planted to wheat, and any orchards of over half a hectare. Member states have the option of not granting compensatory allowances on some or all of the eligible livestock in any less favoured area. Finally, they may grant aids to joint investment schemes for fodder production and towards improvement of pasture and hill grazings which are farmed jointly, and may also, as in the case of 72/159, aid farms not capable of attaining the prescribed level of income, provided that such aids are not more favourable than those available to holdings outside LFAs. Only in this last instance is no reimbursement of expenditure available from FEOGA; in all other cases the Community's contribution to aid given under 75/268 is 25Z (50X in Italy and Ireland). 73. The Portuguese authorities have drawn up maps, based on their own interpretation of 75/268, of both the mountain zones and LFAs of Portugal. These do not necessarily coincide, but mostly do so (see Attachment III). It will be seen that they include virtually the whole of Tr@s-os-Montes; all of Beira Interior; the Alentejo, excluding only the fertile sub-regions round Avis, Elvas, Evora and Beja; all but the main agricultural coastal zones of the Algarve; and the eastern fringes of Entre-Duoro e Minho, Beira Litoral, and Ribatejo e Oeste. Although Directive 268 could represent an important source of assistance to Portuguese agriculture, the potential budgetary gain to the Portuguese treasury is relatively modest. Seventy-five per cent of the cost of compensatory allowances has, under present arrangements, to be found from national budgets (though the 50Z concession to Italy and Ireland would probably be extended to Portugal); there is a ceiling of 20,000 ECU on the Community contribution to joint schemes for fodder production and improvement of jointly farmed pasture and hill-grazings; and the higher rate of aid that may be granted to approved development plans in LFAs is entirely at the discretion of national treasuries. Indeed, it has to be recognized that one of the aims of Directive 75/268, and of the earlier 1972 structural directives, was to establish ground rules for the granting by member governments of investment aids in agriculture; to harmonize the type and level of such aids; and bring to an end the distortions to competition, actual or potential, that they represent. The contribution of the Community budget to the aids, even when harmonized, was from the beginning a modest one (although it was later to be stepped up in the case of member countries with a low per capita GDP). The countries which insisted that this should be so, the German Federal Republic and the Netherlands, were not only at the time important contributors to the Community budget, but also happened to be among those with the most highly developed structural policies of their own - policies on which the provisions of the Directives were largely modelled, and, as we have noted, rather unsuited to the countries most in need of them. - 173 - ANNEX 10 Page 41 F. Aids to Investment in Processing and Marketing 74. Regulation 355/77 constitutes a more promising source of funds for Portugal, and for a much-needed purpose. Here the main obstacles to taking advantage oE aid from the Guidance Section of FEOGA seem likely to be organizational and administrative. Member governments are required to submit coherent national plans for improvement of the processing and marketing (the two being normally, though not necessarily, linked) of particular products or groups of products. Since it is a bebic requirement of such investment that it should be shown to be of direct benefit to producers, it is sometimes easier for cooperatives than for private enterprises to benefit from Regulation 355. But even in a member country such as the UK with a weak cooperative tradition in agriculture, the private sector has received extensive grant aid. With the help of a Ministry of Agriculture interested in obtaining maximum budgetary receipts for the country from Regulation 355, and thanks to careful preparation of their dossiers, the individual applicant processers participating in a national plan have managed to derive considerable financial benefit. Beneficiaries are required to finance not less than half of the investment concerned, but only a quarter in the Mezzogiorno, where the FEOGA contribttion may rise to 50Z. The counterpart funds to be provided by the member government may therefore be as little as 252. This will evidently be an opportunity not to be missed by Portugal, although the EC's overall budgetary provision, and thus the availability of funds to each member state, will of course be at the discretion of the Council of Ministers. Appendix IV provides an indication of the operation of Regulation 355, up to 1981. G. Special Programs 75. The inability of the so-called "socio-structural" directives described above to meet in full the needs of particular regions led the Commission to propose, and the Council, after the usual prolonged discussion, to adopt in 1980 integrated development programs for four selected problem agricultural areas: the Western Isles of Scotland, the West of Ireland, the Belgian Ardennes, and the Lozere department of France. These are essentially experimental. Although dubbed "integrated" they are basically concerned with the development of agriculture in the areas. Mention is made of the need to encourage artisanal activities and tourism, but for these financial provision from FEOGA will be minimal, and it is left to national governments to integrate the aid for the non-agricultural sectors, drawing, to the extent that finance is available, on the Community's Regional and Social Funds. The limited nature of these pilot programs has now evidently been recognized, since the EC Commission's proposals for integrated Mediterranean programs, submitted to the Council in March 1983, envisage that of the share of Community expenditure no more than 46Z would be on agriculture (including 62 on fisheries). The extent to which the Commission's proposals for this expenditure (45% of it in Italy, 38X in Greece and 17 in France) are agreed by the Council will be of particular interest to Portugal. This aspect of the future of the CAP is discussed in Section VIII. - 174 - ANNEX 10 - 174 - Page 42 H. Land Consolidation 76. The extreme fragmentation of agricultural holdings has, as well as the overall small size of a very large proportion of them, constituted a considerable obstacle to the raising of productivity in agriculture in most of the continental member countries of the EC. Since the end of World War II the governments of France, West Germany and the Netherlands, and, more recently, Belgium have operated legislation, backed with substantial public funds, to remedy this. For this reason consolidation of holdings was not an important feature of the Community's structural directives. Directive 72/160, on early retirement, provides an incentive to the enlargement of holdings, but only indirectly (since the fragments of any holding being surrendered would presumably be sold or let to the owners of the most conveniently contiguous ones) to their consolidation. Article 13 of Directive 721159 gives general encouragement to member states to link modernizing farms by means of development plans to schemes for land reparcelling. The opportunity for obtaining any FEOGA contribution under this heading is, however, severely limited by the stipulation that in order to qualify for Community aid at least 40% of the utilized agricultural areas in such schemes should be worked by farms for which development plans have actually been approved, or at least 702 of a scheme's area should consist of farms capable of achieving the development criteria. The potential budgetary receipts to Portugal in respect of land consolidation schemes are therefore minimal. Provision for this form of structural improvement is, however, contained in the Commission's proposals, already mentioned, for Integrated Mediterranean Projects. I. Producer Groups 77. Regulation 1360/78 makes general provision for FEOGA assistance towards starting up expenses for producer groups and their regional or national associations. As early as 1966 officially recognized producer groups had been established as the exclusive channel for certain forms of payment due to producers under the Common Market organizations for fruit and vegetables. In order to assist the formation and operation of these groups, FEOGA aid was given on a degressive basis, over the first three years of their existence. The 1978 Regulation extended the principle to other groups marketing certain products (but not necessarily acting as a channel for market aids) in defined areas of the Community, including the whole of Italy. The starting-up aid may consist of up to 60X, 40% and 20Z respectively of the first three years' formation and operating expenses. To ensure that recognized groups perform as efficiently as possible, a subsequent regulation (2083/80) lays down their minimum permissible size, in terms of volume or value of turnover and of number of members. For associations this must be at least three times the minimum size prescribed for its constitutent groups. The minima currently laid down for Italy are shown in Table 6.2. ANNEX 10 - 175 - Page 43 Table 6.2 Minimum Size Of Producer Crouws In Italy Qualifying For Starting-Up Aids Volume or Value Number of Product of Production Members Bovine animals 5,000 head 200 Swine isnd pig meat 25,000 head 200 Sheep and goats 12,000 head 150 Table fowls 220,000 places 150 Eggs 80,000 layers 200 Milk, cheese and curds cow's 15,000 tons 200 sheep or goat's 3,000 tons 100 Natural honey 130,000 ECU 50 Non-edible horticultural products 2,500,000 ECU 50 Potatoes: ware 10,000 tons ) ) 300 new 5,000 tons ) Cereals: common wheat and maize 15,000 tons 300 durum wheat 12,000 tons 300 rice 10,000 tons 150 Oilseeds 2.000,000 ECU 200 Perfumery/pharmacy plants 800,000 ECU 40 Olive oil 1,200 tons 300 Table wine 150,000 hl 300 Quality wines psr 302 of production of 30S of psr area producers Tobacco 1,000 tons 300 Source: Annex to Regulation 2083/80 of 31 July, 1980. J. Agricultural Advisory Services 78. Regulation 270/79 provides 6 million ECU from FEOGA Guidance Section, to be spent in Italy over a twelve year period, towards the specialized training of teachers, the running of inter-regional training centers, the payment of attendance allowances to students, etc. Teachers' qualifications and course curricula are prescribed. Progress in the development of the services is to be closely monitored, on a year to year basis, by the Commission and the Committee for Structures (of member state representatives). K. Restructuring and Conversion of Vineyards 79. Directive 78/627 provides for a 35X FEOGA Guidance Section contribution towards public expenditure of 2,600 ECU/ha on restructuring 66,000 ha of vineyards in SW France, and towards the cost of public hydraulic works covering 33,000 ha permitting the limited irrigation of vineyards converted to the production of "vin dilimiti de qualiti supirieure" (VDQS); and, for a 50% contribution to the cost of converting vineyards to other forms of production, up to 2,000 ECC/ha. - 176 - ANNEX 10 Page 44 L. Collective Irrigation Works 80. Regulation 1362/78 provides for a 50% FEOGA Guidance Section contribution, up to 3,000 ECU/ha, towards public irrigation works in respect of a maximum of 200,000 irrigable hectares in the Mezzogiorno. Vines are to be excluded from the irrigated area and particular stress place on fodder crops (maize, barley, lucerne, clover, field beans, sorghum, soya, fodder beet, etc.) and livestock production. M. Forestry Measures 81. Regulation 269/79 provides 50% FEOGA Guidance Section funding for approved forestry programs in Italy and parts of southern France. Minimum contributions from the national budget and from the beneficiary (where privately owned land is involved) are 40% and 5% respectively. Measures eligible for grant include afforestation, of up to 88,000 ha at a maximum cost of 2,000 ECUs/ha; improvement of deteriorated woodland, as far as is necessary for soil and water conservation, up to 96,000 ha at a maximum cost of 1,700 ECU/ha; terracing (80,000 ha; 900 ECU/ha); fire protection (200,000 ha; 100 ECU/ha); and construction of forest roads (2,400 km; 12,000 ECU/km). N. Improvement of Rural Amenities 82. Regulation 1760/78 provides for FEOGA Guidance Section financing, at a cost of 125 million ECUs a year over five years of rural infrastructure measures in remote areas of Italy and southern France. Approved schemes for supply of electricity and potable water to villages mainly dependent on agriculture and to isolated farmsteads, and for construction and improvement of local and farm roads, attract a 40% capital grant from FEOGA. A minimum contribution of 20% and of 102 of the cost of the scheme is required from the national authorities and the beneficiary respectively. VII. ADAPTATION MEASURES THAT WILL BE NECESSARY A. Timing 83. The adaptations that will be necessary may be classified as those relating to external trade; to prices and the mechanism of price support; and to production and market structures. The extent to which these three types of adaptation can be undertaken prior to accession varies inversely to the order in which they are listed here. Steps to adapt structures should be immediate and intensive and pursued with energy, all the more so as they are essential to the economic development of Portugal whether or not the farm sector is eventually called upon to meet direct competition from those of EC-10 and of Spain. - 177 - ~~~~ANNEX 10 - 177 - Page 45 84. As far as prices are concerned the levels of support guaranteed to producers is not so far apart from most of those applied in the Community to make difficult their further approximation during the years preceding the date of accession. There may be some problem to ensure that Portuguese prices do not get too far ahead of EC ones, necessitating a reduction or a standstill during the transition period. However, once accession has taken place the weakness of the escudo in relation tc the ECU is likely to ensure a fairly steady upward trend in institutional prices expressed in national currency terms, on the reasonable assumption that any negative MCAs that may arise will be fairly rapidly eliminated. The Portuguese Government's intention to continue progressively to eliminate subsidies during the run-up to accession shouid also help to ensure a gradual approximation of both farm input prices and of consumer prices to the level at which they might be expected to settle after accession, or by the end of the first stage of a two-stage transition period. It should also be possible before accession to adapt the mechanisms of price support to those of the Community. In some cases there are already fairly close similarities. But the elimination of the role of the state trading monopolies presents a major problem. 85. Clearly external trade constitutes the most difficult field for adaptation, especially as regards cereal imports. A decision will have to be taken about the rate at which the present system of Government subsidies on imports (paid to EPAC) and to farmers (paid by EPAC either direct in the case of wheat or via compounder for feedgrains) is to be dismantled and substituted by a system where the level of internal market prices, for producers and users alike, is mainly influenced by the level of levies on imports (and, in the unlikely eventuality of an overloaded market requiring them to be brought into play in Portugal, by the level of intervention prices). The administrative problems associated with this change, in a country not notable for the flexibility of its administrat!on, suggest that any shift to the new system prior to accession - before, therefore, the Government is subject to the spur of its treaty obligations -- is likely to be very slow. This is of course one of the main arguments in favor of a two-stage transition. B. Dismantling of the State Trading Monopolies 86. As noted in Section II, the three Juntas, for fruit, livestock products and wine, whose origins go back more than forty years, and AGAA, EPAC and IAPO (dealing, respectively, with sugar and alcohol, cereals, and vegetable oils and oilseeds), dating from the 1974 revolution, all have a dual role as intervention agencies (broadly analogous to those operating in the EC), and as importers. All but the JNF (fruit) enjoy an "exclusive" right of import of one or more products (the appelation of "monopoly", always vigorously rejected by officials of the organizations, may at least be used as convenient shorthand). Imports of ordinary table wine by the JNV are confined to rare years of national shortfall. The JNF may import fruit and vegetables, including preserved, for which there may be a temporary market shortage, or in respect of which it is thought desirable to obtain a more accurate vieu of the state of the market. - 178 - ANNEX 10 Page 46 87. While the EC Commission appeared at one moment to take the view that these monopoly powers, which contravene the Community's competition rules, would have to be discontinued from day one of accession, the two-stage transition proposal, inspired partly by the Greek experience, suggests that a more lenient view is now prevailing. P.ut it is difficult to see that, to the extent that their activities relate to external trade, they could be permitted to persist for very long even into a two-stage transition. This is particularly the case with ACMA, EPAC and IAPO, whose constitution involves them in the market on a day to day basis and not, like the Juntas (even the JNPP, operating in the livestock sector), on an occasional one only. AGAA (Administrayao-Geral do Acucar e de Alcohol) 88. AGAA is the exclusive importer of synthetic industrial alcohol and of molasses for distillation,-I but not of the spirituous beverages required by the makers of fortified wines, for whom it merely acts as the main import agent. It is also the exclusive purchaser of domestically produced eaux-de-vie and wine-based alcohol. In this respect AGAA is likely to survive under the legal exceptions reluctantly accorded by the EC Commission to the French and German state alcohol monopolies. The absence of any beet sugar production in continental Portugal makes the transition to the CAP sugar market organization easier than in the case of cereals. From accession the import of raw sugar for Portugal's four cane refineries, at present entering at world price levels, would be subject to a gradually increasing level of cost. The EC Commission seems confident that supplies of preferential (levy free) cane sugar from the ACP countries, from India, and from the French overseas departments and territories, will be sufficient to meet the needs of the Portuguese refineries in addition to those of cane refineries in France and the UK. But, although levy free, the import price for this sugar guaranteed to the supplier is equivalent to the EC's intervention price for "A" (full price quota) sugar, and thus in most years well above the world price. In anticipation of accession AGAA has been gradually switching its purchases to "Lomi" suppliers, which now account for about half of Portugal's annual imports of 300,000 tons. But AGAA's exclusive import role, whose original justification was the need to inject a consumer subsidy, would no longer be necessary once that subsidy had been removed. 89. There is a strong lobby in favor of setting up a domestic sugar beet industry. Fortified by the findings of a feasibility study carried out by British consultants and by the evident merits of sugar-beet in an irrigated crop rotation, its advocates claim imminent Government consent to what would be a substantial investment in setting up a beet sugar factory in the Santarem area. Any decision would have to be taken very promptly if the factory were to be in production in time for a national beet-sugar quota within the EC system to be allotted to Portugal under the terms of accession. To apply for a quota at a time when the Community has a sugar surplus of some 7.0 M tons would not, however, be well received in Brussels. _1 Domestic output is sold by the sugar refineries for animal feed. - 179 - ANNEX 10 Page 47 IAPO (Instituto do Azeite e Produtos Oleaginosos) 90. IAPO administers the national price support systems for domestically produced olive oil and oilseeds. It operates intervention buying for olive oil. Imports of oil are very intermittent, being necessary only in years of low yields. The system of price support for oilseeds is similar to that operating in the Community: an aid is paid to the crusher to enable him to bridge the gap between the minimum price which he is obliged to pay to the producer and the lower price at which he could purchase imported oilseeds. Additionally the Portuguese crusher receives an aid towards collection and transport costs. Although IAPO could, in the event of a decision not to operate a central intervention agency for CAP purposes, continue both its intervention role and paying the crushing aid within the EC, there seems little justification for maintaining its exclusive importing role up to the moment of accession, or for long into a first stage of transition. The import of oilseeds for crushing, and export of at least part of the oil produced, has tended to increase, making a positive contribution to the trade balance. It would seem sensible to introduce crushers to direct access and experience of the world market as soon as possible, even ahead of accession. EPAC (Empresa Publica de Abastecimento de Cereais) 91. That it keeps users of grain, whether millers or compound feed manufacturers, sheltered from and ignorant of the import markets on which, given the low productivity of domestic cereal production, they are so largely dependent, is also a strong argument in favor of the dismantling before accession of EPAC's monopoly over imports. It has been put to the Government during the past eighteen months by IAPA, the compound feed industry's trade association, but successive ministers have failed to respond to IAPA's request, or to that of CIAPA, the newly formed interprofessional association of all feedgrain users, for a meeting to discuss their views. There seems no doubt that EPAC's entrenched political position will encourage it to try to resist to the last possible moment, that is until after accession, its change of status. But at least it will not be able after accession to combine an intervention role with its trading one; that part of its functions, admittedly marginal, will have to be transferred to a separate agency. 92. The case against maintaining EPAC's present status is not only a legal one. Quite apart from the implications of the Treaty of Rome, there are sound economic objections to it. Within Portugal it gives rise to market distortions and helps to preserve inefficient structures. Despite overcapacity in the compound feed industry, said to be as much as 200%, a multiplicity of small enterprises engaged in compounding are kept in largely untroubled business by a system which enables them to purchase their grain inputs and sell their products at virtually uniform prices. A buyer even in one of the few comparativeiy large enterprises admitted that the dismantling of EPAC's monopoly would make life less easy for him. But the precariousness of their present situation is well recognized by the more go-ahead millers and compounders; hence the need for them to start to become involved in the import trade and establish direct business links with international shippers and other exporters in the Community before accession. Nor is EPAC's claim necessarily accepted that its expertise as an established and important buyer - 180 - ANNEX 10 Page 48 in the world market protects its clients from falling prey to multinational interests. EPAC's margins, required to support large staffs and heavy interest charges, are widely criticized as excessive. 93. In one respect, however, the suppression of EPAC's privileged status would not solve the problems of its former captive clients. That status has given EPAC access to investment funds which have enabled it to establish the network of port and inland silos necessary to a monopoly importer of all grains and to the exclusive purchaser of the domestic wheat crop. Compounders, making use of the evident facility of buying grain from EPAC according to their short-term requirements, have been spared the need for investing in any long-term storage capacity of their own. EPAC, therefore, even deprived of its de jure monopoly over imports, will find itself with a de facto one over their discharge and storage. Whether it will have to be leaned upon by the Government to lease some of its silo capacity to private and cooperative enterprises, or whether it will be necessary for the Conmission to arraign it on grounds of exercising a dominant position, and if necessary bring it, or the Portuguese Government, before the European Court oi. Justice - of if the future status of EPAC becomes the subject of an appropriate protocol to the Treaty of Accession -- remains to be seen. C. Organization of Producer Groups and Cooperatives 94. The period since the 1974 revolution has witnessed a considerable expansion in the number of agricultural cooperatives. Cooperation received little encouragement from the previous regime. Table 7.1 summarizes the situation at the end of 1981, when some 880 associations of different kinds were recognized by the Ministry of Agriculture. Although listed as "buying and selling" cooperatives (cooperativas de compra e venda) it seems that many of these are effectively supply cooperatives, little if at all geared to marketing their members' produce. The majority of them came into existence in order to fill the gap left by the suppression at the time of the revolution of the corporatist Gremios de Lavoura, Government controlled supply and marketing organizations that were financed by state subsidies and farmers' compulsory contributions. Freedom of association has been a necessary but not sufficient condition for establishing viable cooperatives in their place. There has been a notable lack either of sound management, or of appreciation by farmers, conditioned by long years of passive acceptance of the Gremios, of the principles of cooperation. The cooperative is too often seen by its members mainly as a source of favorably priced farm supplies, and its purchasing role merely as one of the last resort failing other more attractive offers for their produce. 95. The "groups" listed at Table 7.1 are almost exclusively of family members, associated under the group farming scheme (agricultura de grupo). Pooling their land and other resources on a formal legal basis for purposes of production, they correspond to the French GAECs (Groupements Agricoles pour Exploitation en Commun), and in no way to the Groupements de Producteurs, whose essential purpose is collective marketing of a particular product by a number of farmers, ensuring supplies to the market in regular quantities and even quality, and usually under contract. ANNEX 10 - 181 - Page 49 96. The 152 production/processing/niarketing cooperatives listed at Table 7.1 is not exhaustive since at least some of the 186 "mixed" cooperatives also deal in one or more of the individual products in which the others specialize. Unfortunately these are not specified in the Ministry's schedule. However, it seems unlikely that many mixed enterprises are involved in the processing of products such as wine, olive oil or milk which require special equipment. Table 7.1 Agricultural Cooperative OrAanizations In Continental Portugal/ Unions of cooperatives 21 - Wine 5 - Dairying 4 -Olives 2 - Tomato paste I - Rice 1 -Seed potatoes I -Compound feeds 1 - Other (non-product) 6 4ixed" cooperatives lb 186 "Buying and selling" cooperatives /c 102 Mutual insurance (livestock) cooperatives 52 Machinery syndicates 4 Irrigation cooperatives 27 Other 5 Production/processing/marketing cooperatives Id 279 - Wine 117 - Olives 61 -DbiryLig 35 - Sheep 20 - Mixed livestock 16 - Fruit and vegetables 13 - Poultry 7 - Seed potatoes 6 -Other 4 Groups 165 Agricultural Mutual Credit Savings Banks 163 /a As at 31 December 1981. /b Thece may have a processing as well as a supply role. but are not specialized in an-j parLLic;.a product. Ic These are essentially rupply coopeL2:ives. /d Not all engage in processing and market:. Source: Ministry of Agricuiture. Directorate-General for Ruzai Extension (Directorate for Agricultural Associations). ANNEX 10 - 182 - Page 50 Wine 97. About half of Portuguese production of table wine is produced by cooperatives, but the proportions varies considerably from region to region: of the main delimited zones, 80-90% of Dao, and 50 to 60% of Bairrada, but only 10% of Vinho Verde. Seven cooperative wineries product between 50 and 60% of the better quality wine in Tras-os-Montes. In Beira Interior region there are nine, more than 30 in Ribatejo e Oeste, and four each in the Alentejc and the Algarve. Fifty-eight wineries, representing 60% of cooperative table wine production are now federated at rational level in Fenadegas, set up in 1980. One of its main objectives is to establish centralized bottling facilities, with which many cooperatives are inadequately provided, at Lisbon, Coimbra and Porto, for table wine for export. 98. The Ministry of Agriculture's Direcqao de Servicos do Associativismo Agricola is promoting the establishment of regional unions of wine cooperatives. At present these only exist for the three delimited zones and in Tras-os-Montes. Others are planned in Beira Interior, Alentejo and Algarve. The union set up in Ribatejo e Oeste, one of the most prolific wine-growing regions, appears to have been a failure. It is the Ministry's intention that these unions should be one of the main instruments for achieving restructuring of vineyards, and familiarization of producers with the regulations, and the opportunities, involved in adopting the CAP for table wine. In order to qualify for aid for the distillation of wine removed from market, whether substandard or, in years of exceptional production, surplus to demand, Community regulations require from wineries regular annual declarations of production of a precision not at present demanded by the Junta Nacional do Vinho, which effectively buys in any wine offered to it. Declarations also form the basis of the Commission's decision whether to order, at the beginning of any wine year, compulsory distillation that will help to stave off a collapse of the market. 99. Independently of the cooperatives an association of vine-growers is also being formed, a syndical organization with the aim of disseminating technical information and providing formal representation of all vine-growers with the Government. Olive Oil 100. The formation of unions of oil pressing cooperatives in the main olive growing areas is also being encouraged by the Direccao de Associativismo So far, only two unions, each operating bottling plants, have been established at Portalegre .n Beira Interior (Uniavet, a union of 13 cooperatives) and at Cachao in Tras-os-Montes (TUA brand oil). Here again, the value of coopera'ives as a channel for the production aid payable under the CAP is being stressed. A syndical association open to all olive growers, on similar lines to that set up by the vine-growers, is also projected. ANNEX 10 - 183 - Page 51 Dairying 101. There are four unions of ceiperatives, whose headquarters are located at Vila do Conde (Entre Douro e hinho), Aveiro (Beira Litoral), Lisbon, and Farui (Algarve). The first three account for 70% of total deliveries to dairies. North of the Tagus, individual cooperatives act only as milk collection agencies for their union, whose plants carry out pasteurisation or ultra-heat treatment for the liquid market, and manufacture butter, fresh products, or industrial type (mainly Gouda) cheese. 102. In remote upland areas each producer still delivers his few liters of milk to a central collecting point. The principal means of collection north of the Tagus now involves a network of cooperative milking centers, each within convenient distance of up to 40 producers, who walk their cows to the centre for twice daily milking. The parlour is operated by one of the producers, who is also a salaried employee of the local cooperative. The milk is collected daily by the cooperative's refrigerated tanker and delivered to one of the cooperative union's plant.. for instance, in the area covered by the Aveiro union (Lacticoop), which comprises 20,000 producers organized in 23 cooperatives, there are 550 milking centers. Herd-size averages 1.8 cows. Each producer delivered an average of just over 9,000 liters in 1982. Only where daily outpuz exceeds 100 liters would individual milking sheds be considered worth maintaining and justify special collection by tanker. The collective parlor system also has evident advantages for maintaining milk quality, controlling mastitis, etc. 103. This system has been built up largely thanks to the exclusive collection zone enjoyed by each cooperative. The private dairy industry, which is involved solely in manufacturing and not in liquid milk distribution, is therefore obliged to purchase its raw material from the unions, for which it is becoming an increasingly important outlet for the growing volume of output off farms. Lacticoop, for instance, sold 60 M liters to the private sector in 1982 out of total deliveries of 188 M liters, compared with 45 M out of the 109 M five years earlier. The cooperatives are much concerned by the possibility that the present arrangement will pro-ve incompatible with EC competition rules. Prima facie the private sector would seem to have a valid case, and indeed the rather similar zoning system which existed in Germany before the establishment of the Community nae to be discontinued. On the other hand, the precedent of the British Milk Marketing Boards, which are permitted, under certain conditions, to remain the sole purchasers of milk off farms in the UK, may prove adaptable to Portugal. There is a strong economic argument in favor of not introducing a rival private collection network, which would tend to cream off the more accessible supplies, and to leave the more difficult and remoter areas to be operated by the cooperatives (which would be under a legal obligation to collect from all their members). But if the cooperatives were permitted to retain their exclusive rights of collection, it would be necessary to ensure, as is done in the case of the MffBs, that in disposing of the milk there was no price discrimination between the cooperative and private processing industries. Each cooperative would be obliged to deal at arms' length with its own plants. ANNEX 10 - 184 - Page 52 104. The dairy sector is one in which considerable progress has been made, largely through the collective milking center system, in adapting a primitive structure to modern needs. Imports of dairy products do not at present place a heavy burden on the trade balance. But the Government is aware of the wide choice of fresh products and cheeses which will be available to consumers when the Portuguese market is opened up to imports from the rest of the Community. The Portuguese industry is not yet well adapted to meet this competition. Technical assistance to cooperatives and the private sector, to introduce new products and types of cheese, fiscal incentives, and possibly encouragement to mergers so as to create three or four effective medium-sized units, are part of the official program for adapting the dairy sector. The possibility of introducing a form of association analogous to that of the SICA (Societe d'Interet Collectif Agricole) in France, in which cooperatives and private industry can both be shareholders, should not be neglected. Fruit and Vegetables 105. Of the sectors most important to the food and agriculture economy this is, as will be apparent from Table 7.1, tne one in which cooperative forms of association are the least developed. There are fewer than twenty cooperatives specializing in fruit and vegetables (and the majority of those only in fruit), and, apart from the union of tomato concentrate processing cooperatives there is no cooperative union, let alone any national federation. 106. This absence of cooperative organization reflects the chaotic state of the Portuguese market for fruit and vegetables. Some of the cooperatives have access to grading and packing stations established by the Junta Nacional das Frutas. But the absence of any modern central market in Lisbon, by far the most important center of consumption, largely stultifies any effort made, whether by cooperatives or by the more go-ahead private producers, to establish a demand for fruit (including citrus) and vegetables of standard quality and appearance. The existing Lisbon market, in a cramped part of the old city, is always described as "medieval". Attempts to move it to a new and more accessible site have been defeated by local political rivalries and the evident interest of the powerful wholesalers and middlemen to preserve a profitable status quo. In Porto the completion of the last two-thirds of a modern market complex has been held up for a number of years for similar reasons. 107. Recognized "producer groups" play an essential part in the operation of the common market organization for fruit and vegetables. Intervention for a wide range of individual fruits and vegetables takes the form of the withdrawal of supplies from the market after average prices have been below a specified level for a specified number of days. The produce withdrawn is usually processed into industrial alcohol. Withdrawals may only be carried out by recognized producer groups acting on behalf of their own members, and funds, from FEOGA Guidance Section, are only available for the compensation of members of such groups (which may be cooperatives). In order that Portuguese producers may benefit from these arrangements, therefore, it will be important for them to organize themselves into groups or cooperatives during the period ieft before accession. This will also provide the opportunity for educating ANNEX 10 - 185 - Page 53 producers in growing and marketing fruit and vegetables which conform to EC standards. Eventually it will only be permitted to market graded produce, and in any case only graded produce will qualify for the withdrawal premium. 108. Only one cooperative, Lourifruta, at Lourinha, north of Lisbon, appears to be engaged oin an appreciable scale in exporting fruit and vegetables, both fresh and frozen, Denmark, Germany and the Netherlands being their principal destinations. Nor does any other cooperative possess a freezing chain. Finance for Cooperatives 109. Finance for new investment clearly presents major problems -- not access to finance, which appears to be relatively easy, but the heavy interest charges with which many cooperatives find themselves burdened as a result of modernization. Lourifruta, for instance, a notably go-ahead, not say adventurous, enterprise, made investments, including the fret-ing chain, of over 80 M Esc in 1981 alone. Total outstanding medium- and long-term borrowings shown on its 1981 balance sheet amounted to 121 M Esc, of which just over half was borrowed from the local Caixa de Credito Agricola Mutuo, against share capital and reserves of no more than 25 M Esc. On a turnover of 119 M Esc the cooperative had shown a loss of 3.85 M Esc, net interest payments amounting to 3.4 M Esc. Poor weather conditions and high rates of interest were blamed for this unsatisfactory result, and members were presented with an optimistic view of the immediate future. But the cooperative's financial position must be reckoned to be somewhat precarious. Similarly the balance sheets of several wine cooperative indicate a burden of long-term debt that goes uneasily with both their capital structure and their trading results. 110. A notable feature of cooperative balance sheets is the relatively small part played by the membership, except on a short term basis, in providing finance. Compared with EC member countries such as the Netherlands, France, Germany or Denmark, Portuguese cooperatives have been able to raise long-term share capital from their own members only to a very limited extent. In the first place the minimum share subscription required for membership has been no more than 100 Esc, carrying with it no obligation on the part of the member to trade through his cooperative. Second, many, perhaps most, cooperatives were set up on Government initiative at the time of the revolution. With the exception of the Socialiqt inspired production cooperatives in the Alentejo they did not, like the northern European cooperative movement a century ago, grow up from the grass roots. Although membership was not compulsory, as it had been of the Gremios which they superseded, most producers who joined cooperatives did so in order to have easier access to farm inputs at a time of general scarcity rather than from any sense of identification with the cooperatives' aims. Indeed, many of those elected to run the cooperatives had little understanding of management, and marketing remained largely in the hands of the parastatal organizations which were responsible for establishing the cooperatives. The wine cooperatives set up on the initiative of the JNV provide a good example of this. ANNEX 10 - 186 - Page 54 1ll1. Conscious of these shortcomings the Government has recently adopted a "less paternalistic attitude" (in the words of an official of the Direceao do Associativismo) towards cooperatives, no longer treating them simply as laudable voluntary associations, but as business enterprises. It is recognized that Government finance towards the training of management cadres is essential if the largely public financing of investment is not to be wasted. Second, the law on cooperatives is to be amended, raising the minimum subscription to three shares of 500 Esc each (wi-th no mnaximum). Where large investments are involved a cooperative's statutes may include a clause requiring members to deliver a particular product exclusively to the cooperative. Cooperatives would be exempt from corporation tax on profits distributed to members, and the Caixe de Credito would be exempted from stamp duty. 112. Despite the constraints noted above, a survey carried out between May 1981 and May 1982, in which 428 out of 727 registered agricultural cooperatives were contacted, established that almost 807 of them had investment intentions of one sort or anothier. For about half of them plans had already been formulated. However, it is interesting to note that of six schemes subsequently identified in detail, involving an investment of 212 M Esc, over 40% of the proposed financing was to be devoted to "saneamento financeiro".' Extension Role of Cooperatives 113. Where cooperatives employ their own advisers, or, in some cases, retain the exclusive use of a member of the official extension service by paying a large part of his salary, they can provide a valuable means of disseminating technical know-how among their members, with whom they are in direct and regular contact. D. Applied Research and Technical Assistance 114. The shortcomings of the agricultural extension services in Portu_al, and their limited usefulness in promoting the higher productivity of the factors of production that is essential to the future of the economy, whether in or out of the EC, were described in the Bank's 1982 report on the trade effects of accession. This drew attention to overstaffing, including concentration of staff in Lisbon and Porto; poor communication between the Ministry and its regional directorates; and "the absence of any tradition offield work (which) tends to perpetuate botn a diffidence on the part of tecnicos to come into contact with farmers and a reciprocal lack of confidence on the part of farmers about contacting extension workers". As far as applied research is concerned, work at experimental stations tends to be isolated from the requirements of commercial agriculture. 1/ UNDP Project on Cooperative Development. ANNEX 10 - 187 - Page 55 115. The need to overcome these obstacles is recognized by officials at the Ministry of Agriculture who have been involved in the run-up to the accession negotiations. The aid being provided from FEOGA Guidance Section towards the improvement of extension services in Italy, where similar problems exist, is seen as a useful precedent. Part of pre-accession aid will be devoted to extension, indirectly, through the beef from maize silage project for instance, and more directly, if it is approved, through the PADAR. 116. The importance of cooperatives as a channel of communication has already been mentioned. In France, where the formation of producer groups has received financial encouragement from successive governments over the past twenty years, the principal form of year to year aid (apart from starting up grants for establishing a group's administrative base) has taken the form of paying the salary of one or more full-time technical advisers. Advisers are responsible not only for keeping members of groups up to date with production techniques (in the case of livestock production groups may also employ veterinarians), and for recording performance, but also for ensuring that produce, whether animal or vegetable, conforms with market demand and, where applicable, with legal physical standards. E. Export Promotion 117. Promotion of food exports, whether wholly or partly firanced from Government funds or by means of a levy raised at a convenient point in the production/processing/marketing chain, plays an important part in most EC member countries. In Portugal a beginning has been made by the Food and Drink Section of the Instituto do Comercio Externo (ICEP). Its activities, still on a modest scale, include research of potential export markets; descriptive publications of the most promising ones (e.g. Germany, Sweden and the UK); arranging visits for commercial managers to markets abroad; technical assistance to producers; and, so far to a limited extent, promotion campaigns for individual products. 118. ICEP notes a number of important constraints to exporting. For fruit and vegetables the lack of sufficient regular quantities of produce of appropriate uniform quality is the main obstacle, particularly to any form of sales promotion abroad. This reflects the inadequacies of the domestic market already described, and particularly the absence of a central market at Lisbon that would set and maintain standards. It seems that the current five-year Fruit Plan takes no account of export possibilities. 119. As far as table wine is concerned, although the current promotion in the UK of Vinho Verde and Dao is meeting with some success, ICEP takes the view that, as with fruit and vegetables, a closer matching of quantity with quality must be achieved before Portuguese wines stand much chance of competing, especially with Spanish ones, on EC markets. Priority for Government finance should go to the improvement of vine stocks - and oenological practices. Since the export market is not seen primarily as a bulk one, increased bottling facilities will also be necessary. ANNEX 10 - 188 - Page 56 120. Pot plants and flowers, especially the former, also offer export possibilities. Lack of indigenous know-how is being made good by the import of British and Scandinaviao technology. ICEP complains that joint ventures with Portuguese enterprises tend to be handicapped by bureaucratic constraints to foreign investment. However, they cited the case of a Swedish entrepreneur employing some 80 persons on a 2-ha holding in the Algarve. F. [mJ_rovtm1enL of Physital Nlarkt.t SLructures 121. The importance of improving physical facilities, whether in the form of packing stations, abattoirs, transport or wholebale markets, needs no stressing. Their inadequacy has already been highlighted under a number of headings. This is recognized in several of the pre-accession aid projects, notably that for abattoirs, still under consideration. It must be hoped, however, that in a country as lacking in agricultural marketing experience as in facilities, projects will not be undertaken without reference to the experience, including the mistakes, of other countries such as Italy and Spain. The risks of creating over-capacity as a result of satisfying local pride, resolving local jealousies, or giving in to political pressures, are ever present. 122. The inadequacy of specialized long distance transport is a severe handicap to efficient marketing. A total lack of coordination, particularly of the prevalent north-south movement of goods, results in a great deal of empty mileage. This is largely due to the extreme fragmentation of the wholesale trade, especially in fruit and vegetables. One of the objectives of forming unions of cooperatives should be to improve their members' marketing margins through the coordination of transport movements. G. Improvement and Application of Quality Standards 123. The absence of adequate quality standards and the need to improve them has been noted at several points. Quite apart from the need for produce of improved and level quality as an instrument of market penetration, accession to the EC will require the adoption of the body of Community legislation relating to food standards. Action to anticipate this was initiated at the end of 1980 by the establishment of the Instituto de Qualidade Alimentar (IQA), operating within the Ministry of Agriculture. A series of committees for technical standardization, each dealing with a single product or group of products, are proposing new regulations that conform as closely as possible to EC requirements. The committees, consisting of scientific experts (including veterinarians where appropriate), food inspectors, and experts representing food industry and producer associations -- some 400 persons in all -- operate under the aegis of the IQA, which supplies the committees' secretariats. Each completed proposal is subject to public scrutiny for a three month period, amended if necessary, and published as a decree. Only if penalties for infringement are to be prescribed is parliamentary consent required. I/ For which the first phase of pre-accession aid makes provision (Table 6.1). ANNEX 10 - 189 - Page 57 124. In most cases a fairly long period for adaptation to EC standards is allowed for. Any such derogations would have to be agreed during the course of the accession negotiations procedure. While all this work is a necessary preliminary to accession, much, if not most of it will be insufficient, for lack of sanctions, to bring the improvements in quality to the market place. Except where, as in the case of conditions in abattoirs or use of food additives, public health is involved, the standards, for fruit for instance, will remain, as they have been for many years tnder existing Portuguese legislation, voluntary only. Their ineffectiveness is apparent. Within the EC they are mandatory. Even if only a gradual adaptation can be envisaged it is difficult to see how this can be achieved without some form of steadily tightening screw. But the obstacles to establishing an effective inspection service are no doubt formidable. The present policing system relates only to price control, and its 2,000 inspectors would lack any technical ability to control quality. Initially at least the process will have to be educational, of both producers and conswners. VIII. SUMMARY OF KEY ISSUES A. The Future of the CAP The Budgetary Aspect 125. In no fewer than six out of the ten years since the EC's first enlargement in 1973 the Commission has published, usually at the request of the Council of Ministers, major policy documents containing proposals for changes to the CAP. The Council has sometimes adopted some of them rather half-heartedly, after long debate. In member countries that are at a budgetary disadvantage because of the CAP each set of proposals has been greeted, by politicians and the press at any rate, as a plan to "reform" it. On the other hand, where the CAP is seen to benefit the treasury, in countries with a large interest in agricultural exports for instance, great emphasis is placed on the permanence of its "three pillars", and the Commission's proposals treated as no more than technical adjustments to a system that is in good working order and in no way requiring fundamental reform. It is no accident that at least three of these major policy dczuments were occasioned by the CAP's mounting cost to the Community budget. Indeed, the last of the six, the Guidelines issued in the autumn of 1981,'' was an elaboration of the Commission response, published a few months earlier, to the mandate given it by the Council to put forward proposals for the "restructuring" of the budget. The Commission had proposed that in order that agriculture should account for a lesser - and diminishing - share of the budget than the 65 to 75% hitherto consumed by the CAP, and thus permit the more rapid development of other common policies, expenditure on agriculture should, each year, rise proportionately less than the Comnumnity's "own resou-ces". One of the principal means for bringing this about, elaborated in the Guidelines, was to extend the principle of "co-responsibility", that is, the sharing by producers in the cost of disposing of produce that exceeded the demand of the internal l/ Guidelines for European Agriculture. Memorandum to complement the Commission's report on the mandate of May 13. 1980. CON (81) 608 final Brussels, October 23, 1981. - 190 - ANNEX 10 - ~~~~~~Page 58 market. A limit would be placed on the volume of output qualifying for the full level of price guarantee. Production thresholds would be set for cereals, milk, oilseed rape (colza) and processed tomatoes. To exceed them in one year would result in a cut in the support price in the following year. 126. These proposals have not been accepted by the Agriculture Council without considerable reluctance and amendment. It was the very large increases in agricultural spending in 1978 and 1979, and consequent acuteness of the problem of the British net contribut2an to the budget, that had provoked the Council of Foreign Ministers' mandate to the Commission. Thanks to the expensive remedial action taken by the Commission in those two years to get rid of surpluses, mainly of dairy products, agricultural spending rose by a good deal less in 1980. Moreover, owing to the coincidence of unfavorable weather and a strong dollar (therefore high "world" prices and small refunds for major export products) 1981 had actually seen a reduction, albeit a small one, for the first time ever, of FEOGA Guarantee Section expenditure, in nominal terms. Encouraged by this respite from financial pressure and, for two years running, under severe political pressure from their national farm lobbies because of a continuing decline in producers' real incomes, ministers in 1982 decided on a record 10.5% average increase in common prices, on top of the 9% which they had voted the year before. It is hardly surprising, therefore, that, with milk yields resuming their upward trend in 1982 plus a record cereals harvest, FEOGA Guarantee expenditure is now, according to the Commission, running at over a third above its budgeted level for 1983. The Community is once more facing the exhaustion of its budgetary resources, if not in 1983, then in 1984. No doubt it is this alarming prospect which has persuaded the Agriculture Council to accept virtually without amendment the Commission's most recent price proposals (a rare event), involving for 1983/84 an average increase of just over 4%. Even so, thanks to adjustments of green exchange rates, the effect in national currency terms is to raise them by almost 7% above the 1982/83 level. 127. It is always possible that the weather and a strong dollar will once again come to the rescue and save the ministers from the bell. But the Commission, faced by the need to look also for a long-term solution to the "British problem" and to the budgetary needs of a future Community of Twelve, has used the opportunity to put forward proposals for the radical restructurin of the budget which it effectively failed to do when carrying out the Council's 1980 mandate. It starts from the premise that if useful common policies apart from agriculture are to be developed in an enlarged Community whose two new members themselves have important farm sectors, present budgetary resources must be expanded. This the Commission proposes to achieve essentially by increasing the percentage of VAT yield allocated to the Community budget, though it does not rule out other possible sources of revenue in the future, such as a tax on non-industrial energy consumption. In order to meet the objection that, on past form, most of any increase in resources would be likely to be swallowed up by FEOGA Guarantee Section, the Commission has proposed that in future the agricultural share of total expenditure be limited to 33%, to be financed in the normal way. Any excess would be financed by a "modulated" form of VAT-based contribution. A member state's contribution in respect of this excess would be calculated according to three criteria: its share of final production of produce covered by CAP ANNEX 10 - l91 - Page 59 regimes, its share of the Community's net operating surplus (GDP less fixed capital consumption and certain taxes) and its relative GDP. An unofficial estimatel' of the effect of such an arrangement applied to the 1982 budget puts the differences in (gross) contribution as follows: Actual As Proposed Germany 29.8 28.5 France 23.7 27.8 UK 19.1 11.1 Italy 12.7 14.5 Netherlands 5.8 7.0 Belgium 4.1 4.1 Denmark 2.3 3.6 Greece 1.6 1.8 Ireland 0.7 0.8 Luxembourg 0.2 0.3 The relief that would accrue to the UK is evident, whereas the present main beneficiaries of the CAP, France, the Netherlands and Denmark, would be expected to contribute a markedly larger share. Greece, Ireland and, to some extent Italy, all of which also do well out of the CAP, bear a lesser brunt of the proposed adjustment owing to their much lower GDP. The proposals at least have the merit, politically speaking, of not appearing to be ypt another attempt to "reform" the CAP. Its "three pillars" are clearly to be left intact. On the other hand the British and the Germans would have some satisfaction in knowing that if the majority of ministers in the Agriculture Council insist on voting their farmers larger price increases than are justified by the state of supply and demand, at least their treasuries would be bearing more of the marginal cost than under present arrangements. 128. However, it seems highly improbable that, even under the threat of imminent bankruptcy, the Council will adopt the Commission's proposals for revising budget contributions without prolonged discussion, and certainly not as they stand. But if graduated contributions to the cost of the CAP were to be accepted as a long-term feature of the Community budget, Portugal should, once any derogations in its favor permitted during the transition period have expired, stand to be at less of a budgetary disadvantage than would otherwise be the case. It is evidently destined to remain a large importer of feedgrains, any levies on third country grains being surrendered to the Community budget. But Portugal is unlikely to account for a large share of final production of produce covered by CAP regimes, and, as far as the other two criteria -- net operating surplus and relative GDP -- are concerned, its liability to contribute to the budget under the modulated VAT arrangements would be a modest one. 1/ Quoted by Agence Europe, No. 3603, May 6, 1983. ANNEX 10 - 192 - Page 60 The acquis mediterraneen 129. States joining the EC are required on accession to accept the existing corpus of secondary legislation ' acquired over the years since the Community's inception -- the so-called acquis communautaire. In the case of Spain and Portugal an important part of this will be the acquis mediterraneen, dealing with the common market regulations for products originating mainly, in some cases exclusively, in countries with a Mediterrean Littoral: wine, fruit (including citrus) and vegetables, olive oil, and certain fibres. It has been a condition laid down by the three interested member states, France, Italy, and Greece, that no substantive negotiations with Spain and Portugal on agriculture can take place until a revision of the acquis mediterraneen has been completed. This, plus the need to reach agreement on the future of the Community's budgetary resources, has provided a convenient pretext to stall the negotiations and delay the accession of Spain, which is seen as potentially threatening to Mediterranean farmers in EC-1O. 130. The revision of the acquis, the subject of discussion in the Agriculture Council for well over a year, is also seen as an opportunity of further redressing the balance of FEOGA expenditure, traditionally weighted heavily towards "northern" agriculture, in favor of producers in the southern part of the Community. The reluctance of the northern member states, especially those which would incur a disproportionate share of any such additional expenditure, to accept in full the Commission's proposals has contributed to the delay. Although agreement was reached during 1982 on modifications to the regulations for wine and citrus, the agriculture ministers failed to meet a deadline set for them by their heads of government to agree on those for fruit and vegetables and olive oil by the end of March 1983. Wine 131. The measures taken in the wine sector relate mainly to restoring an element of balance to a market showing a current surplus of some 7 M hl of common table wine, and reinforcing the Community's long-term (1980-1986) action program to eliminate large areas of high-yielding vineyards and replace them, at least in part, with higher quality vines of lower yield. Irrigation of vineyards, or the replanting of vineyards on irrigated land unsuited to vine-growing, is to be forbidden. Market control measures now include the extension of obligatory (subsidied) distillation to wine made from table grapes and wine made for distilling into eaux-de-vie, but surplus to distillers' needs. So-called "preventive" distillation, removing wine from the market at the beginning of the season when producers' returns indicate a likely surplus, has also become compulsory, being subsidized at a rate of 50% of the guide price. 1/ Secondary, that is, to the basic law represented by the Treaties. ANNEX 10 - 193 - Page 61 Citrus 132. The changes made to the citrus marketing regime reflected the past inadequacy of incentives to the reconversion of orchards to the varieties demanded in the northern markets of the Community, and the poor structure of those holdings not in need of reconversion. Increased aid is therefore now to be given for reconversion; to improving packing and storage facilities; and to holdings of 5 ha and under. Fruit and Vegetables 133. The proposed revision of the fruit and vegetable and olive oil regimes, involving not only much greater potential addiSional expenditure but also a number of points of principle, has not been so easily agreed. This lack of agreement is still holding up the enlargement negotiations. In the case of fruit and vegetables, two of the Commission's proposals are particularly resisted by the northern member states. Strengthening buying-in arrangements so that a collapse of the market would be remedied by subsidied withdrawal of produce from the wholesale market, instead of, as at present, simply from producers themselves, is seen as potentially expensive. Revising the method of calculating reference prices and extending them to a wider range of products (melons, apricots, lettuce, green beans, artichokes, endives, onions and peppers), and of the period during which they are applied to tomatoes and table grapes, is seen as unnecessarily protectionist. For the producer groups which administer the market withdrawals it is proposed that starting-up aids should be extended from three to five years. This would add to their cost, but there are also strong objections to the proposal, inspired by French practice, that member states should be permitted to introduce the principle of the extension des regles de discipline. This would oblige all producers of a particular product to market their whole output through recognized groups once a substantial majority of them had voted in favor of doing so. This smells of cartels. Also, if combined with the proposal to withdraw produce from the wholesale market it could also effectively set a minimum price on French markets, thus depriving Italian imports of any cost advantage. Within the Mediterranean area of the Community there is therefore a sharp difference of opinion between the Italians who favor a strengthening of protection at the common frontier and the French who place greater stress on group marketing. Both are, however, agreed on the importance of reinforcing quality standards for fruit and vegetables, with a view to these being applicable by the new member states from the moment of accession -- a point that should not be overlooked by the Portuguese authorities. Olive Oil 134. Olive oil remains the most contentious of the Mediterranean products. Although EC-10 is just under self-sufficient, EC-12 would, in the Commission's view, have an annual surplus of oil of 220,000 tons. Its disposal would, at current prices, cost the budget some 720 M ECU a year. Higher prices would encourage output and discourage consumption in Spain, given also the need for Spanish adoption of the EC's liberal import regime for other vegetable oils and oilseeds that is bound in the GATT. At present olive oil is favored in Spain in relation to other oils. The Commission has ANNEX 10 - 194 - Page 62 emergence of an olive oil surplus in EC-12 it would be necessary to main a price ratio of olive to other oils no higher than 2 : 1. This could be achieved either by an extension of the present consumer subsidy, by deconsolidation of the low or nil import duties bound in the GATT on other oiis and seeds, or by raising a non-discriminatory tax on all vegetable oils and seeds, domestically produced or imported, and including olive oil. The tax has, in the context of defending Community butter against competition from margarine, been proposed on three previous occasions, and each time decisively rejected by the northern member states. They are also opposed to any deconsolidation of the GATT duties. But the Commission will probably find it prudent to meet the "southern" point of view by at least exploring this possibility. The compensation that would be required by the US as well as by a number of developing countries (some of them signatories of the Lome Conention) for any increases in duty probably rules out this solution. In order to avoid renewed confrontation on the tax issue the Commission has proposed that during the transition period following Spanish accession Spain and EC-lO should each maintain their existing systems. Portugal, being at present broadly self-sufficient in olive oil, should present no problem. Even in the event of a decline in consumption in favor of alternative oils any export surplus could probably be accomodated within EC-10, which would remain in most years a small net importer. 135. Any decision on how to deal with the surplus eventually expected in EC-12 would thus be postponed until towards the end of the transition period some time in the mid-nineties. In the meantime, to discourage any expansion of the area under olives, production aids would continue to be limited to holdings with olive trees on them on November 1, 1978. Encouragement would be given to more efficient production, including mechanization, and to reconversion to other crops. For this, given that the average size of holding in EC-10 producing olives is 5 ha (of which 1 ha of olives), there is rather limited scope, except in areas where there are possibilities for irrigated production -- and effective marketing -- of fruit and vegetables. 136. Even if the Mediterranean member states accept, however unwillingly, the Commission's delaying tactics over olive oil, it is evident that their main objective in pressing for a revision of the acquis has been to obtain a more generous share of FEOGA finance for Mediterranean producers within EC-10, whether the Community is eventually enlarged or not. The purpose of preparing them for the impact of enlargement has been a secondary one. In any case a right to most of the benefits accruing to them now will eventually be acquired by their new competitors if and when accession takes place. The northern member states, recognizing the potential cost of this to the budget, have been insisting on less favorable arrangements for olive oil producers. But if they do not want to provide a pretext for an indefinite stalling of the accession negotiations, they will probably have to make some concessions. B. Integrated Development Programs 137. As noted in Section VI the type of integrated programs recently proposed for the Mediterranean by the Commission-" could, if adopted by the 1/ "The Commission's proposals for integrated Mediterranean programs", COM (83) 24 final, Brussels, March 23, 1983. ANNEX 10 - 195 - Page 6 Council, provide a valuable precedent for Portugal. In introducing the proposal the Commission quotes from its Report pursuant to the Council mandate of May 30, 1980:1' "The Community must keep two principles in mind: equivalence and equity. Equivalence means that, in line with the basic principles of the Treaties, the common agricultural policy must apply without discrimination to Mediterranean products. Equity means that change cannot be allowed to lead to a drop in living standards of those involved." The Commission goes on to describe the disadvantages of the Community's Mediterranean zones: handicapped by nature, structurally backward, predominantly dependent on agriculture, industrially weak (essentially small- and medium-sized and craft enterprises), with a tertiary sector dependent on seasonal activities, especially tourism. A distinction is made between inland areas, with a falling and ageing population and "an economic fabric in progressive and possibly irreversible decline", and lowland coastal areas with increasing problems of marketing traditional products and lacking the resources to switch to others. The Commission notes that despite all these handicaps the Mediterranean areas only received between 1973 and 1982 31% of Community expenditures on structural improvement. 138. The integrated Mediterranean projects (IMPs) are not however designed to solve general problems of economic under-development. These must be dealt with through sectoral and regional policies. IMPs have two basic objectives: to raise income levels and improve the employment situation. They would be of six-year duration. There would be differentiated rates of contribution by the Community, the three national governments (French, Italian and Greek) involved, and the beneficiaries. In the case of FEOGA Guidance Section, it is proposed that the proportion of Community funding should be 45% for France, and 60% for Italy and Greece. From the ERDF it would be 50%, 65% and 75Z respectively. The stepping up of the Regional Fund's contribution would be with the intention of facilitating mobility out of agriculture, the programs being integrated with regional development programs. 139. Agricultural measures would be of three kinds: improvement of general conditions, physical (farm roads, electrification) and economic (processing and marketing, producer groups); at farm level, technical improvements, but also measures along the lines of Directives 159 and 268, as well as reparcelling (land consolidation) and related works; and back-up measures (forestry and improvement of land use, applied research, vocational training). The first and third type of measure would be more intensely applied in upland areas. There, at farm level, improvements in sheep, goat and cattle raising would be encouraged, with higher compensatory allowances. On the non-livestock side there should be additional scope for production of nuts and medicinal and aromatic plants, and for forestry. Nearer to sea level production of fodder and protein crops for locally raised livestock is envisaged as an alternative to poor quality vines in dry land areas, where it will be important to avoid products already in surplus in the Community. Olive groves would be converted to producing table olives, and vineyards to producing quality wines. In irrigated areas the main aim would be to rationalize production of fruit and vegetables and improve their quality. Small scale irrigation and machinery syndicates for producer groups would be encouraged. 1/ COM 300 (final), May 30, 1983. - 196 - ~~~~ANNEX 10 Page 64 140. As far as non-agricultural measures are concerned, an important aim would be to discourage emigration, providing alternative employment, and providing for artisanal and small- and medium-sized enterprises aids not only to investment but to marketing and managerial know-how. Small hydro-electric projects, and schemes for wind, biomass, and other forms of renewable energy are envisaged. 141. The Commission's indicative estimates put the total cost of the proposed IMFs at 6,628 M ECU over a six-year period. The estimated breakdown between the three member countries by type of measure, and the breakdown between lowland and inland areas, is shown in Attachment V. Agriculture accounts for 40% of the total. All member states would, under the usual Community procedures, be involved in supervising the spending of this money and in the implementation of the IMPs through the FEOGA, ERDF, and other Fund Committees, composed of national civil servants. The actual implementation of the programs would be the responsibility of the Commission acting with the national and regional authorities. "With this structure for cooperation and coordination", concludes the Commission's proposal, "it should be possible to spot problems, gaps and bottlenecks in good time and, by finding solutions, to provide a constant stimulus to the execution and adaptation of the programs" -- a tactful commentary on Mediterranean administrations. 142. The IMPs are likely to be substantially agreed by the Council, even if it cuts down the volume of financing proposed by the Commission. It has already agreed, in July 1982, a regulation (1725/82) "on the acceleration of agricultural development measures contained in the IMP proposals. Up to 116 M ECU of the 119 M ECU provided may be spent on financing 50% of the rural infrastructure measures: electricity and water supply to villages mainly dependent on agriculture, local roads for farming and forestry use, and small-scale irrigation schemes not exceeding 400 ha. Provision is made for improvement and drainage of pasture, development of beef cattle, sheep and goat farming, new housing, machinery for fodder production, afforestation, rehabilitation of deteriorated forest, and improved facilities for agricultural training. The PEDAP 143. Recognizing the limited potential usefulness to Portugal of the EC's socio-structural directives (72/159-161 and 75/268) the Portuguese Government has drawn up, in consultation with the Commission in Brussels, its own development program for agriculture. As its name implies the PEDAP, Programa Especial ara o Desenvolvimento da Agricultura Portuguisa, is closer to the type of action being undertaken in Greece under Regulation 1725/82 than to an IMP as envisaged in the Commission's draft. Although some provision is made for the improvement of rural infrastructure, it is development of the deficient structures of production, processing, and marketing which is stressed, together with improvement of extension services, and agricultural training and education. Although it is envisaged that the PEDAP would eventually be extended to other areas, the initial five-year plan (with a five-year follow-up) would be confined to the districts of Viseu, Guarda, Castelo Branco, Santarem, Portalegre and Faro (see map). Comparison with the ANNEX 10 - 197 - Page 65 maps in Attachment III will, show that the area forms only part of the total area that would be covered by Directive 268. According to the outline proposal it comprises one of the poorest regions of the country, with a low agricultural potential. It is perhaps surprising, therefore, that the Government has chosen neither an integrated program, nor, apparently, to link the PEDAP with any general program of regional development for the area. If no such program exists, an IDP wuuld seem all the more necessary. The Government's memorandum also attributes the choice of region to the desirability of excluding initially areas such as the NW coastal districts of Viana do Castelo, Braga and Aveiro, where the problem of lack of land mobility is particularly serious; and to the need to avoid overlapping with the Bank's project in Tras-os-Montes and with a possible pre-accession scheme, still under discussion with the EC Commission, in Entre-Douro e Minho. The Government also appreciates, realistically enough, the limited resources of finance and trained personnel available for any more ambitious development program. ANNEX 10 - 198 - Page 66 May of PEDAP ,~~ .- > --~~~~~~4 .:. . 1---. *E loAPs *Programa Especial vara o Desenvolvimenzto da Agricultura Portuguisa. - 199 - Page 67 C. Policy Options for Portugal 144. There are five main areas in which adoption of the CAP involves important policy options and considerations of national interebt on the part of a Portuguese Government. None of the options are wholly at its discretion; all require, to a greater or lesser degree, the consent of its future SC partners. They concern the pace at which Portugal should adopt its support arrangements for agriculture to those of the Community; the extent to which in making this adaptation, the Government chooses to favor the respective interests of producers and consumers of agricultural produce; the implications of the cost to the Portuguese budget of adopting the CAP; and its foreign trade effects. All four are in their turn linked to the fifth: the length of the transition period between Portugal's formal accession and its full involvement in the CAP on an even footing with its eleven partners. 145. The adaptation of the first two areas defined above -- farm price support and reconciliation of the interests of producers and consumers, final and intermediate -- need to be considered together. They are inextricably linked. The main determinants of prices and costs that have to be adapted are: the level of prices guaranteed to producers for certain products; the subsidies that reduce the cost of producers' inputs; and the subsidies that reduce the cost of food to consumers' purchases. Adaptations are also necessary to the administrative arrangements for applying prices and subsidies. In addition, the Government's exchange rate policy, influescing costs and prices, will be subject to certain new constraints. Producer Prices and Subsidies 146. As indicated in Section III the ratio between support prices in Portugal and the EC may be expected to remain fairly constant up to 1985. Approximation of wheat and feedgrain intervention prices, although downward, could, for reasons already explained, take place fairly rapidly if necessary. As far as support prices for other arable crops are concerned, those for rice and sunflower seed are markedly lower in Portugal. In the case of livestock products, the corresponding Levels of support for beef are not far apart, but for milk are a good deal higher in Portugal. Pigmeat and sheepneat producers, on the other hand would enjoy a considerably more generous nominal level of price support in the EEC than they do at present. So, ur.oubtedly, would growers of most fruits and vegetables, for whom market support is at present confined to seasonal import quotas. Within the EC, for members of producer groups at any rate, subsidized market withdrawal linked to a basic price, assures a minimum return for a wide range of products. The Community producer price for olive oil is also considerably higher than in Portugal. 147. There are, however, a number of significant constraints to the rather rapid rate of approximation of prices that, on the basis of support levels alone, might at first sight seem desirable for perhaps all but milk producers. In the first place guaranteed prices are not the only form of income support received by Portuguese farmers. Arable farmers benefit particularly from Government subsidies on fuel and fertilizers; livestock farmers from subsidies on their inputs of feedgrains and oil meals. It is unlikely therefore that in negotiating transition arrangements the EC Commission will insists on the dismantling of the feed and fertilizer 20(i ~~~~~ANNEX 10 - 200 - * Page 68 subsidies passu with the approximation to Community levels of price guarantee.- 148. Thanks to subsidies fertilizers cost the user in Portugal on average between 40 and 50Z less than in the Community. On the other hand, usage per hectare of arable land is somewhat below the Italian level and from a third to a half of the average Community rate. The removal of the subsidy is therefore likely to act as a considerable disincentive to increasing fertilizer applications in a country where their traditionally low level already puts a brake on raising cereal yields. 149. Dismantling of subsidies will also have implications for livestock producers, especially serious in the case of pigs and poultry, for which there is only limited scope for any switch to forage feed. Any slight price advantage to feeders of domestic grain to be gained from the downward approximation of cereal support prices to EC levels would be more than cancelled out by the removal of the subsidies on imported feedgrains, chiefly maize, and oil meals. These account between them for well over 80% of feed compounders' raw material usage. Over 40Z of the mixed feed subsidy is estimated to benefit pig producers and over a third goes to the poultry industry. The EC basic price for pigmeat is well above the Portuguese intervention price, but no provision is now made for intervention buying in the Community. Aid to private storage is the only form of internal market support, backed up by a fairly high level of protection at the coumon frontier. Intervention buying has in fact, thanks to a reasonably buyoant market, been only very spasmodic in Portugal in recent years. But once I imports from the Community are available, market prices may be more frequently depressed and producers will'benefit from the safety net provided by private storage. A similar protection at the frontier is given to producers of poultry meat and eggs, but not, of course, against imports from the rest of the Community. Lower overheads might give Portuguese poultry producers an edge on the Community market (even despite transport costs), and they will obtain refunds on any exports to third countries. African swine fever restrictions are likely, however, to close the Community market to Portuguese pig products for some years yet and allow them very limited access to third countries. 150. The removal of the feed subsidy should prove a good deal less serious for beef producers, and indeed provide an incentive to more extensive forms of production south of the Tagus. But they will nevertheless suffer a loss of income support. So will milk producers, but dairy rations attract no more than about 57 of the total mixed feed subsidy, and, when cereal prices have been approximated, barley should be available not only domestically but in ample quantities from the rest of the Community at a price little, if any, higher than before accession.- 2 Sheepmeat producers, for whom the subsidies are only of very marginal benefit, can look forward in the EC to a substantial increase in price support. 1/ Since most other member countries subsidize farm fuel through various types of exemption from excise duty. that subsidy seems likely to be tolerated, at least at a comparable level. 2/ Payments are also made to milk producers per liter mechanically milked and refrigerated. This is effectively a price subsidy and equivalent to about 70Z of the estimated value of the feed subsidy. It would appear to be doubtfully compatible with EEC rules. -201 - ANNEX 10 - 201 - ~~~~Page69 151. The potential difficulties to be faced by the chief users of imported feedgrains prompts the reflection that from the inception of the single EC market for cereals a derogation was made granting a flat rate reduction in the variable levy on sea-borne imports of feedgrains into Italy. This temporary concession, gradually phased out and now coming to an end after more than fifteen years, was made in consideration of the exceptionally high cost of discharging grain at Italian ports -- compared with Rotterdam (the main port of entry for calculating levies). This was undoubtedly the case (and certainly applies to Portuguese ports), though the incidental benefit to the Italian livestock industry, heavily dependent on imported feedgrains, (not to mention to the long-established trade in Plate maize that balanced Italian industrial exports to Argentina) was evident from the beginning. The Italian precedent could prove a valuable negotiating point for Portugal when the future of the feedgrains subsidy comes up for discussion. 152. On the other hand, retention even in the short term of any element of the subsidy on imported oilseeds and meals, making them available to compounders at below world price, is in no way likely to be agreed by the Commission. The duty free entry of these products into the Community, bound in the GATT, has already given rise to massive imports, particularly of soya, as well as of -- a different source of vegetable protein -- corn gluten feed. When combined with starch substitutes such as manioc they displace high-priced cereals in compounders' least-cost formulations, leaving the Commission with very large intervention stocks of wheat and barley, of which only a limited proportion can, owing to political tensions on an oversupplied international market, be exported with refunds. For the same reason Portuguese compounders, or at least the minority of those with appropriate know-how, may be encouraged to cut back their usage of imported cereals in favor of a larger incorporation of substitute proteins. The availability of alternative supplies of low duty starch, would, however, be considerably limited by the operation of the voluntary restraint agreement negotiated by the Community with its main suppliers of manioc. The agreed quota is likely to continue to be largely appropriated by established importers in the northern member countries. Imports over and above the quota, attracting as they do the full barley levy, provide no substitute for Community barley. Consumer Subsidies 153. To the extent that the lower livestock production costs brought about by the grain and meal subsidies are reflected lower down the market chain consumers may indirectly benefit from them. At any rate their disappearance, combined with the higher cost of imported feedgrains, seems likely to push up retail prices of meat. But two subsidies paid by the Portuguese Government on agricultural produce can be identified as more directly aimed towards the consumer: those on sugar and on milk.-' With the cost to Portuguese refineries of imported raw cane sugar, at present imported at world price, being raised to the much higher level at which ACP raws enter the Community, the consumer will suffer a sharp increase in the retail price of sugar and of all products containing it. The EC Commission, rather than see a decline in 1/ The subsidy on milling wheat for bread and pasta has recently ended. - 202 - ANNEX 10 Page 70 consumption in yet another country of the Community, might well bE. inclined to agree to a continuation of the consumer subsidy. Nor would it ..ecessarily take an unfavorable view of a subsidy that encouraged liquid milk consumption. FEOGA funding is already available towards providing milk and other dairy products in schools as well as for a general consumer subsidy for butter. The Use of "Creen" Exchange Rates and MCAs 154. Like Greece, PortugatL may well not on accession join the European Monetary System, arnd the valic ot the escudo will therefore not be included in the weighting of the basket of currencies which constitutes the ECU. Nevertheless, for agricultural purposes, it will be necessary from the outset for a green rate of exchange to be fixed between the escudo and the ECU, in which all institutional prices and Community aids are denominated. A condition of accession will be that the green rate shall be equivalent to the market rate between the escudo and the ECU basket of currencies on the day preceding accession. Since tthe market rate will be a floating one,-- any devaluation of the market rate will tend to give rise to a negative MCA that reflects the divergence between it and the green rate. 155. Within EC-10, sterling and the drachma are also floating currencies outside the EMS, thus giving rise for the UK and Greece to MCAs which may vary from week to week, reflecting the shifts in divergence between the green rates of those currencies and their market rates. For the EMS currencies, on the other hand. the fluctuation of whose market rates is strictly limited, MCAs remain fixed, reflecting the divergence, if any, between their central rates within the EMS and their green rates.-' Adjustments to central rates, which may only be made by mutual agreement, will ipso facto lead to a revaluation or devaluation of the ECU (the extent of which will be a function of the parity change(s) and weighting within the ECU of the currency(ies) involved) and thus to a modification of the central rates of all the ECU currencies. This in its turn may affect fixed MCAs. Any revaluation of a central rate will, by widening the gap between the two rates, tend to create a posiLive MCA (or enlarge an existing one); any devaluation will have the opposite effect, creating, or enlarging, a negative MCA.-" It will then be for each member Government affected to decide, in agreement with its partners and the EC Commission, whether or not to adjust its green rate upwards or downwards to 1/ A crawling peg arrangement, if continued, would be seen by the Commission as equivalent to a float. 2/ The market rate of the Italian lira being permitted to fluctuate within the EMS by 6% (3% on either side of its central rate) for agricultural purposes (instead of observing the narrower limit of 2.25% imposed on its six partner currencies), it is also treated as a floating currency, giving rise to variable MCAs. 3/ This a broad brush description. Rather small parity changes mav, for technical reasons, not be reflected in MCA percentages. ANNEX 10 - 203 - Page 71 its new central rate, maintaining the former relationship between the two, bearing in mind that a revaluation of a green currency reduces institutional agricultural prices in national currency terms and a devaluation increases them.1 156. The above considerations apply to member countries participating in the EMS. The UK, Creek and Italian MCAs, may be changed weekly in sympathy with changes in their floating currencies' average daily market value. These counLries' MCAs may therefore increase or decrease without any adjustment of green rates. The recent performance of sterling provides a good example. Its strengthening against the EMS currencies during the first half ef 1982 resulted in the accumulation of a positive British MCA which reached a peak of over 10%. By early 1983, as the market value of the pound fell, the MCA had dwindled to zero, and was even negative for a few weeks, before recovering to a positive rate of about 5%. Since a positive MCA represents a tax on agricultural imports the British Government could, in -,he interests of its anti-inflationary policy, have chosen at any time to reduce it by seeking the agreement of its partners and the Commission to revalue the green rate of sterling. However, in not exercising this option it ensured, at least temporarily, a subsidy for British agricultural exports. In a contrary fashion in 1976 and 1977 the then British Government, at a time of exceptional weakness of sterling, chose to maintain a substantial negative MCA, carrying out only small devaluations to the green pound at the time of annual price reviews. This provided a subsidy on agricultural imports at a period of high inflation and during the final phase of the five-year transition period during which farm support prices had been raised from their original national level to the much higher Community level. 157. There are evident implications for a Portuguese Government during its transition period. Green rate adjustments can become a tool of general economic policy. A gradual downward float of the escudo provides the option of allowing a negative MCA to build up, to the benefit of, in particular, the cereal import bill, and of the food consumer in general.-" Alternatively the Government may choose to request periodical devaluations of the green escudo with the aim of providing a price incentive -- or income boost -- to its farmers.- In any case, it will normally be under pressure from the 1/ Broadly speaking, MCAs are applicable to all products for which intervention prices are set and for processed products containing, or derived from them. The principal products not attracting MCAs are vegetable oils and oilseeds, poultry meat and eggs, and fruit and vegetables. 2/ The distorting trade effects of maintaining MCAs, whether positive or negative, over long periods have been described in Section I. 3/ Or it may of course seek a formal devaluation, such as that carried out late in 1982 by the Greek Government. The drachma was devalued by over 20%, creating a roughly equivalent negative MCA. Some strengthening of the drachma on the markets, combined with formal devaluations of the green drachma, will probably have reduced the MCA .o zero by mid-1983, representing a massive increase in institutional prices for Greek farmers in the space of a year. ANNEX 10 - 204 - Page 72 Commission and other member states to aevalue at the time of each annual price review in March, -' which, in view of their distorting effect on prices and trade is also the occasion for a review of all green rates, in pursuit of the constantly receding goal of approximating them to central rates and finally getting rid of MCAs both positive and negative. The Budgetary Cost of the CAP 158. The Portuguese Government's policy of gradually phasing out subsidies to food producers and consumers was adopted partly in anticipation of the liberalization of trade involved in entering a common market, and partly as a means of reducing public expenditure. Membership of the EC will in its turn involve budgetary costs which, in view of the fact that FEOGA is likely to continue to account for a major share of Community expenditure, will be largely chargeable to agriculture. On balance, however, it seems likely that Portugal will not be a net beneficiary of the CAP. Unless provision is made, either for Portugal as a special case or in the framework of a "restructured" Community budget, for some form of automatic compensation related to per capita GDP, it could also find itself being a net contributor to that budget. In the first place all duties on imports of industrial goods from third countries will, by the end of the transition period, be payable into the Community budget. So will duties and variable levies on third country agricultural imports. A proportion of its imputed2i yield from VAT, varying slightly each year but up to an agreed maximum (1% since 1970), completes a member country's statutory contribution to the budget. 159. On the credit side Portugal would draw out of the budget, on the agricultural account, refunds due on exports to third countries, production subsidies and certain consumer subsidies. Outside agriculture, grants would be available from the Regional and Social Funds; for industrial and scientific research, etc. Finally, each member state receives at present a rebate of 10% on its duty and levy payments in respect of administration costs. 1/ Since the dairy and beef marketing years start on April 1 (those for other products at later points in the calendar year) the aim is to agree new prices by that date - an aim frequently frustrated by political differences within the Council of Agriculture Ministers. 2/ Since VAT is still applied at different rates for different types of goods and services in each member country, national assessment of liability is (until the distant day when all classes and the rates applicable to them are aligned) based not on actual VAT yield, but on a yield calculated by applying notional uniform rates to national consumer expenditure on each particular class of goods and services deemed to be liable to VAT. - 205 - ~~~~ANNEX 10 - 205 - Page 73 160. Table 8 presents a picture of the agricultural implications of accession for the Portuguese budget that is synthetic and illustrative only. It takes no account at all of the dynamic trade effects of Community preference that would probably lead fairly rapidly to a switch away from third country imports bearing variable levies. Nor has any estimate been included of drawings from the Guidance Section of FEOGA since these require not less than 50% counterpart contributions from the national budget. A three-year average has been taken of quantities and costs, prices, and aids (all converted at annual average exchange rates) for 1979, 1980 and 1981 (the most recent years for which Portuguese trade statistics are available). Where statistics of production and of livestock numbers are not available for all three years it has been necessary to make estimates based on one or two years. In some cases evidence is more tenuous still, or wholly lacking. The table does not at any rate serve to confirm the impression that Portugal is likely to remain in budgetary deficit within the EC, even if not to the dramatic extent that such a purely static analysis suggests. ANNEX 10 - 206 - Page 74 Table 8.1 FEOCA Cuarantee Section: Principal Notional Portutuese Payments and Receipts for the Three-year Average. 1979-81 to Payments Levies '000 tons Esc/ton U Enc Wheat 672 5,352 3,907.0 Barley 46 4,777 221.2 maize 2,394 5,522 13,219.7 Rice 88 8.828 785.3 Sugar 266 1.024 2,730.5 Beef it 84.955 934.5 Pigmeat 5 25,889 129.4 Butter 2 140,394 308.9 Cheese 2 107,234 214.5 Skim Powder 2 116,247 232.5 Total 22,683.5 Receipts x Ese Refunds Wine lb 128.0 olive Oil 18.2 Miscellaneous /c 81.0 Be ficiency Payment Sunflower Seed 256.1 Aids Suckler Cows 494.9 Calves 499.2 Skin Milk Powder /d n.a. Durum Iheat Flax and Hemp Peas and Beans 222.4 Production Aids /e Tomato Concentrate 5,576.6 Towatoes, Peeled 10.6 Tomato Pulp 8.6 Fruit 173.0 Butter Subsidy 115.8 Total 7,584.4 na.& - data not available. . . - negligible. /a Or lesser period where full data unavailable. /b Assuming alcohol content of 120. Refunds are only available on exports to Scandinavia, Japan, E. Europe, and a few countries outside America and Africa. These currently account for only 12Z of Portuguese exports. /c H Ec Sausages (masumed liver) 51.1 Pigmeat 0.3 Eggs 3.6 Chickens 3.8 Apples 12.5 Table Grapes 0.3 Almonds 9.4 /d For animal feed. /e To processing industry. ANNEX 10 - 207 - Page 75 Foreign Trade Implications of Adopting the CAP 161. As will be apparent from Table 4.13, accession is likely to lead to a further deterioration in the agricultural trade balance. Unless higher output of domestic cereals is achieved and a shift made to less intensive forms of livestock production, adoption of the CAP will involve paying the additional cost of imports of cereals from third countries that is represented by variable levies, and, on imports from the rest of the Community, the additional cost of paying the EC internal market price. The import cost of oilseeds, on the other hand, will scarcely be affected since these are bound by in the GATT at low or nil duty. With the gradual removal of present import restrictions, some increase in the volume of imported meat and dairy products must also be anticipated. As some compensation for the additional import burden, Community preference will provide the duty and quota free access to the EC currently denied to Portuguese exports of wine, tomato concentrate, and certain fruits and vegetables, and secure the lifting of minimum import prices. The Transition Period 162. The last main policy option relates to the length of the transition period to be adopted for the approximation of the present system of agricultural support to the full rigor of the CAP. It also involves achieving conformity with Community rules on competition and with legislation governing the removal of technical barriers to trade in the food, animal feed, veterinary and other related sectors. This is an option over which the Portuguese Government has some room for negotiation as to the details of the pace of adjustment for individual sectors, but perhaps rather less where the broader issues of duration are concerned. There the Community will be anxious to keep Portuguese and Spanish transition moving as far as possible in parallel, especially as far as the length of each stage of a two-stage transition (now on the verge of being formally proposed) is concerned. On the other hand, the number of product groups for which a two-stage adaptation would be permitted would be much greater in the case of Portugal than in the case of Spain. - 208 - ANNEX 10 Attachment I Page 1 Compatibility vith EC Law of Notional Aids Currently Paid in Portugal - - - beneficiary -- Industry/ Intermediate Final Product Producer Coops Exporter Consumer /a Consumer lb A. Incompatible Aids Seeds and Breeding Stock 6 e - -- Wheat: Isported - - - 1 1 Domestic I - - - 1 Wheat Flour - - Id 1 I Barley: Domestic - - - 1 1 , Rye. Tmported Domestic Maize: Imported _ _ _ I _ Domestic - - - 1f Sorghum; Imported - - - 1 _ Domestic - - - 1 - Rice. Imported - - - - 1 Domestic - - - - 1 Sugar: Domestic - - - - 1 Oilseeds; Imported _ Domestic - - - 1 - Oilcakes: Imported - - - I Olive Oil; Domestic - - 1 IL - 1 Tomato Paste 1 Ih 1 /h - Table Wine - - 1 - - Milk- Production 1 - - - - Refrigeration/Necbhanization 1 - Transport - - - - 1 Processiog - - - - I Packing - - - - 1 Cheese - - - - 1 Margarine - - - - I Fuel 1 - - - - Fertilizers I - _ _ _ Total 12 1 2 9 16 -209 - ANNEX 10 Attachment 1 (Cont'd) Page 2 ------------------- Beneficiary Industry/ Intermediate Final Product Producer Coops Exporter Consumer /a Consumer lb B. Compatible Aids Safflower Seeds /k 1 - - 1 - Seed Potatoes /k - 1 /1 - - Potatoes Ik - 1 14 - - Wine - lIu 1/n - Fruit - l1p/ l n - Milk 1/g r /r Research 1 - - - Training 1 - - - Extension 1 - - - Land 'Improvement 1 Ij - - - Land Consolidation 1 - - - Natural Disasters 1 - - - Insurance 1 ts Infrastructure 1 Ij - - - Electrification 1 15 - - - Credit (IFADAP" 1 j -. Formation of Coops - 1 _ _ Total - 12 6 2 1 C. Doubrfully Compatible It Social Security /u 1 - - Harvest Credit - 1 Iv Credit (CCAM) /v 1 - Credit (IFADAP) lI 3 _ Total 5 1 Total All Aids 29 8 4 10 16 - 210 - (Conttd) ANNEX 10 Attachment 1 Footnotes Page 3 la Paid to feed compounders and beef producers (cereals) and crushers (oilseeds), although the ultimate beneficiary is intended to be the constumer. /b Consumer subsidies, but paid via millers, sugar refiners, dairies, etc. /c Strawberry plants, other fruit and vegetable seeds and stock, wheat, barley, oats, and rice seed. /d For pasta. /e For coffee roasting. If For bread making. /S Export aid and consumer subsidy to olive oil may be considered incompatible in their present form, but both are features of the EC market organization. /h Harvest credit to producers, and aid to the industry to enable it to pay minimum producer price (but this is in fact analogous to EC's processing aid). /i For butter blended with margarine. /k Product not covered at present by the CAP. A' Aid to co-operatives. tm Compatible if start-ur aids for co-operatives. In Export promotion, compatibLe so long as advertising is generic. /p For setting up packing stations. ,'q Compatible if within the scope of Directive 72/159 on farm development plans, but could also be compatible if included in a specially authorized community program. /r For setting up collective milking parlours. Is Compatible as long as aid is temporary and limited. It Aids about which the EC Commission is said to have expressed reservations. /u Since all other member countries subsidize their social security systems, whether or not a separate system operates for agriculture, the Commission's alleged reservation is puzzling. Iv This relates to guarantees provided by the JNV for tomato processors. /w EC rules for subsidizing agriculture credit are fairly restrictive. Probably not all the activities of the CCAMs and IFADAP would be found to be compatible in this respect. Source: Ajudas nacionais A agricultura, op.cit. (2179E) - 211 - ANNEX 10 AnRtKcrn1 t II Page 1 of 7 PARASTATAL ORGANIZATIONS OPERATING IN THE AGRICULTURAL SECTOR Junta Nacional das Fruitas - JNF (National Fruit Council) The Junta was established by law in 1939. Like the other two Juntas it combines market regulation with a number of other roles. Its 500 staff are distributed between the headquarters office in Lisbon, regional offices in Porto, Faro and the Azores, and its own fruit-packing center near Lisbon. Its activities cover all fruit and vegetables, fresh and preserved, and potatoes. Its functions include: (a) Buying in, storage and disposal of market surpluses; (b) Importing in case of shortages, or simply to assess the state of the market; (c) Setting minimum producer prices for tomatoes and pear for processing; (d) Setting maximum retail prices, when necessary, for melons; (e) Setting an intervention price for maincrop potatoes (not for seed or earlies); (f) Maintaining trade statistics; (g) Maintaining a register of producers and wholesalers; (h) Operating, at its Lisbon packing station, retail sales of fruit and vegetables and potatoes, mainly as a guide to trends in market prices and therefore to benefit consumers. Its annual turnover is expected to be 200 M Esc in 1983. It has operated at a loss since 1975; (i) Operating a small R & D section (10 persons), mainly for the benefit of the freezing industry, advising on techniques and varieties. It also advises on packaging and on exports of apples and pears, and provides some price information, for the trade, including co-operatives. Within the EC the JNF sees its role as carrying out market withdrawals during the transition period until producer groups are capable of doing so in accordance with EC regulations. ANNEX 10 - 212 - Attachment II Page 2 Junta Nacional dos Produtos Pecuarios - JNPP (National Livestock Products Council) The Junta was established by law in 1940. Of its staff of 4,000, 700 work in the Lisbon headquarters, the remainder being distributed among the regional delegations and some 190 abattoirs (of which 150 are being brought up to EC standard). The Junta's activities cover all types of meat, wool, and milk and dairy products. The JNPP has a monopoly of beef and veal, pigmeat, liquid milk, butter, Gouda-type cheese, and milk powder. As a measure of liberalization private industry is to import 3,000 tons of pigmeat, but under the Junta's supervision. The JNPP operates intervention buying for beef and veal (up to an annual maximum of 10,000 tons), sheepmeat (up to about 1% of production), occasionally for pigmeat (6,000 tons in 1981), and very occasionally for chicken meat. It has a near monopoly of slaughter capacity for beef, veal, and sheepmeat. A single private abattoir, mainly processing pigs, at Rio Major north of Lisbon, takes a few beef animals. Otherwise beef wholesalers and processers are obliged to use the Junta's facilities. There are thus three alternative marketing channels for beef: producer - wholesaler - retail butcher or processer; producer - JNPP - trade (processer, wholesaler or retailer); producer - JNPP - intervention store. The Junta owns refrigerated storage in Lisbon and Beja only, the rest is rented. Pig and poultry slaughtering is 99% in private hands. Fourty percent of pig slaughtering is still for auto-consumption. The JNPP is a monopoly purchaser of wool (7,000-8,000 tons a year), purchased at a guaranteed price and re-sold by auction. The JNPP supports the milk market through the purchase of surplus liquid milk, which is processed under contract into whole or skimmed milk powder. The powder is then sold to the end users. Intervention purchases rose to a maximum of the equivalent of no more than 1,500 tons of milk in 1980. Within the EC the JNPP will be required to give up its monopoly of imports, and of beef and sheepmeat slaughtering and transport. Since wool is not classified as an agricultural product by the Treaty of Rome, its activities will, like those of the UK Wool Board, be unaffected by accession. ANNEX 10 - 213 - Attachment II Page 3 Junta Nacional do Vinho - JNV (National Wine Council) The JNV was established by law in 1939. It has a staff of 1,200, mostly elderly, including 400 at the headquarters in Lisbon, and the remainder manning its 33 intervention stores. It is intended that the number should be reduced through natural wastage. Salaries and social charges amount to about 500 M Esc a year. The JNV has two principal functions, as a promoter of wine quality and as an intervention buying agency. The large areas of vineyards still requiring reconversion (two-thirds of the Daui region alone), and the slow progress in creating new delimited zones (admittedly subject to political interference) suggests that the first function has not been exercised with notable dynamism. For its intervention role it has at its disposal a storage capacity of 3.5 M hl, each of its 33 stores having a distillery attached. Intervention stocks usually have to be distilled; it is rare for the market to be so under- supplied that they can be re-sold as wine. Table wine can currently be exported at no more than 9 Esc/liter, against an intervention price paid of 20 Esc. Eau de vie, costing the JNV 170 Esc/liter to distil, can be purchased from France by the port wine industry for 45 Esc (assisted by an EC export refund). The cost of financing its stocks, at non-preferential interest rates of around 25t, places a further burden on the Junta's resources. These are derived from a 0.20 Esc/liter levy on all wine declared to the JNV. Although a producer who does not declare his production forfeits the right to sell any of his wine into intervention, this sanction is so widely evaded that a new law will commute the levy into a consumer tax. Obligatory distillation was introduced in 1982 for *sines of low alcohol content, some 200,000 hl being bought in by the JNV at below intervention price. A reform is planned that would split the JNV into two agencies, one dealing with all aspects of market intervention for ordinary table wine, the other charged with pressing ahead with the cadaster and the classification of stocks necessary to revise the existing delimited zones and create new ones, as well as the restructuring of the remaining non-delimited wine producing areas. ANNEX 10 - 214 - Attachment II Page 4 Administra6ao-Geral do Aoucare e de Alcohol - AGAM (General Administration for Sugar and Alcohol) AGAA was set up in 1975 after the revolution. It is the sole purchaser of raw cane sugar for refining in Portugal as well of imported molasses, and operates the state alcohol monopoly. With the sugar refineries' margin between the purchase price of raws and selling price of refined sugar fixed by the Government, any difference between margin and costs is subsidized, via AGAA, from the Fundo do Abastecimento. The manager of AGAM is an enthusiastic supporter of the establishment of a sugar-beet industry, whose investment cost at 1982 prices was put by British consultants at 8,000 M Esc. AGAM controls the production and sale of eaux de vie, whether derived from wine or other domestic agricultural products, notably figs, or from imported molasses. It also imports all synthetic alcohol for industrial uses, of which there is no production in Portugal. Empresa Publica de Abastecimento de Cereais - EPAC (Public Enterprise for Grain Marketing) Set up in 1977, after the revolution, EPAC is the largest and most powerful of the parastatal enterprises involved in agricultural trading. It accounts for some 2,500 of the 8,500 persons employed in them. Its role as the exclusive importer of all cereals and purchaser of the domestic wheat crop has been justified by the need for a Government agency to inject into the marketing chain the subsidies granted to consumers of bread, pasta, and other cereal products, and to users of feedgrains (compound feed manufacturers and livestock producers). EPAC thus acts as the sole channel for subsidies, which would be more difficult to administer and audit, it is argued, if they had to be paid to a multiplicity of importing firms and rural flour and feed mills. Although there are no more than 20 flour milling firms of any consequence, of which over half are port millers, small country mills still number about 4,000. There are over 100 feed mills. As in the case of AGAM, subsidies are paid to EPAC through the Fundo do Abastecimento, of which it is at most times the major creditor. The need tn finance its payments of subsidies pending reimbursement involves EPAC in substantial interest charges. It also provides farmers with interest free harvest credit for the purchase of 25,000 tons of seed wheat a year. EPAC owns over 350,000 tons capacity of port silos and a further million tons of rural silo capacity - about 902 of total national capacity. ANNEX10 - 215 - Attachment II Page 5 Instituto do Azeite e Produtos Oleaginosos - IAPO (Institute for Olive Oil and Vegetable Oil Products) Also set up after the revolution, IAPO is the sole importer of vegetable oils and oilseeds and carries out intervention buying for domestic olive oil production. It employs a staff of 250, half of them in the headquarters office in Lisbon, and the other half in regional delegations, three of which operate intervention stores. IAPO is responsible for injecting the subsidies, designed to reduce prices to the final consumer. These are paid both on imports of oils and oilseeds, and to domestic producers of olive oil and oilseeds. IAPO is currently owed 27 M Esc by the Fundo do Abastecimento in respect of aids due to crushers of imported and domestic seed in 1981-82. Since the crushers have not themselves been paid, however, IAPO is involved in no interest payments on this sum. The service charge made on the imports that it carries out on behalf of the crushers is said to be sufficient to finance the Intitute's running costs. (2179E p.18)) ANNEX 1O Attachment III -216- Hap 1 4Al'A I _ Zon dcA6avote 4 . 7 4. I~ ~~ ~~~~~~~~~~~ I A IXJ~~~~~~~~~. -S --A ~ /& / 'D7R. 7SI2681CEE . - bs§gjfavoured .L*~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ _, " xbp ~~* . ANNEX 10 -217 - Attacbmaent III Map 2 ,~~~~~~~~~~~~I _A ,-|- sP-,l%6~~~~e-| | - XA DJ VR. 75126SICEE |; ,, Mountain ara ANNEX 10 - 218 - Attachment III Map 3 -lARA Zona.6 de..6fvote mountain areas vgo a Os.v - *a im W-- u111im11111111 alm's arwis: LI 1uAKI l1411* 1UUALI* aInpauao UbiiF fiiom f,il Ic IIt h dt Lid No kid Is o I III Is Lid A li9 toI llid of lid .1 r.l.d of petaled *t retted of 1eales .I p.sta .o tryale .o geeted .o gryol to . ifta . wl ves pro', WI Opel. MA.)O ¶ 1} r .. 141.I 2. orlalltl . (13 14l. 1I.P) oral. 11101 ,33 3r1; 1. 3r3, arI s1. I I. t 14 la 11 3111.31 110OIt .I 11 l.1011A I9 SlI.91S.1 34 MU. ix ..111,4 . . I 1.1.1 44 Y1 13.% 3 33.30 43.0 IIt o.fsti t t l etlltV,51 I,141,111 ll FIIltlI IISo. 0.11 lt il s llt,o11 ,11 , 1tl 11.6164 I MA Ill. 01 . . V I Z a 0.01O.S4 I 08 3Ji.a0.3! . Ia 1i.04I. I 201.48* . . a,o 7a,M.a,0'U s,e IV. (nit - *,1lg . 11 1.13.013 0 tIU.tv H II.2".1Il aI 15.1miM I -ISM14 140 1 11.44 . . it J.730.13? 1I 1,101,JIt Ill 1211.1 lt 3i* v. nl.e mA pi.ws .t.I7 11 1.064.131 I 119.344 1 311.41111 I *,1 1 S.t94.1O tI 4S.A3 It 1C.030.l I ,1 VI, *k ry l 1 304.949 10 I.1I.91l I 1I*44 1 I 1.49.14S s 9 4.191 H I3.1ll.39 . . 19 1,1, 30 I.1.0,1e lil.ta3.II 4, VI , ismi, 9 111.11 . . n I,llI.11 9 *49.19 5 1.429.130 33 S1O%.0. . i . . t I.191.l la 11.11,41. 1,0 9 1111. Ali.l lost I 93.e 3 IW.M . . . , S I,I,V 1 I 13t.00 1 ".UI . . i 9.54 30 3joI.WI *., I ltl 401ed. . * 1.119 9 I.no 23 9.141.41" II %3w.0Il . I .1 .IIs 1 11O,u1 3 11.11 5 MCA.9 %$ 11.1011.311 1.4 I. 193 me .ellrv 3 1,1.11 I 404.41 4 I~4,^X II . . 1 1.344.I0o . . . 44.1 30ti 4o ,no.1s 11 4.448,' 1,) Me. tl. . . . ol. . s Inj. . . is 1.244.131 . . . . . . 1. 1.h3it.11 *,4 111. lduu. . . . . . . , . . . it ,,**99.4' , , , , , , 43 9.OU.94' 1, sl,i U4* . * 1 401.WI 9 I..S o.a64 s 10 I 0 0.0 . . . . . I Is*I4 3X T l s to1I,C4 I -.._ _-_ __ ___- 1- . - S ..1 --_ 16.-- - -_ _ _- - _ -. 11.111M l39._3. 414.91X MALt lEtil| . .l },t,1 ¢SXt 311.91.110 l 11.11.3 501.21I.Ou 1.01%31 11%11%14 111lnd. 1.15 .014.161 Source I EC Commission H' | C - 220 - ANNEX 10 Attachment V EC COMMISSION'S OUTLINE FINANCIAL PROPOSALS Page 1 FOR INTEGRATED MEDITERRANEAN PROGRAMS (MEC1Us) Estimated Breakdown of Expenditure iffecting Farmers in Lowland Areas and in Inlapd Areas * Lowland Inland Areas Areas Total General Measures Reparcelling 41 42 83 Agricultural Advisory Service 75 110 185 Producer Groups 8 9 17 Irrigation 258 258 516 Infrastructure 272 272 Sub-total 382 691 1,073 36% 64Z 1OOX ,Specific Measures Inland Land Improvement 218 218 Areas Livestock Farming 230 230 Other Products 280 280 Livestock Farming + LowlatAd Fodder Cultivation 342 342 Areas Wine Growing 112 112 Olive Growing & Permanent Crops 147 147 Annual Crops 16 16 Sub-total 617 728 1,345 46% 54% 100% Socio-structural Measures Compensatory Allowance 359 359 Cessation of Farming 158 200 358 GRAND TOTAL 1,157 1,978 3,135 372 63% 100% * Agricultural measures together with measures concerning farmers only: agricultural advisory services, producer groups, agricultural infrastructures. (2179E p25) ANNEX 10 - 221 - Attachment V Page 2 Integrated Mediterranean Program Cost of Measures to the Community Costs Based on 1982 Prices Greece Italy France Total --- (MECUs) AGRICULTURE General Measures Reparcelling 20 35 28 83 Land Improvements 14 172 32 218 Irrigation 340 - 176 516 Total 374 207 236 817 Socio-structural Measures Cessation of Farming 173 160 25 358 Compensatory Allowance 166 144 49 359 Total 339 304 74 717 Specific Measures in Inland Areas Livestock Farming 131 72 27 230 Other Products 97 163 20 280 Total 228 235 47 510 Specific Measures in Lowland Areas Livestock Farming + Fodder Cultivation 212 105 25 342 Irrigated Crops 38 10 99 271 Crops Partly or Not Irrigated 44 80 Total 294 195 124 613 Agriculture Total 1,235 941 481 2,657 FORESTRY Forestry 120 190 75 385 Agriculture + Forestry; Total 1,355 1,131 556 3,042 ANNEX 10 - 222 - Page 84 160. Table 8 presents a picture of the agricultural implications of accession for the Portuguese budget that is synthetic and illustrative only. It takes no account at all of the dynamic trade effects of Community p:eference that would probably lead fairly rapidly to a switch away from third country imports bearing variable levies. Nor has any estimate been included of drawings from the Guidance Section of FEOGA since these require not less than 50% counterpart contributions from the national budget. A three-year average has been taken of quantities and costs, prices, and aids (all converted at annual average exchange rates) for 1979, 1980 and 1981 (the most recent years for which Portuguese trade statistics are available). Where statistics of production and of livestock numbers are not available for all three years it has been necessary to make estimates based on one or two years. In some cases evidence is more tenuous still, or wholly lacking. The table does not at any rate serve to confirm the impression that Portugal is likely to remain in budgetary deficit within the EC, even if not to the dramatic extent that such a purely static analysis suggests. ANNEX 11 - 223 - PORTUGAL AGRICULTURAL SECTOR SURVEY THE PORTUGUESE SYSTEM OF RURAL EXTENSION AND POTENTIAL WORLD BANK ROLE IN STRENGTHENING THE SYSTEM'S CAPACITY FOR TECHNOLOGY TRANSFER Table of Contents Page No. INTRODUCTION ........................................................ (i) I. CURRENT ROLE AND ORGANIZATION OF THE EXTENSION SERVICES .... Background . The Proposed Organization. 5 The Program of Support for Regional Agricultural Development .10 The UNDP Technical Assistance Project .10 Other Agricultural Training Institutions .11 Sections II and III indicated below are included in the Project Implementation File for the recently appraised Technical Assistance Project and are not reprinted in this report. II. WORLD BANK ROLE AND STRATEGY ............................... Country Development Priorities and Objectives .............. Options for Extension Methodology .......................... A Possible Research Project ................................ Phasing of Extension ActiviLies ............................ III. ISSUES .................................................... Project Scope .............................................. Staffing and Personnel Policies ............................ Regional Autonomy .......................................... The Budgetary Process ...................................... Hiring of Consultants ...................................... Appendix I. UNDP/FAO Project - Proposed Structure of an Agrarian Zone Appendix II. Operational Notes on the Training and Visit System of Agricultural Extension (T&V) ANNEX 11 - 224 - {i) PORTUGAL AGRICULTURAL SECTOR SURVEY THE PORTUGUESE SYSTEM OF RURAL EXTENSION AND POTENTIAL WORLD BANK ROLE IN STRENGTHENING THE SYSTEM'S CAPACITY FOR TECHNOLOGY TRANSFER INTRODUCTION This annex is based on the findings of a World Bank mission which visited Portugal from June 12 through June 23, 1983. The objective of the annex is to review the existing and proposed organization and operation of the extension service at both the regional and local levels as well as at headquarters in Lisbon. Included in the project implementation file of the recently appraised Technical Assistance Project are discussions of (a) possible strategies and options for World Bank involvement in strengthening the research and extension services focussing on assisting adjustments in farming systems which will be affected by the phasing out of subsidies and by new opportunities available through membership in the European Economic Community (EEC); and, (b) a discussion of major institutional and political issues which must be addressed during project appraisal and explicitly provided for in the form of Loan Agreement covenants or other written agreements. ANNEX 11 - 225 - Page 1 PART ONE CURRENT ROLE AND ORGANIZATION OF THE EXTENSION SERVICES Backeround 1. It was not until May 1977 by Decree Law 221/77 ("The New Organic Act" of the Ministry of Agriculture) that the General Directorate for Rural Extension (DGRE) was organized and charged with formulation of a new national extension program. However, due to the political implications of the virtual autonomy of the regional directorates which report directly to the Ministry, DGRE has very limited influence over the nature and quality of extension activities at the local and farm levels and has confined its role to the training of staff to be sent to the Regions. 2. Currently, the organization of extension services within the overall Ministry structure is approximately as indicated in Chart I.' At the regional level, each region has 2-4 subregions and each subregion is composed of 2-5 agrarian zones,2' whose local extension teams deal directly with the rural population. The extensionist teams are supervised by an agrarian zone chief and are supported by administrative and technical personnel. The linkages from the agrarian zone through the subregional level to the regional level are very unclearly defined. It is the understanding of the mission that the local extension teams and their support at the agrarian zone-level are really the heart of the rural extension effort and that little substantive input at higher levels is in practice available. 3. Official organizational charts and statements of the organization of extension services indicate that, the Regional Directorates are administratively autonomous, but they receive technical and planning guidance from the General Directorates for Rural Extension (DGER), Plant Protection, and Veterinary Services. In fact these linkages are very imperfect and in some cases are very weak. Except for specific "campaigns" through which efforts have been mobilized to promote activities considered during a given year to be of priority, the regional directorates plan their "extension activities" on their own, but carry out functions such as statistics generation, distribution of subsidies, and tax administration, in accordance with instructions from Lisbon. The extension service for forestry is separate from the agricultural extension service. 4. Fragmentation of the extension services is further exacerbated by the relatively weak coordination and planning capacity within the Ministry. This has resulted in (a) undefined priorities and strategies for optimizing comparative advantage and opportunities for improved productivity and efficiency; (b) lack of strategies for adjustment to a new system of Common Agricultural Pricing in the EEC, removal of input subsidies and lack of strategies to facilitate the replacement by private sector management of Government-controlled marketing boards once the transition to accession 1/ As far as I understand, the transformation of the Ministry of Agriculture, Fisheries and Commerce into the Ministry of Agriculture Food and Forestry has not changed the general lines of authority as indicated in the Chart. 2/ Agrarian zone is the phrase used in Portugal for extension district. There are no land reform connotations attached to the term. - 226 - Chart 1 ANNEX 11 Page 2 Portugal: Organization of Ehtension and Regional Services Secretary General 1 I G al Coui Minister I Inspector General I of Planning Cabinet A Agriculture I National Institute for Research a* Rbral Extensica (MM) I I I I I1 1 11 1 Secretary of State /1 | I Secretary of State | | Secretary of I I for Agricultural | State for I| Developmnt | I Forestry I _ _ _ _ ____ II I I I I I Director Genera Director Geeral | I | Director General I I Director General I | Forestry | Plant Protection | | I for Agricultural | I Veterinary I I Services I _ IlX l Services I I Services | | Developent I (forwerly Director I I I I I I General for Rural (in charge of I I Extension, E) I forestry I I /21 extension) I Rqaigul Services I - Entre Douro e Mirito - TrEs-os4Moates - Beira Littoral - Beira Interior - Ribatejp e Ceste -Alentejo _Algarve /1 Altbough there are now four Secretaries of State siune the nmst recent reorganization, their exact titles are unknown. /2 Under the nw reorgaization discussed par. 12, DE has beea merged with IDIA aI a new Directorate General for Agricultural Services wa created. - 227 - ANNEX 11 Page 3 Qart I (comcluded) Orgnization of Extension ad RegioLul Services I I Regioial Tecmical Cocil I Director General for | Regional Agricultural Couiil I Agricultural Services Regional Administrative Coreil { 'I I I I I I Agricultural 1 1 Agri-cultural I I I productia: I I Animl I Extemsion I Production I I I Suppot H leth and Sesrices I Services I I Sevices I I Protection I (cooperatives) (crop production) | (soils & fetility) (animl helth) (training) (animal production) I (agricultural (cm r prtection (home economics) (forestry production)| esineerixu) (livestock (agro-jidustries) | (plant protection) iwrovat) (mricetizg) I (forestry _went) (envir Ital protection) I I~~~~~~~~ I S-egional Office I (each region has 2-4) I I I I I I 1 I l l | (Each Division of | I Division of A ininistrative | Credit Unit C h Oief subregic Support to I IRal Extension&I I unit I I I IAgrarian Zoe 1 has 2-5) Productioa I Agricultural | I - & Animl Health I | Production _ l l l l~~~~~~~~~~I I j _ _ _ . I I Administrative I ; T7 ical I lOcel Ts section 1 I sipport I I Ecteionists I TLocal _____I ~I IPraml Pzopulation Date: 08122/83 1 - 228 - ANNEX 11 Page 4 begins; and (c) lack of definition of the role to be played by research, extension, credit institutions, and cooperatives in these development programs. Institution-building investments needed to strengthen their capacity to play this role have similarly not been clearly defined. 5. Nevertheless, legally, DGER's mandate is broadly stated to (a) provide the regional services with general guidelines for methodologies, training and written materials for dissemination to the rural population; (b) make proposals to the Ministry with a view to framing agricultural policy relating not only to production but also to the well-being of the rural population; (c) encourage the organization of agricultural associations; (d) provide liaison with the various services of the Ministry for Agriculture and other ministries which might cooperate in the achievement of development objectives; (e) cooperate in the formulation of marketing and pricing rules; and (f) contribute to the proper functioning of cooperation between the agricultural advisory services and research and teaching bodies. 6. Legally, the regional agricultural services are responsible for: (a) helping to frame agricultural policy and ensure that it is followed at the regional and local level; (b) providing the necessary administrative and technical support for the rural population; (b) identifying the needs of the rural population so that they may be addressed by relevant departments of the Ministry; (c) providing assistance to farmers and farmer's associations in preparing work plans, organizing bookkeeping and management, and contributing to farmer and farm hand training; and (d) acquainting farmers with existing knowledge and the action which they can best and most economically adopt on their farms. 7. Table li' shows the management, technical and administrative staff broken down by region and by the subregion and agrarian zone levels within each region. Of a total 3,964 staff allocated to the regions, the two regions of Ribatejo e Oeste and of Alentejo, which are nearest to Lisbon, have about 54X of all staff. Interestingly, the rich agricultural zone of the Algarve has the least staff allocated to it, only 7.9Z of the total. 8. Table 2 shows, by region and agrarian zone the ratio of farmers to extension staff. A conclusion which can be drawn from this data is that there appears to be in general adequate staffing in the regions to provide a reasonable ratio of farmers to staff. There does appear to be some problems of statf distribution. In some cases, the ratio of farmers served by one extensionist rises to 3,000. Problems of accessibility to certain farmers further accentuate the problem. In other regions, notably the Ribatejo e Oeste, the Alentejo and the Algarve, the ratio is generally low. Within regions there is also a problem of maldistribution of staff such that some agrarian zones are understaffed while others are overstaffed. 1/ Although these statistics are from a published Ministry document, many inconsistencies between tables are found. Thus at this stage these figures will be used for illustrative purposes only. ANNEX 1 - 229 - Page 5 9. Table 3 presents the numbers and conditions of vehicles available at various levels within the regions. It is estimated that the ratio of good operational cars per extensionist is well below one in some regions. In general, the numbers of operational cars is considered to be insufficient. 10. Table 4 shows the availability of existing and planned Agricultural Training Centers, their student capacity and location by region. In general, there appears to be adequate training facility capacity which could be used for an initial project. The availablility of other facilities which are being assisted by the Bank-financed Education II project is described in paras. 19 and 20. 11. There are various initiatives regarding the research and extension services which are currentLy under consideration or which are being implemented and which should be taken into account by a future Bank appaisal team. They are (a) implementation of the law passed in July 1982 to merge INIA, the research organization, and DGER into a new organization called Instituto Nacional de Investigca Agricola e ExtensAo Rural (INIAER); (b) a proposed national extension project called PADAR prepared by the Government with the assistance of a UNDP/FAO technical assistance project and presented to the EEC for funding; (c) activities of the same UNDP/FAO project to establish training and visit methodology and (d) the Bank-financed Education II Project to strengthen various agricultural educational institutions. Each is discussed below. The proposed reorganization 12. On July 27, 1982, a new "Organic Law" reorganizing the Ministry of Agriculture and Fisheries was passed into law. (Since the installation of the new Government in May 1983, the Ministry has once again been reorganized and is now called the Ministry of Agriculture, Forestry and Food.) According to that reorganization, DGRE was to be merged with the Instituto Nacional de Investigaco Agricola (INIA) into a new organization called INIAER. Although under the reorganization DGRE ceased to exist, in fact, the implementing regulations for INIAER have not yet been passed into law and the old DCRE (now called Directorate Ceneral for Agricultural Services, DGAS) continues to function with the same leadership as previously, as does the former INIA. A director for INIAER has been appointed; however, his role is still unclearly defined. 13. The new Minister who assumed office in June 1983 has apparently indicated no predisposition in favor or against the proposed organization of INIAER and appears to be open to Bank recommendations on the subject. In any case, a review of the proposed operating regulations of INIAER indicates the following weaknesses which offer the Bank opportunities for involvement. These weaknesses are: (a) it focusses only on the establishment of various administrative bodies at the central level without defining operations at the regional, subregional and agrarian zone level; (b) while focussing on the need to define research priorities and coordination activities with the extension services, it does not give adequate attention to the organization and methodology by which the linkage would operate. Partuaal! Staff Recources by Reaional Directorates 1983 Administrative Manapprs Teehnteal Staff and Other Profass10nals Totals I Renion Regional /a Head- Sub- Agric. Head- Sub- Agric. Head- Sub- Agric. Head- Sub- Agric. I of Directorates nuarters Rais Zone 1a2a ouarters Reha Zone TIo Iuarlters Retlo Zone Tota auters Realin Zone mii TIo DRAEOM 26 8 4 38 123 54 64 241 168 139 80 387 317 201 148 666 16.$ ORATH 20 6 8 34 52 18 53 123 91 49 131 271 163 73 192 428 10.0 ORABL 19 6 3 2B 28 79 73 180 54 195 57 336 131 250 133 544 13.7 DRABI 4 3 4 11 44 77 53 174 53 32 5 90 101 112 62 27S 6.9 ORDRO 21 9 5 35 40 127 222 389 135 141 244 523 199 277 471 947 23.9 DRAA 24 11 4 39 103 246 168 517 82 113 41 236 209 370 213 792 19.9 . o ORAAL 20 3 2 25 71 25 20 116 115 36 20 171 206 64 42 312 7.9 TOTAL 134 46 30 210 461 626 653 1.740 731 705 578 2.014 1.326 1.377 1.261 3.964 aj Intre Douro e Hinho (ORAEON) Ribatejo e Oeste (ORA0O) Tris-os-Montes (DRATh) Alentejo (ORM) Beira Littoral (ORABL) Algarve (P0AAL) Beira Interior (DRAB!) SgjAcU: Regional Directorates of Agriculture. ama: 08/22/83 - 231 - ANNEX 11 Page 7 Table 2 Portugal: Number of Farmers per General and Specialized Extensionists by Regional D.rectorates and Agrarian Zone - 1982 Numbe?r1 of the IDAL DAIDA R~ Agrarian |DFVU 4 | £RADA4 |DP DAAL | Z o n e _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 2 1667 717 1 977 3 014- 462 1 224 4 i7i0Ki 2 11563 2 046 7 209 1 107 2 163 368 4 92 3 1971 609 2142 364 1 872 437 861 I 4 1 215 376 3 478 1 794 226 812 68 ______I 333 771 2 525 1 095 333 174 6 1 667 482 2 818 1 902 655 292 7 1 467 650 1 860 223 246 X B 1 692 425 2 252 f 332 | 04 | i 619 827 2 041 349 f 200 10 j 875 1 522 7551 _~~~~~~~~~N y 11 13 000 627 ji Essential Duties Spend approximately equal time in each of three basic activities: training, making field visits, and being trained by research staff and others and being exposed to research. 1. In training, give practical training to VEWs and AEOs on an individual basis during field visits, and by conducting fortnightly training sessions and occasional special short courses. 2. In making field visits, visit farmers' fields (not only their villages and houses) to a fixed scheduled on at least two full days each 5/ It may be appropriate, in some circumstances, to have SMS at the zonal level as well. - 248 - Appendix II Page 12 week, either individually or with other SMSs and research staff. Field visits should aim at giving SMSs an awareness of farmers' production practices and constraints, particularly in an SMS's field of specialization, of the accuracy with which production recommendations are taught to farmers by VEWs, and of the extent to which recommendations have been adopted by farmers. If field visits are effective, they will help ensure that key problems are identified and tackled by research, and that resulting recommended practices are relevant to farmers' conditions and are adequately communicated to them. 3. In being trained by and exposed to research, visit research facilities, keep informed of current research developments, and be trained by research staff and others. The purpose of visits to research facilities (agricultural universities, research stations, and off-station trials, and so on) is: (i) to keep informed of current research programs and findings relevant to farmers in an SMS's area of jurisdiction; (ii) to bring problems revealed in field visits and fortnightly training to the notice of researchers; (iii) to contribute to identifying topics for farm trials that focus on basic, practical problems; and (iv) to report observations on the appropriateness of recommendations to research workers. Active participation in monthly workshops will be the chief source of current information on developments in research for district and subdivision SMSs; additional information will be obtained through participation in special courses, by conducting field trials and visiting farmers' fields together with research staff, and by other formal and informal contracts with researchers. SMSs at higher levels should ensure that SMSs at lower levels have adequate exposure to research. Participate, as required, in meetings of the State Technical Committee (normally only headquarters SMSs), seasonal zonal workshops (all SMSs of the zone and headquarters SMSs), and monthly workshops (all SMSs of the area of jurisdiction).- Ensure that extension recommendations and research activities and programs proposed and discussed by these groups are relevant to the farmers of their area of jurisdiction. Subdivision SMSs, with the help of higher-level SMSs, should prepare draft production recommendations for their subdivision, making appropriate allowances for local conditions, including seasonal conditions and the 6/ Headquarters SMSs attend as many monthly workshops as workshop scaeduling permits: each will attend at least one a month and conceivably two or three. - 249 - Append ix I I Page 13 availability and cost of inputs. Recommendations should be broken down into specific key impact points for presentation at fortnightly training sessions. These recommendations and impact points will be discussed at monthly workshops and adapted as necessary in light of these discussions. District and subdivisional SMSs should attend and lead the fortnightly training sessions held in their areas of jurisdiction. Headquarters SMSs should regularly and systematically atten fortnightly training sessions.'7 With the assistance of the Training Officer and in light of monthly workshop activities and decisions, SMSs should prepare appropriate lesson plans, training materials, and aids for each session; demonstrate and teach recommended practices to trainees; and encourage trainees to discuss their field experiences and the recommendations and impact points they have transmitted or will transmit to farmers. Guide extension staff in the technical aspects of their work (including lower-level SMSs in their areas of specialization) and help build up their technical skills. Ensure that recommended practices are effectively communicated and taught to farmers, modifying them as necessary to fit specific local conditions. Evaluate, in the field, the effect of their teaching: inappropriate recommendations or their ineffective transmission should be corrected immediately and be discussed during the subsequent fortnightly training session. Subdivisional SMSs, with guidance from district and headquarters SMSs, should organize, supervise, and check the farm trials proposed at the seasonal zonal workshop, record observations on the trials, undertake preliminary analysis, and discuss and further analyze results with research and extension staff, as appropriate. Make field visits and discuss problems encountered in production or reco endations with farmers, VEWs, AEOs, and research staff. Find solutions to problems and advise VEWs and AEOs accordingly (both in the field and at fortnightly training sessions). If solutions are not readi'y available, develop proposals with research staff for trials and/or on-station research that can be considered for inclusion in the applied or adaptive research programs. Plan training programs and the calendar of operations for crops. Assist the Training Officer in identifying the training needs of extension staff and in meeting these through special courses. 7/ Attendance of headquarters SMS at fortnightly training sessions will depend, to a large extent, on the session's schedules. However, each headquarters SMS should attend at least two fortnightly training sessions each month. - 250 - Appendix II Page 14 Headquarters SMSs should review, for relevance and appropriateness, the syllabus of any course to be attended by SMSs and other extension staff. Headquarters and district SMSs are also responsible for overseeing the training and guidance of SMSs at lower levels. Assist in the preparation of extension literature. Supplementary Duties Attend to any other duties assigned by higher authorities of the Department of Agriculture (in accordance with the programs of the department) that do not interfere with the essential duties outlined above. Training Officer The Training Officer (also sometimes known as the SMS Training or SMS Training and Information) operates at three levels (headquarters, district, subdivision). At each level, his functions are similar, but they are adjusted for the level of responsibility. The Training Officer at any level should spend at least one-third of his time in the field, where he should review extension activities, identify ways to improve the quality of extension, and assess staff training needs. Essential Duties Plan and organize effective training programs. To this end, (1) liaise with SMSs to organize programs (depending on the level: fortnightly training sessions, monthly workshops, orientation sessions, special and preseason training), select trainers, suggest course topics and content, fix schedules, and provide teaching aids (specimens, charges, slide projectors, and so on) and resources for practical work and demonstrations; (2) in conjunction with the Director of Extension, ZEOs, DEOs, SDEOs, and SMSs, identify and arrange for special training needed by individial staff; and (3) coordinate and promote contact with research for extension staff, through formal and informal means. Teach and promote effective training and communication skills among extension staff. InQtraining sessions and in the field, teach techniques for effective person-to-person contact, group meetings, transmittal and teaching of information and recommendations, and use of simple visual aids. Initiate and promote the use of mass media and other extension methods. Promote understanding of the principles and practices of the training and visit system of extension. This should be done systematically among farmers, Department of Agriculture and other government officers, and input suppliers, as well as the public at large. To this end, (i) establish and - 251 - Appendix II Page 15 maintain a small library (including audiovisual materials) on extension and agriculture; (2) produce and distribute literature and other materials on extension; (3) liaise with locally relevant mass media and ensure their appropriate support for field extension activities; (4) organize field days to show extension's achievements; and (5) give courses on extension methods and the training and visit system of extension. Supplementary Duties Attend to any other duties assigned by higher authorities of the Department of Agriculture (in accordance with the programs of the department) that do not interfere with the essential duties outlined above. District (or University) Extension Agronomist Extension services are supported by diverse and scattered research facilities and agricultural universities. It is useful to have an officer - the District (or University) Extension Agronomist (DEA) - who is responsible, within a defined zone of operation, for coordinating contacts between extension and research, and for making arrangements for monthly workshops. The District Extension Agronomist is usually on the staff of an agricultural university or research institution rather than of the Department of Agriculture; nonetheless, his work is an integral part of the extension service. Essential Duties Act as the prime point of contact between extension and research. Coordinate contact between extension and research (1) through participating in joint meetings (particularly, seasonal zonal workshops and monthly workshops); and (2) by encouraging visits of extension staff to research facilities, and the participating of research staff in the training of extension staff and in visits to farmers' fields, generally in the company of extension staff. To perform this liaison and facilitating function, the DEA must keep himself well informed on both research and extension activities. Coordinate arrangements for monthly workshops in consultation with the DEOs, district SMSs, and the district Training Officer. This will entail (1) drawing up six-monthly (or yearly) plans for workshop schedules and content (based on the decisions of the seasonal zonal workshops), which should be adjusted, prior to the scheduled date, to reflect priorities and problems identified in preceeding workshops; (2) identifying appropriate trainers, including staff of universities, research institutes, and the Department of Agriculture, farmers, and others; and (3) making certain that workshops are well organized and of high quality, that facilitiec are appropriate, trainers - 252 - Appendix II Page 16 and extension staff attend, lesson plans focus on a small number of timely and practical impact points for each recommendation, and that participants have opportunity to discuss their experience and the production recommendations. Participate actively in meetings of seasonal zonal workshops, monthly workshops, and other research/extension forums, and, whenever possible, attend fortnightly training sessions to obtain feedback on the quality of training and field problems. Plan farm trials according to the recommendations of the seasonal zonal workshops and monthly workshop, and, in consultation with district SMSs, help analyze and disseminate farm trial results. Following guidelines supplies by the seasonal zonal workshop, district SMSs decide the location of trials and are responsible, through subdivisional SMSs, for their day-to-day supervision and for the preliminary analysis of results. Visit farmers' fields on at least two full days each week to a preplanned schedule in the company of SMSs and/or research staff, in order to gain awareness of farmers' production practices and constraints and of the nature and extent of the transmission of recommendations by VEWs. Ensure that problems in message transmission or regarding production, identified on field visits, are analyzed in subsequent monthly workshops, referred directly to research, or dealt with by other appropriate means. Subdivisional Extension Officer The Subdivisional Extension Officer has overall responsibility in his subdivision for the effective implementation of the extension program."' He should provide leadership and be responsible for the planning, implementation, and supervision of extension activities, including administrative and personnel matters. The SDEO guides and supervises the work of subdivisional Subject Matter Specialists (SMSs), Agricultural Extensicon Officers (AEOs), and Village Extension Workers (VEWs). Essential Duties Spend at least three days each week in the field visiting farmers and AEOs and VEWs. The visits should be prescheduled on a monthly basis, but, where necessary, can be surprise visits (guided by copies of the visit 8/ The Subdivisional Extension Officer is often known by another title, most commonly "Subdivisional Agricultural Officer". The title itself is of little importance, so long as there is one officer at this level performing the duties described here. In some circumstances, it may be appropriate to have a second officer at the subdivision level responsible for all nonextension agricultural activities to ensure that the Subdivisional Extension Officer can devote sufficient attention to extension. - 253 - Appendix II Page 17 schedules of AEOs and VEWs). The visits will reveal whether the VEWs, AEOs, and SMSs are fulfilling their essential duties, but the main purpose of the visits is to improve the quality of their work by offering constructive advice and guidance. Adjust the visit schedules and work procedures of VEWs, AEOs, and subdivisional SMSs in light of observations from field visits and other sources. Coordinate with the other SDEOs, in cases where SMSs work in a team that covers more than one subdivision, the team's work so that it deals effectively with its entire area of jurisdiction. In the absence of a Training Officer, ensure that (1) fortnightly training sessions are held punctually, are well organized and are practically oriented, and all parties (VEWs, AEOs, SMSs) attend; (2) appropriate simple teaching aids and other training materials are available as and when needed; (3) recommendations and impact points are clearly identified; and (4) any VEW and AEO who is unable to attend is fully briefed on the training content as soon as possible after a session. Meet with AEOs and SMSs early in the day of a fortnightly training session to review progress in the adoption of reconnendations by farmers, field problems, seasonal conditions, availability of key inputs, market conditions, and special achievements of VEWs. Ensure that the significant points from these discussions are included in the fortnightly training sessions. Participate actively in fortnightly training sessions and monthly and seasonal zonal workshops. Through participation in fortnightly training and monthly and seasonal zonal workshops, as well as through individual, informal efforts, ensure that field problems are brought to the attention of research and that recommended solutions reach AEOs, VEWs, and ultimately, farmers. Ensure that AEOs and VEWs maintain daily diaries on their work. When in the field, review the diaries and make suggestions for improvements when necessary. Estimate possible demand for inputs based on each season's production program and technology; review the estimates in fortnightly training sessions with VEWs, AEOs, SMSs, and representatives of input agencies; ensure that estimates of demand are forwarded to appropriate authorities for action. Seek and collate information, periodically, on the input supply and marketing position of service agencies, including input prices and places of availability, and pass the information on to field staff and the DEO. The DEO and supply agencies should be made aware of discrepancies between projected - 254 - Appendix II Page 18 demand and supply and be encouraged to make up short-falls in a timely fashion. Be sure that extension recommendations take into account whether inputs are actually available. Collect information on serious pest and disease problems and natural calamities; report significant occurences and trends to the DEO, and see that these are discussed at monthly workshops and fortnightly training sessions and that production recommendations are adjusted accordingly. Make sure that all vehicles and equipment are maintained in good working condition and that all extension staff have access to them when required. Also ensure that extension staff are engaged exclusively in extension and live in their areas of jurisdiction, and that all resources assigned to extension are used only for that purpose. Supplementary Duties Attend to any other duties assigned by higher authorities of the Department of Agriculture (in accordance with the program of the department) that do not interfere with the essential duties outlined above. Agricultural Extension Officer The Agricultural Extension Officer (AEO) is responsible for the technical guidance and support of the Village Extension Workers (VEWs) in his area of jurisdiction, the "range". Without strong guidance and support, VEWs are unlikely to function effectively and the quality of their work will suffer. Essential Duties Guide and help train the eight or so VEWs in his range. Spend at least eight days a fortnight in the field working with VEWs, visiting all VEW circles according to a monthly schedule. Each VEW should be visited in the field at least once in a fortnight. If a VEW has missed a fortnightly training session, ensure that he receives immediately the appropriate advice for his operations in the subsequent fortnight. On field visits, (1) give technical advice and support to VEWs to build up their professional competence and help them solve technical problems; (2) ascertain that farmers are being visited regularly in their field by VEWs; (3) confirm that farmers are receiving appropriate technical recommendations and are aware of impact points; (4) ascertain wb% her farmers are adopting recommendations and their production and incomes are increasing; (5) check that contact farmers have been selected in accordance with selection guidelines and are interested in meeting the VEW and are trying some recommendations, and that other farmers are also systematically met by VEWs; and (6) review the VEW's diary and write a substantive comment in it. - 255 - Appendix II Page 19 Spend one day in each fortnight in a fortnightly training session. Participate actively in it and present, and encourage VEWs to present, problems encountered in the field, obtain solutions, and help determine the best way to communicate solutions to farmers. Also, suggest ideas for farm trials and on-station research that can be noted by SMSs for discussion at monthly workshops and elsewhere. Ensure that all VEWs of his range participate regularly and actively in these training sessions. On the day of the fortnightly training and before the session begins, meet briefly with the SDEO and SMSs to report on progress in the adoption of recommendations by farmers, special achievements of VEWs, seasonal conditions, input availability, and market conditions: this information should be taken into account in the training session. In the training session, production recommendations should be discussed with SMSs in the light of the AEO's perception of farmers' needs. Spend one day a fortnight (in the week following the fortnightly training session) at a meeting with all the VEWs of his range to review their activities and discuss their technical and practical problems. Assist SMSs in organizing farm trials and work with VEWs in conducting them; ensure that farmers are aware of these trials and their results. Assist VEWs and SMSs in the organization of field days. Maintain a daily diary in which field activities and observations are recorded. Note input supply and demand and market conditions, relying both on his own observations and those of the VEW. Report such changes to the SDEO at fortnightly training sessions and elsewhere as the urgency of the matter requires. Supplementary Duties Attend to any other duties assigned by higher authorities of the Department of Agriculture (in accordance with the programs of the department) that do not conflict with the essential duties outlined above. Village Extension Worker The Village Extension Worker (VEW) is the cornerstone of the training and visit system of extension. He is responsible for presenting relevant recommended practices to farmers, teaching and demonstrating related skills to farmers, motivating farmers to adopt recommended practices, and bringing farmers' production problems to the attention of SMSs and research. The area of jurisdiction of the VEW is know as a "circle". - 256 - Appendix II Page 20 Essential Duties Teach relevant technical messages and skills to the farmers in his circle and motivate them to adopt recommended practices to improve their agricultural productivity. Divide the farmers in his circle into eight discrete, approximately equal-sized groups. Visit each group for one full day each fortnight, each group being visited every fortnight on the same day. The fixed fortnightly visit schedule should be made known by all possible methods to all farm families in each group. Select about ten farmers in each group to be contact farmers. Concentrate on contact farmers during visits but also reach as many other farmers as time allows. Other farmers should deliberately be sought out and contacted in their fields and elsewhere, and be called upon to participate in discussions and demonstrations of recommended practices. Encourage contact farmers to show the practices they adopt and to spread their knowledge to other farmers. As many farmers as possible, but certainly all contact farmers, should be encouraged to adopt some of the recommended practices on at least part of their land. Spend most of the time of a field visit in farmers' fields. On a visit (1) observe the condition of the crop and field operations and problems, and suggest appropriate action (or otherwise, discuss the problem later with the AEO and SMSs); (2) note to what extent recommendations have been adopted and the reasons why this has not been done more widely; (3) teach and demonstrate to farmers in the field recommendations learned in the previous fortnightly training session; and (4) listen to farmers and encourage them to tell their problems and difficulties. Participate actively in fortnightly training sessions on one day in each fortnight. Learn the recommendations and impact points and, under the guidance of the SMSs and Training Officer, work out how to teach and convince farmers to adopt them. Check that recommended practices are relevant and timely for the farmers in his circle and that all major crops of the circle are covered by some recommendations. Bring any shortcoming or potential difficulty with recommendations - as would be revealed by previous field visits and knowledge of the production practices and constraints among the groups - to the attention of SMSs. Report problems encountered in the field and discuss solutions. Arrange for SMSs to visit the field if a satisfactory solution to a problem is not given during the training session. Use the unscheduled days in each fortnight to (1) make extra visits to farmer groups that were missed on the scheduled visit day; (2) attend to farm trials; and (3) arrange for special extension activities such as field days and group meetings in conjunction with AEOs, SMSs, and the SDEO. - 257 - Appendix II Page 21 Carry out a small number of farm trials each season under the guidance of the SMSs. Encourage farmers to participate in, and observe, farm trials. Organize mini field days for each farmers' group to show the results of recommended practices to as many farmers as possible. Encourage farmers to participate in these and other field days. Maintain a daily diary. Record in it, among other things, field observations on crop and field conditions and farmer reaction to and adoption of recommended practices, along with the remedial measures recommended. Be familiar with the demand and availability of inputs (e.g., seed, fertilizer, pesticide, weedicide, power, fuel, irrigation water, credit) and also with market conditions, and advise farmers accordingly. Report to the AEO any unusual occurences in the input supply/demand situation and serious pest and disease problems and natural calamities. SupplementaUy Duties Attend to any other work assigned by higher .1uthorities of the Department of Agriculture (in accordance with the programs of the department) that do not conflict with the essential duties outlined above.