Dahomey - Zou - Borgou Cotton Project

RESTRICTED Report No. P-994 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF DAHOMEY FOR A COTTON PROJECT February 1, 1972 FILE COPY   IDTIERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND REC(I'TH,ENDATION OF THE P2ESIDENT TO THE EXECUTIVE DIREECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF DAHOMY FOR A COTTON PROJECT 1. I submit the following report and recommendation on a proposed credit to the Republic of Dahomey in an amount in various currencies equivalent to US$6,100,000 on standard IDA terms to help finance a project for developing cotton production. PART I - INTRODUCTION 2. Dahomey has been independent since 1960 and a member of the Bank Group since 1963. In 1966, the Government requested IDA assistance for an agricultural development project in the Hinvi area of southern Dahomey. The purpose of the project was to develop 6,000 ha. of oil palms and 6,000 ha. of food crops. In 1969 the Association made a $4.6 million credit (144-DA), and Fonds dtAide et de Cooperation (FAC) of France made a grant of the same amount, to finance a palm oil factory, maize storage silos, palm plantings, food crop development and related infrastructure. The difficulties encountered with this project and the actions proposed to deal with them were reported to the Executive Directors in my memorandum of September 13, 1971 (IDA/R70-63). Agree- ment on those actions was reached in Washington in September of this year with a delegation led by H.E. Chabi Mama, Minister of Rural Development and Cooperation. Disbursements are much behind schedule, but they can now be expected to accelerate. (See Annex I for a summary statement of IDA credits as of December 31, 1971). 3. In 1967, the UNDP financed a survey of Dahomey's land transport requirements and the Bank acted as Executing Agency. As a result of the survey, a $3.5 million Development Credit (215-DA) for highway mainte- nance and engineering was made in 1969. Execution of this project is proceeding satisfactorily, including the engineering studies which are expected to lead to a road project in 1973. 4. A long-term program for cotton development has been carried out since 1964 wfith financial support from FAC and the Fonds Europeen de Developpement (FED) of the European Communities. The proposed project, which would be financed concurrently by IDA and FAC, -was identified by the Bank's Permanent Mission in Western Africa (PMT14A) and appraised in January/February 1971. The Development Credit Agreement and the other legal documents were negotiated in TArashington in September 1971. Representatives of FAC participated in the negotiations.  - 2 - 5. Presentation to the Executive Directors was delayed because institutional arrangements regaarding the marketing of cotton seed and the management of credit had to be further discussed in December at the request of the Government. Final agreement was reached with the Government in mid-January. The credit has been increased by $400,000 over the amount originally negotiated to take account of the increase in project costs in terms of US dollars resulting from the currency re- alignments of 1971. 6. As discussed briefly in Part II below and more fully in the Economic Memorandum attached as Annex II, Dahomey faces serious economic problems at two levels. The first is the fragile financial position of the public sector. This is in part the result of ineffectual management, aggravated by frequent changes of government. The need now is to re- establish control over the volume and direction of public spending and to increase revenues. The second is that the Government has not developed an economic strategy which would make the best use of a narrow resource base and has actually contributed to a growing disparity of incomes between town and countryside. The two are of course interconnected. The narrow resource base means a narrow revenue base; even with strong financial management the scope for public savings will be limited for a number of years. As it is, weak financial management has hampered efforts to develop new resources. The Bank Group's approach must be tackled together. In close collaboration with the IlF, Bank missions have been discussing with the Government measures to regain control of expenditures and improve revenue collection, to reorder spending priorities and to introduce more effective development planning. By lending for projects to increase production in the rural areas, as in the case now proposed, the Bank Group, in collaboration with multilateral and bilateral sources of financial and technical assistance, particularly the European Econo- mic Community and France, can help to strengthen the resource base and improve income distribution. In the course of the next two fiscal years it is hoped to bring forward proposals for the rehabilitation and improve- ment of the Parakou-Malanville road, which is part of the main North-South artery and an integrated rural development project in the south. Also under preparation is an education project that would be a first step towards relating the education system to manpower needs. PART II - THE ECONOMY 7. Prior to independence in 1960, Dahomey was part of the large French West Africa Federation, which provided part of the costs of public services and offered wider prospects for employment than could be found in Dahomey. Dahomey produced many of the educated elite of French West Africa and provided many of the civil servants in both the federal and other local administrations. In the years following independence they became unemployed or unwanted and returned to Dahomey, a small country, poor in natural resources, faced with latent regional antagonisms and hard pressed to establish a viable political framework. In these circum- stances, political instability has been reflected in an unsatisfactory use of government resources and the lack of an effective approach to economic development.  - 3 - 8. Dahomey has virtually no mineral resources or manufactures which could be a source of substantial foreign exchange earnings. The only physical resource available at present is cultivable land. Progress in the use of this resource has been slow and per capita income of village people has been stagnant. The disparity between rural and urban incomes has been growing, leading to rapid urban growth which constitutes one of the main problems facing Dahomey. 9. Efforts to accelerate agricultural development since independence have focussed mainly on export crops. Oil palm, one of Dahomey's tradi- tional assets, has received assistance from various foreign sources and in particular was the main object of the first IDA-financed project. Modern cotton cultivation was introduced around the middle of this century. This crop is presently one of Dahomey's main assets. It gives satisfactory returns, and the farmers are interested in its development. Furthermore, modern cotton cultivation also benefits food crops grom in rotation with it. However, the comparative advantage now enjoyed by cotton is likely to diminish and greater attention will have to be given to food crops such as rice and maize, some of which could be exported to neighboring countries, and to cattle raising. As indicated with respect to the Hinvi project, there have been difficulties in developing a program to encourage food crops production by subsistence farmers. Nevertheless, such efforts are important and, in the project area, a study to be financed under the proposed project is expected to lead to a crop diversi- fication project. In the south, we hope it will soon be possible, in the light of experience derived from the Hinvi project and its continuing food crop program, to identify a project for agricultural development on an integrated basis, and we are prepared in principle to assist the Govern- ment in preparing and financing it. Finally, we also hope that livestock resources in northern Dahomey can be developed. 10. The development of human resources has been very poorly related to the development potential of the country. Formal education, which absorbs the bulk of a relatively large education budget, has been provid- ing training almost exclusively for clerical employment and fostering hopes of a different and better life in the cities. The number of literate unemployed continues to increase and the Government is always under pressure to create jobs for them. Uhat may be most needed as a basis for sustained economic development is to provide manpower training which would make possible a better use of available physical resources. That would mean a major reorientation of the education system. In this pers- pective, the first education project now under preparation would include a manpower survey and curriculum development for primary and secondary education. 11. In infrastructure, due to the small size of the country and its location, most projects have a regional aspect. The improvement of the North-South axis would yield appreciable benefits to both Dahomey and Niger.  -4- It should, however, be followfed by smaller projects for the improvement of feeder roads, which would be to the advantage of the rural areas. Some investments may also be justified in regional telecommunications. Power is imported from Ghana, which will remain the most economic source of energy for some time. 12. Additional sources of foreign exchange may be found some day in off-shore oil, where exploration is actively underway. 13. Great efforts will be required to improve the budgetary situation and the use of government resources. Government deficits have been a cause for concern and IMF fiscal experts have suggested measures to increase government revenues. The Government has implemented some of these suggest- ions and has invited a new vJBF missiLon to discuss the implementation of further measures. However, a balanced budget cannot be achieved without rigorous control over current expenditures, which requires in the first instance that the Government be able to resist pressures for the continued creation of new Jobs on the government payroll. The Government recently informed the Association of its intention to recruit only for replacement purposes at the higher levels and to defer salary increases, but considers similar measures impossible in education at this time. Since it will be some time before Dahomey can reasonably be expected to generate substantial public savings, the immediate objective is to secure a better allocation of resources and in particular a better maintenance of government fixed capital, such as schools and roads, and more financing for those govern- ment services which are related to productive developments, such as agri- cultural extension services. The Government has agreed to discuss these questions, as well as the level of government expenditures, with a forth- coming economic mission. 14. Since the Dahomean economy has a very limited capacity to generate savings, even with improved fiscal performance by the Government, foreign lenders should be prepared to finance part of the local costs of productive investments. Due to Dahomey's poverty and difficult develop- ment prospects, it is clear that external assistance should be provided as far as possible on concessional terms. PART III - THE PROJECT 15. An appraisal report, entitled "The Zou-Borgou Cotton Project - Dahomeyt" (PA-99a), dated January 21, 1972, is being distributed separately. A credit and project summary is at Amnex III. 16. The project area, located in the center and north of the country (see attached map) enjoys favorable conditions for cotton cultivation, and the quality of the cotton is good. The Government has maintained producer prices at levels which at present world market prices leave room for large surpluses by the marketing organization, even after the recent realignment of currencies, but are attractive to farmers. The vast majority of the Dahomean people (over 80 percent) draw their livelihood from agriculture, although agricultural production has failed to keep pace with the growth in population, and an increased effort is needed to raise productivity in the food crop sector.  - 5 - 17. The project aims at developing cotton production by extending cotton growing areas in two large districts, the Borgou and the Zou, from 29,000 ha. to 59,000 ha. over a four-year period. The number of farmers growing cotton would increase from 29,000 to 41,000. Production of maize and groundnuts, grown in rotation with cotton, is also expected to double. In addition, rice production would be developed on some 3,300 ha. and rice milling facilities provided. This project would be the culmination of a program supported up to now with financial and techni- cal assistance from France and managed by CFDT and by SATEC (see para. 19 below). The present program, which started in 1966, represents the only practicable means at this time of substantially improving the standard of living of a large segment of the rural population and improving Dahomeyts balance of payments. 18. The project would cover the four-year period 1971-74. Its principal components would be: a) the provision of staff and equipment to the "Societe Nationale Agricole pour le Coton" (SONACO0), which will administer exten- sion, credit and marketing services; b) establishment of a revolving fund to provide cotton growers with seasonal and medium-term credit; c) construction of two ginneries in the project area to increase annual ginning capacity from 43,000 tons of seed cotton to 67,000 tons and provision of six small rice mills to process 3,600 tons of paddy; d) rehabilitation of about 620 km of feeder roads; e) execution of field trials to adapt research results for practical application; f) provision of funds for the preparation of an agricultural diver- sification project in the Borgou and Zou districts. 19. The Ministry of Rural Development and Cooperation would oversee project execution with the help of the following organizations: - Societe Nationale Agricole pour le Coton (SONACO), a government- owned, autonomous corporation established in 1971 to develop the production of cotton and other crops in the north and center of Dahomey and to organize primary marketing; its statutes are acceptable to the Association; the posts of General Manager, Deputy General Manager and Financial Manager would at all times be held by persons whose qualifications and experience are acceptable to the Association; the Financial Manager would initially be provided by CFDT;  - 6 - - Compagnie Francaise pour le D6veloppement des Fibres Textiles (CFDT) is a French statutory corporation with public and private participation (societe d'6conomie mixte) established in 1949 to provide assistance in the production, ginning and marketing of fiber crops, particularly cotton. CFDT is financed mainly by the French Government and has its headquarters in Paris and regional offices in several French-speaking African countries including Dahomey; - Societe d'Aide Technique et de Cooperation (SATEC) is a French government corporation established in 1956 to provide technical assistance for the development of production, particularly in agriculture, also with headquarters in Paris and offices in several African countries, including Dahomey; - Direction des Travaux Publics (DTP) is a department of the M4inistry of Public WJorks. 20. The Government would, by a contract which is acceptable to the Association, entrust SONACO with the development of production and the organization of primary marketing, i.e., delivery by the producers to the marketing organization (CFDT), or to the ginneries. For that purpose, SONACO would provide extension services and credit. Extension services would be contracted to CFDT in the Borgou district and SATEC in the Zou under terms which are satisfactory to the Association. Personnel employed by SONACO, including government personnel seconded to SONACO, Dahomean personnel heretofore employed by CFDT and SATEC, and foreign personnel employed by CFDT and SATEC, would work in an integrated structure with a single chain of command. The contract will provide for in-service training of Dahomean personnel and lay down a timetabl- for their taiing over posi- tions that have to be filled initially by expatriates. The Government would undertake to make available the necessary financial resources for the execution of these contracts. 21. The organization of credit has posed a problem. The Banque Dahomeenne de Developpement (BDD), which might have been expected to handle it, has an unsatisfactory record. It ceased agricultural credit operations in 1963 and requires a thorough reorganization before it could resume them. Credit operations in the project area are presently managed by CFDT and SATEC with financial resources provided by the Fonds de Sta- bilisation et de Soutien des Prix des Produits a l'Exportation (FAS). Under the proposed project the I4inistry of Agriculture would establish an agricultural credit fund for the project area, which SONACO would manage. Short-term credit would be provided for seasonal inputs and medium-term credit for agricultural equipment. Satisfactory credit procedures have been agreed. 22. For the purchasing and ginning of seed cotton and the marketing of cotton lint, the Government would enter into a joint venture (associa- tion en participation) with CFDT, the terms of which are acceptable to the Association. Each partner would put at the disposal of the venture  -7- its relevant capital assets (gimneries and storage facilities). Profits and losses would be shared between the Government and CFDT in the ratio 4:1, except for losses attributable to government decisions, e.g. should the producer price be set too high, or to CFDT, e.g. should there be mismanagement. CFDT's liabilitv would be limited to profits previously received plus CFAF 5 million../ CFDT would also be contracted to design and construct two ginneries to be owned by the Government and put at the disposal of the venture. The terms of the contract are satisfactory to the Association. 23. Marketing cotton seed has been carried out since 1969 by OCAD), a public marketing organization which has not proved efficient. In the course of negotiations it was accordingly agreed that CFDT would take over the marketing of cotton seed under the joint venture arrangements. The draft Credit Agreement provides that any change in these arrangements would be subject to the approval of the Association. 24. Under the proposed project, 620 km of feeder roads would be improved by the Department of Public TWorks (DTP), which would establish a special unit, open a separate account and engage consultants for this purpose. The list of roads to be improved each year would be drawn up by SONACO in consultation with DTP and presented to the Association for approval. The Government would also undertake to maintain satisfactorily the feeder roads in the project area. 1/ US$ 1.00 = CFAF 255.79  -8- 25. The estimated project cost and respective contributions thereto by IDA, FAC and the Government would be as follows: IDA FAC GOVT. TOTAL 7T$ milli T A. Extension services .53 2.50 2.87 5.90 B. Farm inputs (on credit) 2.59 - .29 2.88 C. Processing equipment 1.42 .17 - 1.59 D. Feeder road improvement .63 .07 - .70 E. Research and studies .51 .19 .03 .73 F. Contingencies .40 .18 .30 .88 TOTAL 6.08 3.11 3.491/ 12.682' Foreign exchange cost 7.63 Percentage of project cost (including taxes) 48.0 24.5 27.5 Percentage of project cost (net of taxes) 54.4 27.8 17.8 26. The Government's financial contribution to SONACO to finance the salaries of Dahomean personnel and other expenditures on extension services should not give rise to budgetary problems since a large part is expected to be provided from the Goverriaent's share in the profits of the joint venture (see paragraph 28 below). Increased revenues expected to result from the project, for example from export taxes, would more than cover the remainder of the government contribution to project costs. 27. The Government's share in the profits of the joint venture would be applied in the first instance to setting up a special cotton price stabilization account within the FAS and maintaining it at a level of 2! Including taxes of about 12 percent, equivalent to about $1.5 million.  CFAF 500 million, and thereafter to meeting the annual costs of SONACO for extension services in the project area. Any excess over these re- quirements would be applied to the improvement of cotton extension services outside the project area. The alternative would also be open for the Government to raise the producer price, which under the draft Credit Agreement-would be reviewed annually with the Association. -All- the profits would thus remain in the rural sector of the economy. 28. To illustrate the importance of the Government's 80 percent share in the profits of the joint venture, the folloinTng table gives an estimate of what it would be on the assumption of a projected decline in the world market price for cotton of about 15 percent a year through 1975, an average annual increase of 5 percent in the cost of farm inputs provided by the joint venture and an unchanged producer price. 1972 1973 1974 1975 1976 1978 1980 (CFAF mlion) 515 521 397 361 324 255 179 29. The Government would undertake to make sufficient funds avail- able in advance on a quarterly basis to each of the project accounts: SOMACO's account (for extension services), the agricultural credit fund, the ginneries construction account, and the feeder road account of DTP. 30. Procurement of fertilizers, insecticides, sprayers, farm equip- ment, corrugated steel pipes, vehicles, ginnery and rice milling machinery, etc., totalling about $8.0 million equivalent, would be on the basis of international competitive bidding. Tenders for the construction of stores, houses and offices (total cost about $330,000) would be let locally since the individual contracts would be too small to justify calls for bids outside Dahomey. Furniture and office equipment (total cost about $45,000), for which there is adequate local competition, would be procured according to the Government's procedures, which are satisfactory. 31. Disbursement of the proposed credit would be made as follows: a) 100 percent of the c.i.f. Cotonau costs of goods directly imported for the project such as ginnery equipment and rice hullers, corrugated steel, pipes and vehicles, estimated at US$1.12 million; b) 90 oercent of the cost of office equipment and furniture, building and road construction, applied research, and the feasibility study, about Us$1.99 million; and c) 100 percent of the c.i.f. Cotonou costs of fertilizers, insecti- cides, and agricultural equipment to be purchased before December 31, 1972 and 15 percent in each of the following years, about US$2.59 million. 32. The project would be expected to raise substantially the cash incomes of about 41,000 participating farmers (about 350,000 persons includ- ing their families) of whom about 12,000 would be new. Total annual net  - 10 - cash returns on the project would almost triDle between 1970 and 1975 from CFAF 580 million to 1,570 million, or an average increase of about $95 per participating family. 33. Dahomey's cotton exports during the project period (1971-74) are expected to increase from 35,000 tons to 82,000 tons, mainly as a result of the project, and the resulting foreign exchange earnings are expected to double, from $10 million to $20 million. Dahomey's increased cotton exports will, however, have only a negligible impact on the world market. 34. Assuming a project life of 10 years, the economic rate of return on the project is estimated at 34 percent. No economic cost has been attributed to farm labor in view of the extensive under-enrployment in Dahomey and the lack of alternative employment opportunities. All labor will be provided by participating families and no hired labor will be required. The estimated rate of return would be reduced to 19 percent if the benefits were 15 percent lower on account of a steeper decline in world market prices than now forecast or of lower yields. Part of the expected benefits arise from extension work and investments already carried out in the project area. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 35. The draft Development Credit Agreement between the Republic of Dahomey and the Association, the draft Project Agreement between the Association and the Societe Nationale Agricole pour le Coton (SONACO), the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement and the text of a resolution approving the proposed credit are being distributed to the Executive Directors separately. 36. The draft Development Credit Agreement and the draft Project Agreement conform substantially to the pattern of agreement used for this type of project. 37. In addition to the standard conditions of effectiveness, we have included the followi-ng conditions in the Credit Agreement: a) the execution and delivery of the Project Agreement, the contract between SONACO and the Government, the contracts betw,ueen the Government and CFDT and SATEC, and the Convention de Mandat de Gestion establishing the asso- ciation en participation between the Government and CFDT; b) the appoint- ment of the General Manager, Deputy General Manager and Financial Manager of SONACO who shall be acceptable to the Association; c) appointment by FAS of an experienced accountant and carrying out by FAS of accounting procedures satisfactory to the Association; d) completion of the necessary action by the Government to allow SONACO to comply with the agricultural lending procedures set down in the Credit Agreement; e) completion of the necessary governmental measures for the marketing of cotton seed through CFDT; and f) certification that there has been no material adverse change in SONACO's condition since the date of signing of the credit.  - 11 - 38. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART V - RECOM2EDMATION 39. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President by J. Burke Knapp Annexes (3) Washington, D.C. February 1, 1972  ANNEX I SUE4L