Liberia - Rubber Development Project

Document of FIL E COPY sur The World Bank FOR OFFICIAL USE ONLY Report No.P-2259-LEBR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED CREDIT TO THE REPUBLIC OF LIBERIA FOR A RUBBER DEVELOPMENT PROJECT March 15, 1978 This document has a restricted distribution ad 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 EQUIVALENT The official monetary unit is the Liberian dollar, with a par value equal to that of the US dollar. Apart from the Liberian dollar, the US dollar is a legal tender in Liberia. GOVERNMENT OF LIBERIA - FISCAL YEAR July 1 - June 30 GLOSSARY OF ABBREVIATIONS ACDB Agricultural and Cooperative Development Bank CDC Commonwealth Development Corporation LRPC Liberia Rubber Processing Corporation ODM Ministry of Overseas Development (U.K.) PSC Project Steering Committee RAS Rubber Advisory Service RDU Rubber Development Unit  FOR OFFICIAL USE ONLY RUBBER DEVELOPMENT PROJECT Loan/Credit and Project Summary Borrower: The Republic of Liberia Amount: IDA credit of US$6 million equivalent; Bank loan of US$7 million equivalent Terms: IDA credit on standard terms; Bank loan to be amortized over 20 years, including 5 years' grace, at 7.45 percent interest. Prolect Description: The project seeks to increase Liberia's income and export earnings from rubber through an intensive program of replanting about 40,000 acres of old rubber and rehabili- tation of about 24,000 acres of mature untapped rubber. Improved farm inputs would be provided to about 6,300 small and medium-size farmers on the basis of credit along with extension service, training of farmers and tappers, and assistance for on-farm processing and market- ing. The project would also aim at institution building by establishing a Rubber Development Unit as a permanent extension service and training of Liberian staff at all levels. At peak production, the project would increase rubber production from Liberian-owned farms by more than 100% of the present output and would bring about a sub- stantial increase in productivity and the income of small and medium rubber farmers. The project faces no special risks that cannot be overcome through advance planning and appropriate cultivation practices. Estimated Cost: ------- US$ Thousands ------- Local Foreign Total Field Operations 7,119 4,101 11,220 Rubber Development Unit 3,900 5,590 9,490 Training 630 990 1,620 Consultant/Studies 50 470 520 Nursery Land 200 - 200 Baseline Costs 11,899 11,151 23,050 Contingencies 3,910 2,680 6,590 TOTAL PROJECT COST 15,809 13,831 29,640 Net of taxes 15,559 13.831 29,390 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.  -2- Financing Plan: --- US$ Thousands -------- Local Foreign Total Bank/IDA 600 12,400 13,000 CDC 7,000 - 7,000 ODM - 1,400 1,400 Government 7,400 - 7,400 Project Farmers 800 - 800 Estimated Disbursements: ------------- US Millions ------------- Bank FY 1979 1980 1981 1982 1983 Annual 2.3 3.5 3.6 3.0 0.6 Cumulative 2.3 5.8 9.4 12.4 13.0 Rate of Return: 13 percent Appraisal Report: Rep. No. 1771-LBR dated March 6, 1978  INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND A PROPOSED LOAN TO THE REPUBLIC OF LIBERIA FOR A RUBBER DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$7.0 million and a proposed development credit for the equivalent of US$6.0 million to the Republic of Liberia to help finance a rubber development project. The development credit would be on standard IDA terms and the Bank loan would have a term of 20 years, including 5 years of grace, with interest at 7.45 percent per annum (The blend will have a grant element of 46 percent). The U.K. Ministry of Overseas Development (ODM) and Commonwealth Development Corporation (CDC) would co-finance the project on a parallel basis with a technical assistance grant equivalent to US$1.4 million and a loan equivalent to US$7.0 million, respectively. The CDC loan would be repayable over 20 years including a grace period of 5 years at an interest rate of 7.5 percent. PART I - THE ECONOMY 2. A basic economic mission visited Liberia in March 1973. Its report "Liberia: Growth with Development - A Basic Economic Report" (No. 426a-LBR dated March 1, 1975) was distributed to the Executive Directors. An updating report entitled "Liberia: Economic Memorandum" (No. 873-LBR dated September 15, 1975) has also been distributed subsequently. An economic report on the "Current Economic Position and Prospect of Liberia" (No. 1642a-LBR) dated February 28, 1978 has been distributed to the Executive Directors. Structural Characteristics 3. The growth of Liberia's economy remains heavily dependent on the performance of the enclave sector consisting mainly of: (a) iron ore mines, (b) rubber plantations, and (c) forestry concessions. These enclaves are the main source of export earnings. Iron ore mining is by far the largest single activity in the enclave sector, accounting for about one third of gross domestic product at factor cost. There are only limited linkages be- tween the enclaves and the rest of the economy; as a result, the benefits of economic growth have been unevenly distributed. The enclave sector yields a per capita GNP of about US$2,500 compared to US$550 for the rest of the monetized economy. 4. Another dimension of structural imbalance is the disparity between traditional agriculture and the (monetized) modern sector. Traditional agri- culture has minimal inter-action with the rest of the economy; however, it supports the majority of the population - as much as 70 percent - who live at or near subsistence level. With a population of about 1.6 million, average per capita GNP in 1976 was US$450; about 4 percent of Liberians have per capita  - 2 - income levels of US$3,000 or more while the great majority live with a per capita income of about US$100 per annum. To help redress this imbalance the Government is trying to increase its earnings from the concessions and use the resources to diversify the economy with increased participation by Liberians. Development Plan 5. The Government has prepared a Four-Year Development Plan covering the period July 1, 1976 to June 30, 1980. In preparing the Plan the Govern- ment was assisted by a planning team financed jointly by the Bank, the United Nations Development Program (UNDP), the United States Agency for International Development (USAID) and the Government (Reference: President's Memorandum to the Executive Directors, No. R74-61 dated March 25, 1974). The Plan identi- fies the basic, long-term objectives of Liberia's socio-economic development as: (a) diversification of production; (b) dispersion of sustainable socio- economic activities throughout the country; (c) greater involvement of Liberians in development activities; and (d) equitable distribution of the benefits of economic growth so as to ensure an acceptable standard of living for the people throughout the country. The average annual growth of real GDP during the Plan period is envisaged at around 6.8 percent. However, because of delays in the implementation of expected investments in iron ore mining and some slackening in demand for the country's main exports, the recent Bank economic mission has estimated that real growth during the four-year period is unlikely to exceed 3-4 percent. Total development expenditure is projected at US$415 million, of which US$251 million would be financed from foreign sources and US$164 million domestically. Firm commitments accounted at the start of the Plan for almost 60 percent of the expected foreign financing. However, the Plan is currently being revised to reflect the experience of the first year and to incorporate effects of the world wide decline of steel pro- duction on the demand for iron ore. 6. The Development Plan attaches high priority to agriculture, parti- cularly integrated rural development, as the cornerstone of the Government's diversification strategy. The objective is to diversify and modernize agri- cultural production, increase productivity, improve associated rural economic activities such as marketing and processing, and provide social and physical infrastructure to promote income distribution and improve the quality of life in the rural as well as urban areas. The Government has already embarked on two important agricultural development projects in the Bong and Lofa counties which are being assisted by the Bank Group. Other projects in forestry and rubber are expected to start shortly which will lead to greater participa- tion of Liberians in the development of the country's principal agricultural resources. The Government plans to convene a conference with UN agencies in April 1978 to consider ways in which to improve the effectiveness of its rural development programs. However, the shortage of adequately trained manpower at all levels is likely to prove the most important constraint to the Government's efforts to develop and diversify the economy. The Government is keenly aware of this and has adopted a number of policy measures, supported by the three Bank Group financed education projects, to tackle the problem. However, by their very nature, these policies are likely to bear fruit only in the long term; over the short and medium terms, the Government will have to rely heavily on foreign technical assistance.  -3- Recent Economic Developments 7. During 1973-1975 Liberia, like most other developing countries, was hit by higher import prices and international inflation. While strong world demand for Liberia's major export, iron ore, brought large gains in export prices in 1974, the 1975 recession in the industrialized countries signifi- cantly reduced the demand for the country's most important export commodi- ties -- iron ore, rubber and timber. With growth performance continuing to be largely a function of enclave activities, growth of real GDP -- which averaged about 6.4% a year in the 1967-1970 period has slowed down significantly and is estimated to be about 2.5% in 1976. Preliminary estimates indicate that GDP growth may have declined further during 1977. 8. Liberia has had a long history of sound fiscal management and public sector resources have not come under undue pressure during the past decade. A satisfactory growth in government revenues averaging about 13.5% per year between 1970-1975 enabled the Government to finance increasing expenditures. Recurrent expenditures during this period grew by about 10% while development expenditures increased nearly fourfold. However, public sector finances have recently come under increased pressure which is likely to continue over the medium term mainly because of an anticipated acceleration in the rate of growth of government expenditures -- particularly current expenditures -- coupled with a more moderate rate of growth in revenues. The rate of growth of government revenues is likely to be moderate in view of the anticipated lower GDP growth rate as well as the continued recession in world demand for iron ore. There may be scope for an increased revenue effort on the part of Government as well as improvements in the efficiency and pricing policies of the public corporations so as to ease the pressure on central government finances. In this context, Government is negotiating with the iron ore com- panies regarding its share in profits and future dividend distribution poli- cies. Balance of Payments 9. During the 1964-1972 period, the value of merchandise exports grew by 10% and imports by 5.9% annually in current prices. Thereafter, from 1972-74, mostly reflecting accelerated international inflation, imports rose by 29% annually, exceeding the 22% annual export growth. Oil imports in- creased from US$12 million in 1972 to US$56 million in 1974 but declined to US$48 million in 1975 due to reduced mining activities. Nevertheless, Liberia achieved a trade surplus of US$110 million in 1974, US$63 million in 1975 and US$61 million in 1976. During 1975, Liberia received aid commitments of US$93 million: US$82 million in loans and about US$11 million in current transfers. The World Bank Group was the largest donor in terms of commitments (43%). The other major donors were the United States, Italy and the African Development Bank. Creditworthiness 10. Liberia's external public debt outstanding and disbursed was esti- mated at about US$170 million as of December 1975. Debt service payments as  - 4 - a proportion of exports of goods and non-factor services were estimated at 5.4% in 1975 as compared to 5.7 and 7.7% for 1974 and 1972 respectively. Debt service payments as a percentage of government revenues have also de- clined from 24.3% in 1972 and 21.1% in 1974 to 17.3% in 1975. Both ratios are projected to decline further in the next few years as the final portion of the heavy debt incurred in the early 1960s is paid off. The Bank Group share of the public debt outstanding and disbursed is presently about 16 percent and, based on commitments of the aid agencies up to 1975, is pro- jected to increase to about 30 percent by 1980; as a proportion of public debt servicing liability, the Bank Group share is projected to increase from its present level of about 12 percent to about 35 percent in 1980. However, with an expanding program of future assistance from other aid donors, the Bank Group share may prove to be rather lower than this. Even with an expanded public borrowing program, Liberia's debt service ratio through the 1980s is expected to remain relatively modest unless there is an unexpected deterioration in external conditions. It should be noted, however, that Liberia's exports are highly concentrated in a few commodities (mainly iron ore and rubber) with unstable world market prices. Given the country's satis- factory performance in economic management and its modest debt service ratio, Liberia should be regarded as creditworthy for a significant amount of Bank lending, blended with some assistance from IDA. PART II - BANK GROUP OPERATIONS IN LIBERIA 11. The Bank has made 14 loans (including one Third Window loan) for projects in Liberia totalling US$77.5 million; there have been 5 IDA credits totalling US$24 million and one technical assistance grant of US$200,000 for development planning. IFC has made two equity investments totalling US$555,000 in the share capital of the Liberian Bank for Development and Investment (LBDI). The Bank loans have been for roads, port expansion, power and LBDI; IDA credits have been for education and agriculture. Annex II con- tains a summary statement of Bank loans, IDA credits and IFG investments as of January 31, 1978 and notes on the execution of ongoing projects. 12. The objectives of Bank Group operations are: (a) to help Liberians take greater initiatives in developing their own resources for the benefit of their own people; (b) to support policies and programs leading to broader sharing of the fruits of economic progress; (c) to help the Government in broadening the economic base and in overcoming infrastructural constraints to growth; and (d) to assist the Government in mobilizing development resources from other external agencies. In furthering these objectives particular attention is being paid to the need to expand the supply of trained manpower so as to relieve this potential constraint to development. 13. In line with the priorities established in the Government's Four- Year Development Plan, the Bank plans to give increasing emphasis in its lend- ing program over the next few years to the agricultural sector. The Bank Group is currently co-financing with USAID two agricultural projects currently under implementation in Bong and Lofa Counties. These projects are designed  -5- to assist a total of about 17,000 subsistence peasant farmers to diversify their production base and to increase their productivity and income through the provision of an integrated package of support services and infrastructures. A forestry project has recently been appraised which would strengthen the Government's forest service, initiate an industrial plantation program and help Liberia to better manage and exploit its forestry resources. The pro- posed rubber project would lead to expanded exports, increased productivity and incomes for small and medium size farmers, strengthen credit and extension service and promote greater Liberian participation in the development of this sub-sector. 14. In infrastructure, a water supply project is under preparation which would rehabilitate and expand the Monrovia water supply system, extend water distribution to lower income groups in the metropolitan area, and help strengthen the management and finances of the Liberia Water and Sewerage Corporation. A fourth highways project is also being considered which would include improvement of priority sections of two primary roads including the main access to the agricultural hinterland, and road maintenance. In the power sector, a fourth power project is being proposed which would expand the Liberia Electricity Corporation's thermal power generating facilities to meet demand until a new hydro-electric generating facility has been constructed and made operational around 1985. The project would also include management and training assistance to LEC and service connections to about 5,000 urban poor households in Monrovia. In the social sector, three education projects have been financed by the Bank Group. The first two projects aimed at improving secondary education, education planning and management, as well as extending the educational system to rural areas through the provision of secondary schools and 45 village community schools. The third project emphasizes vocational and technical training. PART III: THE AGRICULTURAL SECTOR Sector Characteristics 15. Agriculture is the second largest productive sector in the economy and provides one-quarter of gross domestic product. Agricultural output in 1976 totalled US$224 million of which US$94 million originated in the mone- tized sector composed of rubber (US$44 million), forestry (US$35 million), coffee, cocoa, palm products, etc., and US$130 million in the subsistence sector. About 54% of the total population of Liberia or about 150,000 house- holds work in agriculture. With 15 persons per square kilometer, average population density is low, ranging from 5 to 20 in the various counties. Thus land availability is not a constraint to the development of smallholder agriculture. 16. Liberian agriculture is characterized by small, traditional farms that comprise more than 90% of total agricultural holdings. The traditional sector is largely outside the monetized economy, located in areas with minimal  - 6 - infrastructure and composed of farms where less than 5 acres are cultivated each year, producing mostly subsistence crops such as rice and cassava and some cash crops such as coffee, cocoa and sugar cane. There is little or no adoption of modern innovation. The average income of the traditional small- holder is less than US$120 per capita, compared with a national average of about US$450. Alongside the traditional agriculture, there are large foreign- owned plantations producing exclusively for exports (rubber, timber) which are characterized by use of trained managerial and technical staff and ex- tensive capital outlay. Also in recent years Liberian-owned commercial farms have gained importance. These farms are primarily engaged in rubber production but gradually expanding into cocoa, coffee, oil palm, and vege- tables, as well as some poultry and livestock. Management of these farms, with few exceptions on the larger ones, is generally inefficient and yields are poor. Sector Objectives and Strategies 17. As stated in the Four-Year Development Plan, which earmarks about one-fifth of total investment resources for the development of agriculture, the Government's objectives for agriculture aim at diversifying and moder- nizing agricultural production. Based on general ecological conditions, fac- tor endowments and market prospects, agriculture has greater potential for efficient diversification of the economy than any other productive sector and could provide a continuing source of the country's growth and develop- ment to supplement earnings from iron-ore which may in the years ahead gra- dually decline. Within this framework the Government has adopted two basic strategies: development of smallholder agriculture and development of indus- trial tree crop plantations. 18. In recent times the Government has been increasingly concerned with the problems relating to smallholder agriculture and rural poverty. Under the Four-Year Development Plan integrated rural development projects are envisaged as a main vehicle for improving productivity, income and liv- ing conditions of the small traditional farmers by providing a range of farm support services and infrastructural improvements. Two such projects are being implemented in Lofa and Bong Counties, financed jointly by IDA (under Credit 577-LBR, Lofa County Agricultural Development Project and Credit 700-LBR, Bong County Agricultural Development Project respectively) and USAID. These projects are assisting about 17,000 subsistence farmers in the two Counties to increase and diversify production of upland and swamp rice, coffee and cocoa by providing credit, inputs, extension services and physical and social infrastructures. The Lofa Project is in its second year of implementation and is making good progress. The project has received necessary cooperation and support from the Government agencies and there has been a positive response from the project farmers. The implementation of the Bong Project has just begun. Another integrated rural development project is being prepared for Nimba County with financial assistance from Germany. A further integrated smallholder project was identified in Grand Gedeh County and will be prepared for possible Bank financing by consultants provided under the Bong County Agricultural Development Project.  -7- 19. At the same time the Government seeks to establish large-scale plantations, particularly for tree crops (oil palm, coconut, coffee, cocoa, etc.), which would be operated by special commodity corporations owned by the Government. The upland areas of Liberia are generally unsuitable for permanent cultivation of annual crops due to low soil fertility. For this reason shifting cultivation is widely practiced which, with increasing popu- lation density, has a damaging environmental effect, particularly on the country's forest resources. However, the ecological conditions of Liberia's upland areas are generally suitable for profitable cultivation of tree crops. The Four-Year Development Plan envisages implementation of the first phase tree crops plantation program consisting of 5,000 ha oil palm, 8,000 ha coconut, 4,000 ha coffee and 6,000 ha cocoa. Liberia is not a major pro- ducer of these crops and its shares of world production are negligible (in the case of coffee and cocoa, 0.2%) and will continue to be so even after the implementation of the expansion program. Sector Constraints 20. A rapid expansion and diversification of the sector in the short and medium term is constrained by several factors. The most critical factor is the shortage of adequately trained manpower, at all levels but particularly at the managerial and professional levels, to plan and implement an increasing number of projects. Although some attempt is being made to deal with the problem on an individual project basis, as under the proposed and on-going Bank-financed projects, there is no comprehensive manpower planning and training program for the sector as a whole. The Government is currently in the process of carrying out a manpower study with USAID assistance which will be used to formulate a comprehensive training program geared to the long-term need of the sector. 21. Another major constraint to the development of the sector has been the institutional deficiencies in the delivery of essential supporting services. The Government's extension services, input and credit supply system are rudimentary and their impact has been severely limited. The Ministry of Agriculture is aware of the need to reorganize its activities, particularly to develop an effective structure for servicing smallholders, and is working with consultants provided under previous Bank-financed agricultural development projects. In the past commercial agricultural credit was channeled mainly to large farmers, cooperatives and special project farmers. There was no smallholder credit apart from that channeled through the Cooperative, Credit and Marketing Division of the Ministry of Agriculture. The credit under these programs was limited and the credit recovery was poor. In order to expand and streamline Government's agri- cultural credit operation and as a first step in creating a framework for institutional credit for the traditional agricultural sector, the Govern- ment has recently established an Agricultural and Cooperative Development Bank (ACDB). The Government has consulted closely with the Bank/IDA regard- ing the appropriate organization and operating policies for this new credit institution. Under the proposed project, ACDB would be charged with the responsibility for handling the credit fund for the project rubber farmers. The proposed project would provide technical assistance to strengthen this new institution.  -8- Rubber Subsector 22. A distinctive feature of Liberian agriculture is the existence of a dominant rubber industry, accounting for 70% of all agricultural ex- ports and employing one third of the national labor force or 90% of all agricultural wage earners. The rubber industry is divided into foreign- owned concessions and Liberian-owned rubber farms. Six foreign-owned concessions operate a total of 140,000 acres with capital intensive modern management methods based on their own research effort. A Liberian-owned private sector developed parallel to this, initially as an outgrower scheme of the country's largest concessionaire, Firestone, to meet increasing rubber demand during World War II. Planters have been highly responsive to fluctua- tions in rubber prices. Two decades of declining rubber prices led them to abandon and neglect many plantations. As a consequence only 143,000 acres (38% of the total 375,000 acres planted) are in production at present and most plantations (200,000 acres or 53% of total) are estimated to become overaged by 1984. Poor planting material and low management standards are responsible for the low yields achieved ranging from an average of 150 to 500 lb/acre compared with over 1,000 lb/acre on the foreign-owned concessions. This is evident from the fact that in 1976, although Liberian-owned farms accounted for 72% of the total rubber acreage, they produced only 31% of total output estimated at 83,000 tons. 23. According to the 1971 agricultural census there were approximately 8,800 Liberian-owned rubber farms. A majority (58%) had farm size of less than 25 acres, averaging about 7 acres per farm. There are a large number of farms under absentee owners which are operated by hired managers, over- seers or headmen depending upon the size and financial capacity of the farms. Except where experienced managers are employed, the farm management standards are poor. The Government's support services for Liberian-owned rubber farms have been confined to the Rubber Advisory Service (RAS) consisting of 8 expatriate advisors and 9 Liberian counterparts. To date, however, the impact of RAS has been limited although a start has been made with a farm survey, establishment of a nursery and cooperative replanting program. 24. There are five companies which purchase rubber from Liberian farmers, for processing and exporting mainly in the form of block rubber. All are foreign-owned except for the Liberian Rubber Processing Company (LRPC) which is owned by the Government. Firestone, buying 70% of Liberian- owned farm production, is the largest and effectively sets producer prices. On average farmers receive about 58% of f.o.b. Monrovia price. The Govern- ment established LRPC in 1976 to process and mar'ket Liberian farmers' rubber and ultimately to compete effectively with Firestone and other concessionaires. LRPC is currently processing less than 5% of the Liberian rubber production and it is too early to assess its future prospects.  - 9 - PART IV - THE PROJECT 25. The proposed project was identified by the Government and prepared by consultants, Agrar-und-Hydrotechnik (Germany), financed under the Liberia Agricultural Development and Technical Assistance Project (Credit 306-LBR). The Government requested Bank Group assistance in financing the proposed project, which was appraised in June, 1977. A report entitled "Liberia: Rubber Development Project", No. 1771-LBR dated March 6, 1978, is being circulated separately to the Executive Directors. Negotiations took place in Washington on February 15-17, 1978. The Liberian negotiating team was led by Mrs. Johnson-Sirleaf, Deputy Minister of Finance. Project Objectives 26. The principal objectives of the project are to: (a) increase Liberia's income and export earnings from rubber through an intensive program of replanting about 40,000 acres old rubber and rehabilitating about 23,500 acres mature untapped rubber as a first phase of a long-term effort to increase and sustain production from Liberian- owned rubber farms; (b) improve productivity and the incomes of about 6,300 small and medium size rubber farms (70% of total Liberian hold- ings) through provision of credit for improved planting material and other inputs; better extension services; and assistance for on-farm processing and marketing; and (c) strengthen the institutional capability of the Government to plan and implement further development of Liberian- owned rubber industry through establishment of a Rubber Development Unit (RDU), staff training, and provision of technical assistance. Project Area 27. The project area consists of some 288,000 acres of rubber, account- ing for 75% of total area of Liberian-owned rubber farms, in Montserrado, Bong, Nimba and Grand Bassa Counties, and Marshall and Bomi Territories. A survey of rubber farmers of less than 100 acres in the project area showed that the majority (65%) were less than 20 acres in size. The ecological conditions in the project area are suitable for rubber production and the existing physical infrastructure is adequate for the delivery of farm inputs and marketing of rubber production. Project Content 28. Replanting and Rehabilitation - Over the 4-1/2 year development period FY79-83 the project would replant about 40,000 acres of old rubber  - 10 - with high-yielding varieties and rehabilitate about 23,500 acres of mature untapped rubber. To achieve these targets, the project would provide: (a) farm inputs (e.g. planting materials, fertilizers, chemicals, farm equipment and implements, labor, and land-clearing services where required) on the basis of long- and short-term credit; (b) extension services which include technical advice on planting, maintenance, rehabilitation and tapping operations; (c) training of farmers, farm operators and tappers; and (d) assistance in land registration, on-farm processing and marketing for smallholder rubber farms. 29. Institutional Support - The project would include: (a) establish- ment of a Rubber Development Unit within the Ministry of Agriculture as a permanent rubber extension service by providing expatriate and local staff, buildings, vehicles and equipment; (b) training of Liberian staff at all levels to service the entire Liberian-owned rubber sector; and (c) estab- lishment of nurseries. 30. Farm Planning Service - The project would operate on a fee basis a farm planning service to assist large farmers who cultivate more than 150 acres in preparing proposals for commercial bank financing. 31. Technical Assistance - The project would include the employment of consultant services for: (a) a rubber pricing policy study (24 man-months) including examination of the feasibility of a rubber development fund financed by a cess system; (b) a feasibility study of a second stage project including the feasibility of expanding Liberian-owned rubber processing capacity (9 man-months); (c) formulation and monitoring of effective smallholder rubber marketing programs (4 man-months); (d) training RDU instructors and monitoring RDU training programs (6 man-months); and (e) assistance to ACDB in formulat- ing operating procedures and training staff (48 man-months). The average cost of consultants is estimated at US$5,600 per man-month. Project Cost and Financing 32. Total project cost is estimated at US$29.6 million, which includes US$0.25 million of identifiable taxes but excludes all other taxes and import duties. Costs include physical contingency of 5% and price contingencies ranging from 7% to 9% per annum. The foreign cost component is estimated at US$13.8 million or 46% of total project cost. 33. The proposed Bank loan of US$7 million and IDA credit of US$6 million would cover 44 percent of total project cost and would be used to finance US$12.4 million of foreign expenditures and US$0.6 million of local expenditures. The Commonwealth Development Corporation (CDC) would co-finance the project on a parallel basis with a loan equivalent to US$7.0 million which would be used to cover local expenditures of the replanting and rehabilitation credit component of the project. The United Kingdom Ministry of Overseas Development (ODM) would provide a technical assistance grant equivalent to US$1.4 million, which would be in the form of eight British rubber experts for the RDU. The CDC and ODM contributions, which have been agreed in prin- ciple, remain subject to confirmation by their authorities. The remaining US$8.2 million in local cost would be met by the Government (US$7.4 million)  - 11 - and project farmers (US$0.8 million). Together the external donors would finance 72 percent of total project cost. The CDC loan would be repayable over 20 years including a grace period of 5 years at an interest rate of 7.5 percent. Project Implementation 34. The project would be implemented by the Ministry of Agriculture through its Rubber Development Unit established as a semi-autonomous entity with its own management and budgetary procedures. RDU would be responsible to an inter-ministerial Project Steering Committee (PSC) which determines project policy and exercises budgetary control. RDU headquarters would be located in Totota, about 80 miles north of Monrovia in the heart of Liberia's rubber belt. RDU would absorb the functions of the present Rubber Advisory Service and would have three divisions: Finance and Administration, Technical and Operations. RDU would be responsible for implementing all project activities including extension service, training, input supply, and marketing for small- holder rubber farms. The project would be staffed by qualified local staff whenever possible, but because of shortage of experienced Liberians, certain key positions may have to be filled by expatriates. The post of Project Manager, Financial Controller, Chief Technical Officer and Chief Operations Officer would be filled by persons having qualification and experience satis- factory to Bank/IDA (draft Development Credit Agreement, Section 3.01(c)). 35. In order to speed up implementation of the project, the Government has embarked on project start-up activities: PSC and RDU have been established with terms of reference satisfactory to Bank/IDA; a Liberian Project Manager has been appointed and is presently planning and directing all pre-project activities; recruitment of local staff and staff training programs are underway as well as a survey of potential project participants. A condition of effec- tiveness of the proposed loan/credit would be that appointments have been made in accordance with paragraph 34 above to the positions of Financial Controller, Chief Technical Officer and Chief Operations Officer (draft Development Credit Agreement, Section 6.01 (f)). Training 36. Training would be an important aspect of the project and would encompass all levels and disciplines of modern rubber production. The follow- ing types of training are envisaged under the project: (a) training of about 130 field extension staff of RDU; (b) training of about 660 budders and 3,000 tappers; and (c) training of about 6,300 project farmers. In addition, the project would provide on-the-job and overseas training of senior Liberian staff of RDU with the objective of replacing most expatriate staff by Project Year 4. Project Credit Operations 37. The project would provide credit in cash and kind of two types: (a) Rehabilitation Credit would cover initial expenditure (amount- ing to US$40 per acre) for materials and labor required to  - 12 - open mature but untapped rubber. Once the trees start yield- ing, the farmers would furnish at their own expense labor and material for tapping over the 5-year period (amounting to US$85/acre per year). Rehabilitation loans would be repay- able over 4 years including one year of grace with interest at 10% per annum. (b) Replanting Credit would supply all significant material inputs and 75% of estimated labor costs (amounting to about US$460 per acre) required to replant an approved area and bring it into production. Remaining labor costs and minor material needs (amounting to about US$50 or 10% of total costs) would be provided by farmers. Replanting credit would be repayable with interest at 10% per annum in 20 years including an 8-year grace period during which interest would be capitalized. 38. Screening and approval of individual credit applications would be the responsibility of RDU extension staff who would draw up a farm plan on the basis of field appraisal. The newly established Agricultural and Coop- erative Development Bank (ACDB) would be responsible for credit recovery through deductions made by the rubber processing companies from rubber sold by project farmers for which ACDB would receive a 2% commission. The Govern- ment, ACDB and RDU would enter into a Revolving Credit Fund Agreement under which ACDB and RDU would administer the project credit. A condition of effec- tiveness of the proposed loan/credit would be that the Revolving Credit Fund Agreement satisfactory to Bank/IDA has been executed (draft Development Credit Agreement, Section 6.01 (d)). As noted in paragraph 21 above, the Government has consulted closely with the Bank/IDA regarding the establishment of the ACDB and, as a condition of effectiveness of the proposed loan/credit, ACDB would establish its lending and borrowing policies and operational procedures including accounting systems and financial controls satisfactory to Bank/IDA (draft Development Credit Agreement, Sections 3.03 and 6.01 (e)). 39. Each year, in advance of the next replanting year, RDU will carry out a farm survey in selected areas in order to identify prospective parti- cipants in the replanting/rehabilitation program. The survey will collect all the essential data on farm characteristics and as much information as possible on farmers and farm family income. On the basis of this informa- tion and RDU's annual work program and budget, it was agreed that RDU would apply the following guidelines for selection of project participants and issuance of the project credit to ensure that project beneficiaries include as many small farmers as possible (draft Development Credit Agreement, Sec- tion 4.02 (d)): (a) in selecting participants, priority would be given in the order of: small farms up to 10 acres; medium farms of 10-30 acres; and large farms of 30-150 acres - within each category, farms operated by resi- dent owners being given preference over other types of farms: (b) at least 30% of the total amount of the project credit would be earmarked for small farms of less than 10 acres: (c) the project credit would be subject to a maximum of 30 acres per farmer and would be limited to persons who own not more than 150 acres of rubber lands. It was further agreed that each year RDU would review with the Bank/IDA the application of the above guidelines to ensure that the objective is achieved.  - 13 - 40. Main conditions of the project credit would be that the recipients undergo training offered by RDU; accept RDU advice on field establishment, tapping and processing techniques; sell all rubber harvested from the reha- bilitated/replanted area to a single processing plant chosen by the applicant and made known to RDU; and provide land title as collateral. RDU in coopera- tion with the Ministry of Lands and Mines would assist farmers obtain freehold title. 41. Because of low yield expectations under traditional method of cul- tivation and the long gestation period (8 years), in the past small farmers have been reluctant to replant rubber. As a result most smallholder rubber farms in the project area are semi-abandoned and the majority of smallholders grow rice and cassava for subsistence and work part-time on large rubber concessions for cash. Under the project the cash flow for a 3-acre replant- ing farm shows that, even at full production, the return per manday would be unattractive compared with that expected from alternative employment, such as working as estate laborers. In order to improve the cash flow and hence encourage smallholder participation, financial assistance in the form of a grant would be required. Accordingly, in the case of smallholder farms cul- tivating less than 6 acres of rubber the project would provide a cash grant, instead of credit, equivalent to 80% of the imputed cost of smallholders' family labor (amounting to US$95 per acre). This would reduce the debt liability of smallholders to a level that would allow sufficient return per manday for rubber farm work. The total cost of providing smallholder grants is estimated at US$1 million. Processing, Pricing and Marketing 42. The project output will reach 12,000 tons by 1990 and 26,000 tons by 1998. By 1990, however, none of the existing processing companies would have excess capacity and new facilities will have to be built to process project output. The feasibility of establishing new Liberia-owned processing facilities would be examined as a part of the study on the second phase project which would be financed under the project. 43. As stated in paragraph 24 above, at present foreign rubber conces- sions effectively set producer prices in Liberia. Prices paid to Liberian farmers are based on Singapore f.o.b. prices for RSS1 less deductions for processing and other costs. While there is no evidence that the current price (US$22 cents per lb) constitutes a constraint to increasing production from Liberian farms, the level of producer price is important since farmers' response to price fluctuations has been highly elastic. Furthermore, no previous attempt has been made to verify whether processing and other deduc- tions the concessions make to arrive at a producer price reflect actual and reasonable costs. In order to provide the basis for formulating a pricing policy which would ensure that Liberian farmers receive fair and reasonable prices, the project would include a study of rubber pricing policy to examine the current pricing formula, processing and marketing costs of all rubber processors and production costs at the farm level. The Government has agreed that it would complete and submit to the Bank/IDA within two years of loan/ credit signing a rubber pricing policy study executed under terms of reference and by consultants acceptable to Bank/IDA. The Government has further agreed that it would establish, in consultation with the rubber processors, an  - 14 - equitable producer pricing policy and its implementation procedures satisfac- tory to Bank/IDA (draft Development Credit Agreement, Section 3.02). 44. The project would assist smallholders by improving on-farm processing and reducing transportation costs. RDU would work closely with processing factories in scheduling farmers' deliveries and collections. The project would try several methods of marketing (e.g. use of group marketing organizations, cooperatives and private contractors) to determine the most cost effective and practically feasible method of collecting and transporting smallholder rubber. Procurement 45. Procurement contracts for fertilizers, chemicals, vehicles, equip- ment and tools valued at more than US$50,000 would be through international competitive bidding in accordance with Bank/IDA guidelines. Such contracts are estimated to total US$3.1 million. Domestically manufactured goods would be allowed a 15% preference or the applicable duty, whichever is lower, when comparing domestic bids with those of foreign manufacturers. Contracts for less than US$50,000 would be awarded on the basis of competi- tive bidding advertised locally in accordance with procedures satisfactory to Bank/IDA. The aggregate total of such contracts would be limited to US$500,000. Civil works, estimated to cost US$3.0 million, comprising mainly offices, staff housing, training centers and warehouses, are widely scattered and construction is phased over 4-1/2 years; such works would not attract international contractors and it is proposed that these be awarded on the basis of competitive bidding advertised locally under procedures satisfactory to Bank/IDA. The employment of consultants and internationally recruited staff to be financed by the Bank/IDA would be in accordance with normal Bank/IDA's procedures. Disbursement 46. The Bank loan of US$7.0 million and the IDA credit of US$6.0 million would be disbursed over 4-1/2 years FY1979-83 against: (a) 100% of the foreign cost of directly imported vehicles, equipment, machinery for felling old rubber trees, spares, fertilizers, agrocides and all other on-farm/nursery materials required for the replanting and rehabilitation program, or 80% of local cost if procured locally, totalling US$5.6 million; (b) 80% of the cost of buildings and furnishing, totalling US$2.3 million; (c) 100% of the costs of internationally recruited staff (other than staff financed by ODM), including their salaries, allowances and recruitment costs, and of consulting ser- vices, feasibility studies, totalling US$1.0 million; (d) 85% of the total costs of training, totalling US$1.4 million; (e) An unallocated amount of US$2.7 million.  - 15 - Benefits and Justification 47. Primary benefits of the project would be increased production and exports of rubber. Rubber production from the project is estimated at 16,500 tons in 1991, increasing steadily to 26,000 tons (over 100% of present output from Liberian-owned farms) at a peak production in 1998. This level of pro- duction could be sustained for the following 10 to 15 years without major replacements. From 1998 the project would generate annual net foreign exchange earnings of US$18.5 million, helping to reduce Liberia's heavy reliance on income from iron-ore. The project would bring about a substantial increase in income of about 6,300 small and medium-size rubber farms, and, in addition, would provide employment and increased incomes for about 3,000 tappers and 600 budders. The principal beneficiaries of the project would be smallholders cultivating less than 10 acres of rubber with family labor. By strengthening the economic viability of small-scale rubber farming through intensified farm support services, the project would encourage small farmers to work full-time on their own rubber farms instead of seeking alternative wage employment in large rubber estates and concessions. The illustrative cash flow of a 3-acre rubber replanting farm shows that, at full development, the return per man-day would be US$7.0 (constant terms). This compares favorably with the market wage of US$1.50 per man-day or about US$3.0 per man-day received by workers on concessions. The project through establishment of a permanent rubber ex- tension service staffed with well-trained personnel would enable Liberians to take greater initiatives in further expanding Liberian-owned rubber industry for the benefit of their own economy. The organizational and manpower capa- bility developed under the project should enable Liberia to carry out further replanting/rehabilitation programs on a continuous basis. The proposed pric- ing study would provide a basis for reviewing the present cost/price structure of the rubber industry and for establishing an appropriate producer pricing policy. 48. The economic rate of return of the project is estimated at 13% which compares favorably with the return expected from other Bank-financed rubber projects. Sensitivity analysis indicates that the rate of return would still be over 10% with increases in costs up to 20% or with decreases in benefits up to 15%. The financial rate of return to the Government is estimated at 12%. 49. In order to bring all project plantings to full maturity, a further investment of US$18.7 million would be required in the period 1983-89. The Government recognizes the importance of this investment and is considering establishment of a Rubber Development Fund financed from an additional tax on rubber exports. The consultants who would undertake the pricing policy study (see para 43 above) would also examine the feasibility of such a fund. Risks 50. This project has no unusual technical risks. Shortage of profes- sional staff, skilled and unskilled labor is a possible risk to project implementation but this would be overcome by an intensive training program for staff at all levels, tappers, smallholders, headmen and overseers; pro- vision of regular jobs at satisfactory wages; and finally through use of mechanical tree-felling where required.  - 16 - 51. Other risks include susceptibility to wind damage, incidence of dry trees, destruction of bark reserve caused by poor tapping and disease. The project would try to minimize the risks through intensified extension work and farmer training to ensure that project participants follow proper agronomic practices. PART V - LEGAL INSTRUMENTS AND AUTHORITY 52. The draft Loan Agreement between the Republic of Liberia and the Bank, the draft Development Credit Agreement between the Republic of Liberia and the Association, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agree- ment of the Association are being distributed separately to the Executive Directors. 53. In addition to the features of the Loan and Development Credit Agreements which are referred to in the text and listed in Annex III, addi- tional conditions of effectiveness include: (i) signing of a loan agreement between the Republic of Liberia and CDC, (ii) conclusion of the technical assistance arrangement between the Republic of Liberia and ODM, (iii) estab- lishment of ACDB's lending and borrowing policies, (iv) execution of the Revolving Credit Fund Agreement, satisfactory to Bank/IDA, among the Government, RDU and ACDB, and (v) the appointments to the positions of Financial Controller, Chief Technical Officer and Chief Operations Officer. 54. I am satisfied that the proposed loan and development credit would comply with the Articles of Agreement of the Bank and with the Articles of Agreement of the Association respectively. PART VI - RECOMMENDATION 55. I recommend that the Executive Directors approve the proposed loan and the proposed development credit. Robert S. McNamara President Attachment March 15, 1978  ANNEX I LIBERIA - SOCIAL INDICATORS DATA SHEET Page 1 of 4 pages LAND AREA (THOU K12) ------------------------------------------------ --------------- LlIBERIA REFERENCE COUNTRIES (1970) TOTAL 111,4 MOST RECENT AGRIC. 6.2 1960 1970 ESTIMATE GHANA IVORY COAST JAMAICA** GNP PER CAPITA (US$) 170.0* 280.0* - 43Q * 350.* 670.0* POPULATION AND VITAL STATISTICS POPULATION (MID-YR. MILLION) 1.0 1.3 1.6/a 8.6 5.4 1.9 POPULATION DENSITY PER SQUARE KM. 9.0 12.0 14.0/a 36.0 16.0 170.0 PER SQ. AfT. AGRICULTURAL LAND 163.0 217.0 258.0Wa 64.0 32.0 384.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 44.4 42.8 43.6 49.8 46.1 38.5 CRUDE DEATH ..TE (/THOU,AV) 27.9 23.5 20.7 24.4 23.3 8.6 INFANT MORTALITY RATE (/THOU) .. 137.3 159.0/b 156.0 * . 32.2 LIFE EXPECTANCY AT BIRTH (YRS) 36.5 41.0 43.5 41.5 41.0 67.8 GROSS REPRODUCTION RATE .. 2.6 2.7 3.2 3.1 2.7 POPLJLTIoN GROWTH RATE (%) TOTAL. 3.3 3.3** 3. 3*** 2.6 3.4* 1.4/a URBAN .. .. 8.6/c 4.5 6.7/a 6.2 URBAN POPULATION (% OF TOTAL) . 26.2 27.6/b 28.4 28.0 37.1 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 37.2 a 40.7 41.6 46.9 42.5 45.9 15 TO 64 YEARS 5B.8 a 56.0 55.0 49.5 54.8 50,4 65 YEARS AND OVER 4.07a 3.3 3.4 3.6 2.7 3.7 AGE DEPENDENCY RATIO 0.7la 0.8 0.8 1.0 0.8 1.0 ECONOMIC DEPENDENCY RATIO 1.07a,b 1.0/a 1.1/d 1.4 0.9/b 1.7 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) . . .- 10.9 * 49.8 USERS (S OF MARRIED WOMEN) .. .. . 2.0 . EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 410.0 580.0 650.0_& 3300.0 2600.0 eoo.o/b LABOR FORCE IN AGRICULTURE (%) 81.0 72.0 . 54.0/a 82.0 33.0 UNEMPLOYED (% OF LABOR FORCE) .. 20.0/b *- 6.2 .. 17.5/b INCOME DISTRIBUTION X OF PRIVATE INCOME RECOD BY HIGHEST 5% OF HOUSEHOLDS . 61.7 /C * . * HIGHEST 20% OF HOUSEHOLDS .. 72,67 TC . LOWEST 20% OF HOUSEHOLDS .. 5.3 . . ..7. LOWEST 40% OF HOUSEHOLDS . 100.97 . .. DISTRIBUTION OF LAND OWNERSHIP X OWNED BY TOP 10% OF OWNERS .. .. .. . . X OWNED BY SMALLEST 10% OWNERS .. .. .. .. HEALTH AND NUTRITION POPULATION PER PHYSICIAN 12000.0/c 11590.0 11000.0 12950.0/b 15320.0 2630.0 POPULATION PER NUR,ING PERSON 571o.0TW 4590.0 2640.0 1070.07U 2830.0/C 1710.0 POPULATION PER HOSPITAL BED 730.0 580.0 * 760.0 1150.0- 240.0 PER CAPITA SUPPLY OF - CALORIES (S OF REQUIREMENTS) 66.0 84.0 87.0 96.0 108.0 103.0 PROTEIN (GRAMS PER DAY) 35.0 36.0 39.0/e 46.0 60.0 56.0 -OF WHICH ANIMAL AND PULSE .. 0.0 /d 10.0/c 18.0/d 29.0/C DEATH RATE (/THOU) AGES 1-4 29.01a 18.2 21.0 4.2 EDUCATION ADUUSTED ENROLLMENT RATIO PRIMARY SCHOOL 31.0 53.0 59.0/f 61.0 76.0 106.0 SECONDARY SCHOOL 2.0 9.0 11.0ff 11.0 11.0 30.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 12.0 15.0 13.0 12.0 VOCATIONAL ENROLLMENT (x OF SECONDARY) 12.0 8.4 6.2/f 23.0 7.o 5.0 ADULT LITEPACY RATE (%) 9.0/a 15.0 ,. 25.0 20.0 82.o HOUSING PERSONS PL ROOM (URBAN) 1.7/d .. .. OCCUPIED DUELLINGS WITHOUT PIPED WATER (%) * * * . . . . 7s.0/d ACCESS TO ELECTRICITY (% OF ALL DWELLINGS) .. .. .. .. .. 27.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) .. .. .. .. . CONSUMPTION RADIO RECEIVERS (PER THOU POP) 77.0 132.0 156.0 7.0 . 376.0 PASSENGER CARS (PER THOU POP) 1.0 11.0 6.0 S.0 10.0 39.0 ELECTRICITY (KWH/YR PER CAP) 101.0 330.0 509.0 338.0 95.o 825.0 NEWSPRINT (KG/YR PER CAP) . 0.1 .. 0.4 0.2 4.6