Somalia - North-West Region Agricultural Development (Phase II) Project

D_cument of The World Bank WOk OMFCL USE ONLY C fiP iS-13- So Rep,t No. P-3911-SO - I REPORT AND RECOIIMNDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOP1MENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED SDR 10.7 MILLION (US910.6 KlLION) CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC FOR A NORTH WEST REGION AGRICULTURAL DEVELOPMENT PROJECT PHASE II December 14, 1984 llis docment 1 s a leslted d_ismuI ad my be ed by recipiuts only in the peofnmmee o tledr olffid dude.. lb coumeaf may not oc_ewis be discoed wihout Weddl BDak _nhodiatis.-  CURRENC! EQUIVALENTS Somali Shilling (So.Sh.) - 100 cents US$1.00 - So.Sh. 26426 S.. WEIGHTS AND MEASURES 1 Hectare (ha) 8 10,000 u2 I Square Kilometer (1cm2) 100 ha I Metric ton (mit) 1,000 kg ABBREVTATIONS ADC - Agricultural Development Corporation EEC European Economic Community GOS Government of Somalia ICB International Competitive Bidding IFAD 3 International Fund for Agricultural Development OA. - Ministry of Agriculture XES N National Extension Service ONAT - Tractor Hiring Agency PHC m- kroject Ministerial Committee PHU - Project Management Unit PPF Project Preparation Facility SDA Settlement Development Agency SDB ' Somali Development Bank GOVESNENT OF SOMALIA FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY SOMALTA NORTH WEST REGION AGRICULTURAL DEVELOPMEMI PROJECT - PHASE II CREDIT AMD PROJECT SUMMARY * Borrower: Somali Democratic Republic Beneficiary: Ministry of Agriculture Amount: SDR 10.7 million (US$10.6 million equivalent) Terms: Standard Cofinancing: SDR 7.05 million (US$7.0 million) equivalent concessionary loan from the International Fund for Agricultural Development and US$5.4 million equivalent grant from the European Economic Community. Project Description: Objectives: Over a five-year period, the project would (i) increase small rainfed farmer incomes and subsistence through improved production of grains (sorghum and maize) by soil and moisture conservation, adaptive research, extension, farmer training and the supply of farm inputs, (ii) increase fruit and vegetable production from smll irrigated gardens through consarrction of new gardens, rehabilitation of existing gardens, technical support, research, extension and the supply of farm inputs and (iii) strangthen local institutional capacity to implement projects and to improve services to farmers. Components: (a) Rainfed components would include soil and water conservation works on 25,000 ha, a pilot watershed program and appropriate extension and research. (b) Irrigation components would include 50 small irrigated farms, appropriate extension and research and establishment of a new horticultural research farm. (c) Water points (d) Farm input and equipment supply (e) Training (f) Project Management Unit (g) Semi-Mechanized Rainfed Agricultural Development at Kurtun-Waarey and Sablaale. This document has a restricted distribution and may be used by recipients only in the performancc of their official duties Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Benefits: The principal benefits would be increased production of sorghum, maize, fruits and vegetables estimated at full development (year 10) to be about US$3.4 million annually; increased farzm household income for rainfed farmers, from So.Sh. 12,530 (US$480) to 33,170 (US$1,260) and for irrigated farmers So.Sh. 81,120 (US$3,090). The project would affect 42,000 persons in rainfed and 3,000 persons in irrigated farming and create additional job opportniities in the agricultural sector in the region. The project would continue the process of institution building to sustain the provision of services to farmers and involve private sector participation in input supply and marketing. Risks: Project risks include security in the region and continuity of staff employed in the project. Security problems have diminished but such risks in the project area cannot be excluded. Staff incentives applied in the first project would continue to be used in Phase II, thus helping to attract and retain qualified staff. Project Components Local Foreign Total - US$ Millio Rainfed Components 2.8 6.6 9.4 Irrigation Components 0.5 2.2 2.7 Water Points 0.3 0.3 0.6 Farm Input and Equipment Supply 0.2 3.2 3.4 Training -- 0.7 0.7 Project Management Unit 1.0 1.4 2.4 Semi-Mechanized Rainfed Agricultural Development 0.2 0.4 0.6 Subtotal 5.0 14.8 19.8 Physical Contingencies 0.5 0.7 1.2 Price Contingencies 1.1 3.5 4.6 Total 6.6 19.0 25.6 Financing Plan IDA Credit 2.0 8.6 10.6 IFAD 1.5 5.5 7.0 4 EEC 0.5 4.9 5.4 Government of Somalia 2.6 - - 2.6 Total 6.6 19.0 25.6 Estimated Disbursements IDA FY 19R6 1987 1988 1989 1990 1991 (US$ Million)- IDA: Annual 1.0 3.4 2.2 1.7 1.55 0.75 Cumulative 1.0 4.4 6.6 8.3 9.85 10.6 Estimated Economic Rate of Return: 16%  INTERNATIONAl. DEVELOPMENT ASSOCIATION RPORT AND RECOI4JENDATION OF THE PRESIDET TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC FOR A NORTH WEST REGION AGR1EULTURAL DEVELOPMENT PROJECT PHASE II 1. * I submit the following report and recommendation on a proposed credit to the Somali Democratic Republic for SDR 10.7 million (US$10.6 million equivalent) to help finance the North West Region Agricultural Development Project Pbase II. The IFAD has agreed to co-finance the project with a loan of US$7.0 million equivalent, on concessionary teris and conditions to be determined. The EEC is expected also to cofinance the project, with a grant of US$5.4 million equivalent. PART I - THE ECONOMY 2. An Agricultural Sector Review in three volumes (Report No. 2881a-SO) was distributed to the Executive Directors in June 1981. A report on the economy entitled: -Somalia - Policy Measures for Rehabilitation and Growth- (Report No. 408la-SO) was distributed to the Executive Directors in May 1983. An economic mission visited Soualia In May 1984; its prelininary conclusions are reflected in this report. The Resource Base 3. Somalia is a large, sparsely populated country; its varied topography includes a hot and arid coastal plain, rugged mountains and plateaus, and lowlands of varying fertility and rainfall. Its population of about 5 million (including 500,000 refugees) is unevenly distributed over a land area of nearly 630,000 sq km of semi-desert. Population growth in recent years has been approaching 3 percent (excluding refugee inflows) which will result in long-term pressure on the fragile resource base. Only about 13 percent of the land is suitable for cultivation, but with water the limiting constraint, only a small fraction (8.5 percent) of this potentially arable land is cultivated. 4. The mainstay of the economy has long been nomadic pastoralism. Over 60 percent of the people depend on livestock for their livelihood; about 20 percent are farmers; and 20 percent are engaged in various agricultural operations. Livestock production accounts for about 35 percent of GDP and provides over 8D percent of export earnings. Crop production generates about 8 percent of GDP. Although Somalia has one of the longest coastlines (3,000 ku) in Africa, fisAing generates only about 2 percent of both GDP and employment.  -2- 5. The country's limited natural resource bae and its uncertain energy potential account for the scarcity of ecotmaically viable investment opportunities. Apart from the traditional e pert of livestock, coImercial agriculture is centered mainly on the productilon and export of bananas and the production of sugar for the domestic market. Expansion of the manufacturing and service sectotls La limit*d by the small size of the domestic market, poor infrastructure, and shortages of capit3l and entrepreneurial experience. The existence of several mirarals has been confirmed, but their exploration is still at an early stage, and the commercial viability of production remains to be proved. 6. A number of foreign companies have been engaged in inshore and offshore exploration of hydrocarbons but so far no comercially Viable oil prospects have emerged. Hovever, investigations under an IDA project for petroleum exploration promotion have indicated possible natural gas reserves near Mogadishu which could be used for power generation in substitution for petroleum Imports. An IDA credit to finance the first phase of a two-stage program for the development of the gas reserves was approved by the Executive Directors on May 1, 1984. In the absence of other known resources, Somalia's prospects depend upon agricultural and livestock development, whose progress will depend upon careful management of the scarce land and water resources. 7* Somalia is among the poorest countries in the world and is classified by the United Nations as a least-developed country. Per capita income was estimated at $266 in 1982. Other indicators of the country's low level of social and economic development include: a crude death rate estimated at 25 per thousand population (compared to a crude birth rate of 48 per thousand); an average life expectancy of only 40 years-; an infant mortality rate as high as 150 per thousand population; primary and secondary enrolment ratios of 50 percent and 7 percent, respectively; and a ratio of nearly 20,000 persons per physician. Past Development Strategy and Performance 8. Following its assumption of power in 1969, the Government adhered to a program of 'scientific socialism" whose stated objectives were egalitarianism and social justice, development through the public sector, nationalization of certain foreign enterprises, and the formation of cooperatives. Public ownership and management expanded both through nationalizations and through the creation of new public enterprises. The parastatal sector established in the 19709 included about 45 autonomous agencies which eliminated private enterprise in wholesale trade and banking -and which dominated manufacturing. 9. In the early 1970s Somalia made considerable progress in meeting certain basic needs. A program of literacy and primary education had notable results, and an effective system of food distribution was also established. In other respects, however, the record in the social sectors has been less impressive, particularly in water supply, sanitation and health where services bave frequently been biased in favor of the urban population. Moreover, there are indications that there has been a trend towards increasing income differentiation within the rural sector.  -3- 10. On the production side, during the 1970s the Somali economy experienced stagnation in production and a decline in per capita income. Only the services sector grew during the period, by 3.5 percent per year and the growth in government services, at an annual rate of about 7 percent, was particularly striking. Since the beginning of 1981, the economy witnessed a reversal of the past trend, with real GDP in 1981-82 growing on average by 6.4 percent per year notwithstanding some decline in the services sector. 11. Over 100,000 Somalis have migrated to work in neighboring oil-exporting countries in the Gulf area. As labor migration has been neither organized nor controlled by the Government, it has led to a severe depletion of Somalia's already small stock of qualified and skilled manpower, thereby weakening institutions and reducing the country's absorptive capacity. The savings of thqse emigrants are potentially an important resource for the economy, but despite substantial adjustment of the exchange rate, only a small proportion of emigrants' savings is remitted, largely through unofficial channels. 12. Following a border conflict with Ethiopia in 1977/78, there was a great surge in Government expenditures which resulted in widened deficits in both the budget and the balance of payments. During 1978-80, the Government's financial situation deteriorated rapidly, mainly because of the sizeable expansion in expenditures consequent upon the border conflict, the cost of maintaining large numbers of refugees, and the wage bill associated with the Government's policy of guaranteeing employment for secondary school leavers. At the same time, official foreign aid declined. This resulted in Government recourse to deficit financing. With further deterioration in the budgetary situation in 1979 the Government's recourse to the Central Bank rose to record levels (about 13 percent of GDP). This, in turn, led to rapid inflation, from 10 percent in 1978 to 60 percent in 1980. 13. Official data on Somalia's balance of payments are incomplete and provide a very deficient basis for analyzing trade and capital movements. It may nevertheless be concluded that Somalia had a reasonably comfortable overall balance of payments position up to the beginning of 1979. The stagnatior in exports and surge in imports since 1979 resulted in a widening of both the current and overall- balance of payments deficits. The current account deficit during 1980-83 averaged $290 million, as compared to $110 million in the years 1977-78. Total international reserves, which rose st:eadily in the 1970s to $158 million in March 1979, dropped to $15 million at the end of December 1980, and have since then remained at about this level (about tWo weeks' imports). 14. The stagnation of export earnings and the low level of domestic savings have rendered Somalia increasingly dependent upon external assistance for the financing of development. After joining the Arab League in 1974, Somalia mounted a major effort to attract funds from the Arab petroleum exporting countries. The large inflows of external capital and transfers from 1975 onwards indicate that the effort has been successful. After 1977, the sources of foreign assistance shifted from the centrally  -4- planned economies (except for the People's Republic of China, which maintains a large program) towards Arab bilateral and multilateral institutions and OECD countries, several of which have had substantial assistance programs for a number of years. According to OBCD data, Somalia's receipts of ODA during the period 1980-1982 averaged $400 million per year, equivalent to some $90 per capita per year. 15. Somalia's external debt burden has grown rapidly in recent years and amounted to about $1,500 million at end 1983, representing about fifteen times the value of recorded exports in that year. The structure and terms of borroving have also hardened. As a result, the country's debt service burden has steeply grown. The debt service ratio rose from 7 percent in 1979 to 27 percent in 1982 and is projected (without debt relief) at over 100 percent in 1985. The country has also accumulated debt service arrears. IMF and the World Bank staff have encouraged the Government to seek debt relief, where possible on concessional terms. 16. In sum, Somalia experienced in the late 1970s and into the early 1980s an economic and financial crisis characterized by: stagnation in production and exports; a rapidly rising budget deficit flnanced through recourse to the banking system; rapidly rising inflation; a worsening balance of payments situation; a critical loss of foreign reserves; and a worsening external debt situation. This crisis reflected not only adverse developments in the international economy, but also past and current weaknesses in economic management. Policy Changes 17. As the financial crisis deepened through 1978-1980, the Government became convinced of the need to take remedial action and embarked on a course of moving towards a more market-orLented economy. Beginning in early 1981, the Covernment successfully implemented two successive stabilization programs supported by IMF standby arrangements. The measures taken under these programs incluJid adjustment of the exchange rate, fiscal and monetary restraint, and de fac.o liberalization of agricultural marketing. Under the first sta-edby program, c dual excbange rate vas introduced, producer prices for agricu7tural crops were increased, and banana growers received the full benefit of devaluation. This program also involved a substantial reduction in Government recourse to the banking system and increased interest rates. 18. . Following the completion of the 1981/82 program, a new stabilization program was adopted in mid-1982, supported by the IMF with an SDR 60 million 18-month standby arrangement for the period July 1982-December 1983. Under this program, several key policy measures were taken: the dual exchange rate was unified on July 1, 1982, the Somali shilling was further devalued, and interest rates were further raised. The Government also further restricted fiscal and monetary expansion. Furthermore, in January 1983, a bonus scheme was introduced providing for a premium of 25 percent in foreign exchange terms of inward remittances and capital inflows by Somali nationals. These actions were reinforced In mid-1983, when Somalia introduced a more flexible exchange rate system. Under the new arrangement the Somali shllling was pegged to the SDR adjusted by the relative rates of inf tion between Somalia and the five  -5- countries in the SDR basket. However, the beneficial effects of these measures were overshadowed by the negative impact of a ban on Somali cattle imports by Saudi Arabia (which has been in effect since May 1983) and by the impact of a drought that began in 1983 and continued into 1984. 19. In a courageous action, the Government decided in 1983 to abandon its policy of guaranteed employment to high school leavers. An interministerial committee reviewed the future of public enterprises and the Government is now in the process of determining which public enterprises should be phased out of operation, which privatized, and which retained in the public sector. Another step to liberalize the economy was the de facto elimination of the Government monopsony on grain purchases. 20. The policy reforms introduced by the Government from 1981-83, are quite significant and they had a positive impact on the economy. Reductions were effected in the rate of-growth of the money supply, in Government recourse to the banking system, and in the rate of inflation. These measures, which also resulted in increasing commodity production and exports, represent the first stage in the formulation and implementation of a policy agenda directed simultaneously at restoring financial equilibrium, rehabilitating and making fuller use of existing agricultural and industrial productive capacity, and establishing the foundations of long-term growth. 21. In March 1983 the Government requested the Bank to organize a first Consultative Group meeting for Somalia. It then proceeded to prepare a Medium-Term Recovery Program (MTRP) for presentation to the Consultative Group meeting. As outlined by the Government in a paper entitled 'Development Strategy and Public Investment Programme for 1984-86", the KWP consists of (i) a program of phased policy measures aimed at restoring equilibrium in the balance of payments and public finances and at rationalizing the pricing and incentive structure; and (ii) a resource-constrained Public Investment Program for the period 1984-86. The formulation of this recovery program represented a major accomplishment. 22. The inaugural meeting of the Consultative Group for Somalia was held in October 1983. Participants were encouraged by the remedial measures taken by the Government under the 1981-83 stabilization programs and by the Government's pursuit of its new policies. In particular, participants appreciated the formulation of the public investment program and the emphasis in the program on rehabilitation and improved utilization of existing facilities. The participants welcomed in particular,the substantial adjustments made by the Government in the size and composition of the investment program at the Consultative Group meeting. These adjustments included postponing some new projects (including the Bardhere Dam and associated investments, pending results of new studies), rephasing the implementation of ongoing projects and introducing new high-priority schemes such as the rehabilitation of irrigation in the Shebelli region. Participants at the meeting responded favorably to the external aid requirements of the public investment prograu and other elements in the  -6- recovery program for 1984-86. It was recognized at the meeting that further financial aid to Somalia should be on highly concessional terms and that Somalia should attempt to secure debt relief on concessional terms. 23. Following the Consultative Group meeting, intensive discussions between the Government and donors were held concerning follow-up action on the development of the Juba Valley, including the proposed Bardhere Dam, and agreement has been reached with the Bank on terms of reference and a timetable for a study of interim water solutions; the study is being financed under an IDA TA credit. IDA has also granted a PPF to finance the preparation of a scheme for rehabilitation of irrigation infrastructure in the Shebelli region. The Government has also negotiated verbal arrangements for debt relief with some of its creditors A USAID civil service study has been reviewed by the Government. Some initial measures under consideration to improve the civil service are; reduce the size, reassign staff to other economic activity, intensify training programs and gradually improve the salary structure. 24. After ef-fectively implementing the 1981-83 stand-by arrangements, the Government approached the I N for further balance of payments support under an Extended Fund Facility (EFF) to deal with the country's structural and short- to medium-term financial problems. Agreement in principle on such a program was reached in early 1984, but in the event key measures were not implemented, and neither an EFF nor a standby arrangement was put into effect during 1984. Recent Developments 25. After having improved markedly between mid-1981 and late 1983, in 1984 the Somali economy came under increasing stress. This situation emerged from (i) the acute shortage of foreign exchange due to the fall in livestock exports (Ui) a drop In domestic food production owing to a drought in 1983 and the lateness of rain in early 1984; and (iii) the March 1984 Government decision not to go ahead with the IWF program. Following the breakdown of the stabilization program, the exchange rate in the parallel market has fallen steeply. In addition, there has been a sharp acceleration in monetary expansion, fueled largely by a rapid expansion in net credit to the Government. The money supply in 1984 is expected to rise by about 74 percent, as compared to less than 5 percent in 1981. As a result, domestic inflation rose from 32 percent in 1983 to over 90 percent in 1984. 26. As the economy deteriorated, the Government came to realize the need for new corrective measures. Followiag an IMF mission and a parallel Bank mission in early Senteuber 1984, the Government further adjusted the exchange rate. During the 1984 Bank/Fund Annual Meeting discussions, the Minister of Finance reiterated Somalia's commitment to a recovery program emphasizing development of the productive sectors, rehabilltation and full  -7- utilization of existing capacities, and encouragement of the private sector. The Minister also confirmed the Government's decision to reopen a policy dialogue with the IMF. 27. An INF mission visited Somalia during October 23- November 7, 1984. The IMF mission negotiated, ad referendum, a stand-by arrangement for 1985. A Bank mission in the field, at the same time, vorked in close cooperation with the IMF mission to review the 1985 public investment * program and to advise Fund staff on issues from the standpoint of the Bank. The stand-by arrangement is expected to be reviewed by the IMF Executive Directors in January 1985. The Bank has also agreed to the government request to organize a second Consultative Group meeting, tentatively scheduled for October 1985. PART II - BANK GROUP OPERATIONS IN SOMALIA 28. Bank Group gross commitments to Somalia to date total US$228 million, consisting of 26 IDA credits and one IFC lnvestment. Ten projects are under implementation. Over thirty percent of total IDA lending has been for agriculture, twenty five percent for transport and the rest about equally divided over education, water supply, ports, energy, industry and technical assistance. IFC has so far made one investment in Somalia - a US$375,000 loan for a molasses terminal for the Juba Sugar Project. IFC is now actively considering a polypropyline bag project. Annex II contains a asumary statement of IDA credits and IFC investments as of September 30, 1984. 29. Physical progress in implementing development projects in Somalia has been mixed, and some have not done well. Progress of the North West Region Agricultural Development Project - Phase I has been excellent, and the main production targets estimated at appraisal have been met or exceeded. Projects for roads, ports, water and education have been more successful than in the agricultural sector. Many IDA-financed projects have experienced delays in execution. Staffing and management problems have impeded effective preparation and implementation of projects. Problems with projects in execution were brought to the attention of Government authorities during the last country implementation review, which was held in Somalia in June 1984. At that time understandings were reached on the restructuring of several projects in execution. 30. Somalia's disbursement performance on projects assisted by the Bank Group has been satisfactory. The FY84 disbursement rate was 27.9 percent, as compared to 24.7 percent for Eastern Africa and 23.4 percent Bank-wide.  -8- Assistance Strategy 31. We propose to continue to assist the Government to devise and implement policies and programs to improve the efficiency of both the public and private sectors, to improve the macroeconomic framework for domestic and external resource mobillxation and allocation, Improve pricing administration and marketing systems, and to increase productloa and exports We aim to support further use of existing capacity and to help lay the foundations for longer term growth. Our economic and sector work program strives to support the macroeconomic reform process, and to provide analytical inputs for the work of the Consultative Group for Somalia. We are giving particular attention to aid management issues, and are now undertaking an assessment of technical assistance to Somalia jointly wLth the UNDP. An energy assessment is underway, and a review of population, health and nutrition issues iS ln preparation. Plans are now being completed for a collaborative review with the Government and donors of major issues in the agricultural sector. We are cooperating with the government in the preparation and review of periodically updated publlc investment and expenditure programs, at both the global and, increasingly, at the sector level. The Advisory Committee for Juba Valley Developoment established by the Consultative Group at its October 1983 meeting provides an important forum for review and collaboration on issues affecting the development of Somalia's major water resource. Issues in public enterprise reform are expected to become an increasingly important component of our policy dialogue. In our lending work, we plan to emphasize productive investments and rehabilitation programs. An irrigation rehabilitation project is being prepared to help increase productivity and farmer income in the Shebelli Valley. A technical assistance project is under consideration, as is also a project for the development of the gas resources at Afgoy being defined under the Afgoy Gas Delineation Project. Projects have been cofinanced with a number of other donors, and this is expected to continue in the future. Relationship to Other Aid Flows 32. IDA disbursements represent about eight percent of total aid flows to Somlia. We expect that this relationship will continue at about the same level during the aext several years. IDA obligations represent about 12 percent of Somalia's total outstanding and disbursed debt up to December 31, 1983. Debt service payments to IDA represent a very small proportion of Somalia's total debt service obligations. In 1984, payments to IDA were estimated at about one percent of total debt service payments for that year. This trend is expected to continue in the future.  -9- PART ml - The Agricultal Sector 33_ The Somali economy is dominated by the livestock sector, ubich provides a living to the large nomadic popuLation and generates 35 percent of GDP. Exports of live aniuals represent about 80 percent of total exports. Crop tion generates about 8 percent of GDP and roughly the sine sbare of exports. Rainfed crop production is based primarily upon sorghum. Crop production under controLlad irrigation is centered on bananas (tbe principal cash crop and the second largest ezport comodity), sugar cane, rice and maize; production nuder flood irrigation comprises mainly maize and sesame. Fish and fish products accouat for about 3 percent of exports and their share of GDP does not exceed 2 percent. 34. The Association has committed about US$72 million since 1970 to help finance seven agricultural projects in Somalia. Pive are still being implemented. The projects focus on agricultural extenslon, drought rehabilitation, range management and rural development. Project implementation bas been mixed and some projects have not done well (para.29). An Agricultural Sector Review (Report No. 2881a-90) distributed to the Exective Directors in June 1981 emphasized the need to strengthen and develop certain key areas of the agriculture and fisheries sector in particular activities generating increased production of exports in the short-run. As noted above (para. 31), a new agricultural sector revIew is about to start in collaboration with the Goverm ent and otber donor agencies active in the sector; this review is expected to update the 1981 study, and provide a basis for future investment planning in the sector. 35. Joint studies on grain marketing and pricing issues have been undertaken by a Somali-IEBRD team; they are expected to contribute to implementation of the Government's decision to liberalize agricultural marketing and pricing. In addition, a major study on agricultural inputs and supply institutions has recently been completed by consultants. These studies are expected to fors a major part of our agricultural sector dialogue in the period ahead. The objectives of the Association's assistance to the agriculture sector are to increase production and exports, to improve financial and marketing conditions in part by expansion of private sector incentives and opportunities, and the establisbment of additional export narkets to increase foreign exchange. The North-West Region 36. After the two major river valleys of the south, the north-Rest region is the most important part of the country in terms of population density and agricultural activity. The region's total area of some 3.5 million hectares contains less than 100,000 hectares of land suitable for cropping. The major part of this is concentrated in a relatively narrow band in the plateau districts of largeisa, Gebiley and Boorama. The region has some 450,000 inhabitants, most of these being concentrated in Rargeisa, the country's second largest city (300,000) and the other urban centers (50,000).  - 10 - 37. A wide range of services is provided by Government to the agricultural sector. These services include agricultural extension, anial1 health, domestic and livestock water supply development, forestry, credit and mrkketilg. All of the institutions involved, including the Ministry of Agriculture (RDA) suffer from budgetary constraints, shortages of trained staff, transport and housing. 38. Stock-rearing is the most important economic activity In the area. i: constitutes the traditional pursuit of the nomad families, though many of them have become partially sedentary and practice rainfed agriculture along with stock-rearing. Irrigated agriculture has expanded in a spontaneous manner over recent years and at present about 760 hectares are irrigated. Dryland farmers have limited options in a region where the rainfall regime is unreliable, and where work must be carried out carefully to conserve soil Aoisture and prevent erosion. Most rain comes in short intensive storms causing rapid runoff, flash floods and severe erosion. Scarce rain aad other water resources are the principal constraints to crop production since temperatures would allow year round cropping. Other constraints include the supply of agricultural equipment ad inputs, poorly organized marketing, lack of extension services, and medium-term credit. 39. The bulk of production is in private hands. There are, however, some cooperatives of two -ain types: (a) service cooperatives (6, with 1,194 members) which serve as intermediaries between individual farmers and state organizations of the Agricultural Development Corporation (ADC) and the Tractor Hiring Agency (ONAT), and (b) 17 group farm cooperatives with a total membership of 1,042 members participating in collective cultivation. The tocal firming area for all cooperatives does not exceed 3,000 hectares. 40. Staff turnover in the north-vest is high due to the relatively harsh local conditions and isolation from the mainstream of social and political life and chances of promotion. In the absence of a solid- institutional presence ia the north-west region, it was deemed necessary to =orm. a Project Management Unit (PMU) to implement the first project under a Project Ministerial Committee (PMC). Most agricultural service activities have been vested in the PMU which carried out farm and water development, developed its own research and extension and imported small supplies of basic inputs for farm demonstration. While this arrangement has worked well, it is no substitute for soundly staffed and adequately financed national institutioas and this will be addressed in the proposed project (para. 60) 41. Implementation of the first phase IDA-financed project was delayed by about two years after loan signing, due to postponements in effectiveness and the security situation in the region. However, by June 30, 1984, the project had constructed bunds2/ on about 17,000 ha thus protecting an area of about 32,000 ha representing 120 percent of appraisal estimates. Project farms bunded are 5,250, equivalent to 200 percent of appraisal estimate. In addition, the 50 livestock and 100 human water points planned under the project have been constructed, thus improving the supply of water for a part of the dry season. Targets for buildings and procurement have been achieved; progress has been made in the construction of one hectare irrigated gardens (20 completed -- representing 40 percent of the appraisal estimate) and a start made in the provision of 2/ Banks of earth, triangular in vertical section, 1 m high and 2 m wide at the base and about 120 m in length constructed on the contour at approximately 2 bunds per ha.  - 11 - extension services for dryland and irrigated agriculture in the project area. Average annual incremental sorghum yields derived from sample field measurements during 1980 through 1983 have been In the range of 55 percent to 78 percent of bunded as opposed to unbunded lands. 42. The first project made provision for partial cost recovery from beneficiaries. The amount to be recovered is limited to 15 percent of the 10-year average incremental yield. This represents about 50 percent of the actual costs of banding. The cost recovery scheme was agreed by IDA in 1983, and letails of farmer indebtedness were calculated and subsequently passed to the Treasury in 1984. However, repayments have not yet started because of the present severe drought in the region. Government has signalled its intention to proceed with the cost recovery scheme as soon as practicable. 43. The first project has been wefl managed, often under extremely difficult circumstances of local political unrest and external security hazards. It has demonstrated the technical, feasibility and financial attractiveness of the technology applied. While the operations initiated under the first project would continue during the second phase, major emprasis would be placed on the integration of the various support service operations such as extension, input supply, credit and marketing into the national iDstitutions. PART IV - TEE PROJECr 44. The project was appraised in March 1984, and the Staff Appraisal Report No. 5292-SO, dated November G., 1984 is being circulated - separately. A supplementary project data sheet is attactahz as Annex III. Negotiations were held in Washington, D.C. on November 5-9, 1984. -The Government delegation was led by the Vice Minister of Agriculture, Dr. Mohammad Abdi Nur. Project Objectives 45. Over a five year period, the project would (i) iacrease small rainfed farmer incomes and subsistence tihrough improved production of grains (sorghum and maize) through soil and moisture conservation, adaptive researcb, extension, farmer training and the supply of farm inputs, (ii) increase fruit and vegetable production from the small irrigated gardens through construction of new gardens, rehabilitation of existing gardens, technical support, research, extension and the supply of farm inputs and (iii) strengthen local institutional capacity to implement projects and to services to farmers. These objectives, and the detailed project design, are responsive to the concern in the IDA assistanEe strategy (para.31) to increase production, to improve public sector efficiency, and improve resource mobilization and allocation. Project Rationale 46. As shown above, the agricultural sector dominates the economv. Although the country possesses an abundance of land relative to its small population, the low and variable rainfall (less than 600 mm per annum in  -12- most places) places considerable constraints on both livestock and crop production. In the North-West of Somalia, pressures placed on its laod resources are exacerbated by restricted access of Somali nomads to traditional grazing in the neighboring Ogaden Region and the absorption of several hundred thousand refigqes from disputed border territories. Consequently, Government is placing high emphasis on sedentarizatios of nomads through exploitation of available resources, particularly In rainfed agriculture. The Bank-is assisting with these efforts; the first phase of the project, pilot work on semi-mechanized farming In the area between the Juba and Shebelli Rivers and the Bay Region Project are examples of the strategy. Dissemination of appropriate technologies would be facilitated by the Farm at and Extension/Training Project vhich is under Implementation . 47. A promising start has been made under the first phase. TLe project has contributed to more secure food and water supply for the already settled population in the North-West. The proposed project will consolidate and expand these achievements and will help relieve the chronic and sometimes acute shortages of staple grains, and lessen the dependence on food imports and relief operations. 48. While agricultural operations under these marginal rainfall conditions always present some risks, the proposed project is based on valuable experience on pilot works which were first started in 1954 and on six years of in-field experience under the ongoing project. Consultants to provide technical assiEstance and prepare a feasibility study for a second phase of the project were provided under the first phase project. During this period, a resource inventory and exploratory drilling for groundwater were also completed. Thus the work already conducted has improved the data base and provided solid experience for the identification and preparation of the project proposed in this report. During implementation of the first phase, a strong Somali management team, assisted by ezpatriate staff, has been built up. 49. The proposed second phase project would build on a s*ccessful and attractive technology and a tested management team. The technological achievements need to be refined and consolidated, while the support services need to be expanded and linked with the national institutions. Continued Bank involvement is therefore needed to further the development of appropriate technology and institutions to establish a sustainable system of extension, input supply and marketing in conjunction with the private sector. In addition, support is needed for the development of the region's potential water resources through continued intervention in small-scaled irrigation. These components of the project would be financed by the European Economic Community (EEC). Project Description 50. The project would be implemented by the existing Project Management Unit (PMU) of the Ministry of Agri:ulture (MOA) under the overall policy guidance of the Project Ministerial Committee (PMC). The project would expand the present soil and moisture conservation works onto 25,000 ha of accessible cultivable farm land In the region, undertake a pilot watershed progran based on selected catchments, and develop an additional 50 ha of small irrigated garjens, 100 human water points and 50  - 13 - livestock water yards. It would also provide support servieie for research, extension, and in conjunction with the private sector, for farm inputs. Medium-term credit would be provided through the Somali Development Bank (SDB). The project would continue to provide support to the PMU, technical assistance and training. In addition, funds would be provided to continue a pilot redearch program on semi-mechanized farming and project preparation at Kurtun-Waarey and SabLaale; this component would be implemented by the Settlement Development Agency which is under the Ministry of Agriculture. The project components are described In the following paragraphs.31 51. Rainfed Soil and Water Conservation Works (USS7.3 million). The project would finance additional machinery and equipment to carry out soil and water conservation works, such as bunding, terracing and contour hedging, together with operating costs, materials for the pilot watershed program, labor for soil and water conservation vorks, and an internationally recruited soil conservation officer, surveyor and chief mechanic would be financed. Furthermore, the project has financed under the Project Preparation Facility (PPF) aerial photography and mapping and short-term technical assistance for preparatory watershed managememt design. 52. Rainfed Dryland Farming Extension (US$1.5 million). The dryland farming extension service, programmed on the basis of regular vIsits to the farmers to explain methods of improving production technologies, would be expanded to provide assistance to farmers whose fields were bended under Phase I as well as those of Phase II. Vehicles and equipment and operatlog costs for the five teams, together with an internationally recruited extension and training officer. would be finamced. 53. Rainfed Research (US$0.6 Million). The project would finance vehicles and equipment, operating costs and modest improvements to the facilities at Aburin Farm where adaptive research trials would be conducted. 54. Irrigated Small Garden Development (US$0.4 MilLion). The project would develop fifty new one ha irrigated gardens. In addition, the project has financed under the PPF short-ters technical assistance in small irrigated garden design. 55. Irrigated Horticultural Extension Service (US$1.2 Million). The horticultural extension service would be expanded to five teams to provide assistance to all existing small-scale irrigation farmers in the area. The project would finance vehicles and equipment, operating costs, and the serviceds of an internationally recruited horticultural extension officer and short-term consultancy for project preparation for future irrigation development in the region. 56. Irrigated New Horticultural Research Farm (US$1.1 Million). The existing station at Geed Deeble is no longer suitable due to its remote location and with a water supply system which cannot irrigate more than 3 ha. There is no possibility of an alternative water supply. Therefore, the project would finance the cost of development of a new 30 ha site, vehicles and equipment and operating costs. 3/ All amounts in this section are shown at baseline cost in November 1984 prices. _  - 14 - 57. Water Points (US$0.6 Million). As vater is a ujor constraint in the region, the project would continue to develop human and livestock vater supplies within the bunded farming areas. A further 100 human water points and 50 livestock water yards would be financed. 58. Farm Input and Equipment (US$3.4 Million). To overcome the chronic shortage and intermittent. and umtimely delivery of inputs which are important for increasing production yields, the project would initiate a system of farm input supply through private wholesalers/retailers (para. 70). This would help fill the gap left by failure of the Tractor Hiring Agency (ONAT) and the Agricultural Development Corporation (ADC) to supply inputs to farmers in a timely way. The PMU would purchase and resell to wholesale/retail merchants ox-drawn equipment, sprayers, scraper boards for bund maintenance, pumpsets, piping, hand tools, fertilizer, insecticides, pesticides and seeds. An internationally recruited input supply and marketing officer would be employed for a period of 48 months. 59. Training (US$0.7 Million). Overseas training would be provided through a mixture of courses from 2 to 10 months for 29 staff members in various disciplines of agronomy, conservation, economics, sociology, monitoring and evaluation, mechanics and inventory control. In addition, one 2-year course in finance and 3 post-graduate courses in agronomy, soil conservation and dryland agriculture would be financed. Farmer training -would be carried out through the dryland and horticultural extension services. v 60. Project Management Unit (US$2.4 Million). The project would continue to provide support through the provision of vehicles, house and office furnishings and equipment, stores equipment and fuel storage, an - interntionally recruited technical advisor to the general manager, sid a financial controller. Operating costs of the project management unit for staff, the renovation of the warehouse handed over by ADC to the project, rent and maintenance of buildings, vehicle operating costs and office expenses would be financed. In addition, short-term consultancies in monitoring and evaluation and a study of government recurrent expenditures would be financed under the project. 61. Semi-Mechanized Rainfed Agricultural Development (US$0.6 Million). The project would provide funds to the Ministry of Agriculture to ensure continuation of the large-scale testing of semi-mechanized * rainfed technology at Kurtun Waarey and Sablaale. A Bank mission In May - 1984 recommended that a further phase of two years would be required to carry out further field testing of the production technology-and to gain experience in the creation of instltutional arrangements which could ensure sustained and stable production in the settlement areas. Arrangement. have been wade to fund the cost of the first of the two years of continuation from the Bay Region Agricultural Rehabilitation Project = (Credit 972-SO), while the second year would be financed under this project. Project Costs 62. Total project cost is estimated at So.Sh. 1,196.0 million (US$25.6 million), including a foreign exchange component of US$19.0 million (74 percent). Investments under the project are free of duties and  - 15 - taxes * The cost estimates are based on March 1984 figures updated to November 1984 baseline price levels and are derived from the preparation report, recent quotations and appraisal estimates. No physical contingencies have been provided for technical assistance, training and input supplies-10 percent has been provided for all other project components. Price contingencies have been separately calculated for the foreign exchange and local currency components and total about 23 percent of base costs. 63. A PPF advance of US$500,000 was approved in March 1984 to cover the estimated foreign costs of: aerial photography and mapping (US$140,000), technical assistance for watershed management and irrigation development (US$240,000) and vehicles and equipment (US$120,000). The advance wlll be refinanced under the proposed IDA credit. Proposed Financing 64. Project costs would be financed as showQ below. Under joint financing arrangements, IDA would contribute a credit of US$10.6 million and IFAD a loan of US$7 million. The IDA credit and IFAD loan would finance, jointly with Government, all the rainfed components, water points, overseas training and the project management unit. IDA would finance alone the input and equipment supply for farmers in the rainfed areas and the one year extension of the semi-mechanized rainfed agricultural development. The 3EC grant of $5.4 million equivalent would finance the irrigated components and the input supply and equipment for farmers in the irrigated areas. All co-lenders would contribute towards financing of local currency expenditures. These would be on a decreasing annual percentage basis (90 percent in year one decreasing by 15 percent annually to 30 percent in year five). Government's contribution would be US$2.6 million equivalent to about 10 percent of total cost. Proposed Financing Plan (US$ Million) Local Foreign Z of Total Currency Exchange Project Cost Cost Total Cost U~~~~~~~~~~~~~~~~ IDA Credit 2.0 8.6 10.6 42 IFAD Loan 1.5 5.5 7.0 26 r EEC Grant 0.5 4.9 5.4 21 Government of Somalia 2.6 - 2.6 10 6.6 19.0 25.6 100 -s - _- 65. The proposed IDA Credit and IFAD Loan would be on standard terms to Government, with the usual cross effectiveness arrangements. The EEC grant would be covered through a separate financing agreement still to be drawn up. Notification of approval of the EEC Grant would be a condition of effectiveness of the Credit (draft Development Credit Agreement, Section 7.01(b)).  - 16 - 66. Under the input supply system, the PMU would procure ox-drawn and irsigation equipment and sell to contracted wholesaler/retailers for cash. These local currency proceeds would be deposited by Government with the Somali Development Bank (SDB) in Hargeisa to create a revolving fund to meet the credit needs of farmers for the equipment. Details of the scheme were agreed upon at negotiations. Loans to farmers would be at the existing 11 percent rate of interest of SDB for medium-term credit. This is also the rate being used under the Fisheries Exploration/Pilot Project which was recently approved by the Executive Directors. The credit activity over the project life is estimated to be small and loans vould, in the main, be to low-income beneficiaries In addition, the project is situated in a part of the country that has poor natural resources and is remote from the center of Government. Project Implementation 67. The Project Ministerial Committee (PMC) presently consisting of the Ministries of Agriculture, Finance, Planning and the Somali Development Bank, has the overall responsibility for the project. The PMC in turn delegates responsibility for project management to the Project Management Unit (PMU), which is attached to the M3A for administrative purposes. The PMU4, headed by a general manager assisted by a technical assistance team, would be responsible to the PMC for the direct implementation of all project activities. These arrangements have proved satisfactory under the first project. Under the second phase, it would be important that there be a gradual handing over of the various services, such as extension, research and input supply, and the implementation of this would be decided upon at the mid-term review (draft Development Credit Agreement, Section 4.10). 68. On-farm conservation works would be carried out by construction teams decentralized in the three main districts of Hargeisa, Gebiley and Boorama; these are the arrangements used in the first project. The bunds constructed would be identical to the existing design. Maintenance of the bunds is the responsibility of the farmer. Actual on-farm interventions would depend on the degree of slope, rainfall regime, local experience and farmers' choice. Under the project alternative methods of construction would also be tried as would a pilot watershed program based on selected catchments. 69. Small-scale irrigated farm development would, as under the first project, consist of land clearing, levelling, construction of main and lateral water delivery channels, borders, basins, drop structures, channel lining, pipes, sprinklers, and drainage as are considered appropriate to each farm. The main crops would be citrus, papaya, a wide range of vegetables of which onions and potatoes would be predominant. 70. Project advisorv services and training facilities were established during the first project for both rainfed and irrigated farmers. These services would be expanded and would serve farmers benefitting from both the first and second projects and would adopt a more systematic extensfan methodology based on the Training and Visit system, which has been adopted by the NDA as Somalia's extension approach. The National Extension Service (NES), supported under the Agricultural Extension and Farm Management Training Project (Credit 905-SO), is  - 17 - currently providing a limited extension service in the North West region. However, it is impossible at present for NES headquarters staff to provide the supervision needed to ensure effective operations in this part of Somalia, although NES can and does play a valuable role by providing pre-service orientation and in-service training in Nogadishu for new field extension agents for the area. It was agreed at negotiations that the PMU would be responsible for extension services within the project area and that proposals for transfer of this responsibility would be decided on at the mid-term review (draft Development Credit Agreement, Section 4.07). 71. Rainfed Researc:. Trials at the Aburin experimental farm would concentrate on soil and moisture conservation techniques, both mechanized and with animal draft, and on improving sorghum and maize production by variety testing and relevant agronomy and plant protection trials. The station would provide necessary facilities and support to the National Sorghum Research Program, part financed by the International Development Research Center and based at Baidoa in southern Somalia. 72. Irrigated Research work would concentrate on the improved use of water and distribution methods, the introduction of new fruits and vegetables and the demonstration of cropping methods, disease control, pruning and multiple cropping. 73. The two heads of extension and training would coordinate the research programs and decide upon work priorities. They would also interpret the results, in consultation with the MDA research department, and ensure that only tested technologies are passed on for extension to the project farmers. 74. Input Supply- To overcome the almost total lack of supply of farm inputs, ox-drawn equipment and irrigation equipment, the project would establish an input supply system in conjunction with private retailers/wholesalers. The PNU has already developed satisfactory procurement and stocking procedures for project supplies and spare parts and these would ensure adequate controls for the development of the input supply function. The PMU would purchase mainly, from overseas, equipment and inputs which would be initially stocked in the former ADC warehouse in Hargeisa which has been transferred to the project. The PMu vould enter into contractual arrangements with retailers/wholesalers for onward sales for cash. The contract would specify the modus operandi and financial arrangements, including profit margins. Initially, outlets would be limited to the maia towns. It would be a condition of disbursement of the input supplies category that these contractual arrangements had been completed in a manaer satisfactory to the Association (draft Development Credit Agreement, Schedule 1, paragraph 4(b)). Annual Work Program 75. The annual work program, which would cover all project components, would be a key project implementation mechanism. It would include: (a) a review of project implementation in the current year; (b) a detailed description of the work to be carried out in the forthcoming year including objectives, deployment of staff and equipment; (c) require- ment for additional staff, equipment and other inputs; (d) a budget; and  - 18 - (e) a financing plan including foreign and local currency requirements and budgetary support from Government. The annual work program would enable the PMC to review progress, scrutinize forthcoming programs and provide the necessary budgetary and other support needed for the project. The annual work program would be submitted to the PMC by October 1 and to IDA, TEAD and EEC by November I each year for acceptance, to cover the ensuing financial year beginning January 1. Initial work programs would be prepared within two months of signing of the creoit (draft Development Credit Agreement, Section 5.03). Mid-term Review 76. The review would consider develupments under the project and in particular Government's proposals: (i) for th-a integration of the PIMU services within existing national institutions and the institutional capacity to sustain development in the follow-oL period; (ii) on the development of the input supply system and plans for its future operation, (iii) for adjustments in project implementation procedures which would need to be incorporated within the annual work program; and (iv) on revisions to the terms and conditions of the cost recovery scheme. Assurances were obtained at negotiations that this mid-term review would be held with cofinanciers no later than June 30, 1988, and that the subsequent implementation plans would be subject to IDA, IFAD and EEC approval (draft Development Credit Agreement, Section 4.10). Procurement 77. Contracts for supply of machinery and equipment, vehicles, prefabricated buildings and annual farm inputs totalling approximately US$6.5 million would be grouped wherever possible into contracts valued at USS100,000 or more and procured by ICB in accordance with the World Bank guidelines. Assurances where practical would be sought from suppliers on servicing facilities within the project area. Qualifying domestic manufacturers would receive a preference in ICB bid evaluation of 15 percent or the import duty, whichever is lower. Miscellaneous items in packages of less than US$100,000 but totalling no more than US$400,000 would be procured under local competitive bidding (LCB) procedures which are acceptable to the Association. For contracts under US$20,000 or less, but totalling no more than US$300,000, local shopping or purchasing off-the-shelf after obtaining at least three quotations would be used. In total, ICB would account for about 92 percent by value of the purchase of goods described above. 78. Civil works for waterpoints and site development for prefabricated buildings and infrastructure, amounting to approximately US$1.0 million, because of the small unit cost and dispersed nature of the works would be let under LCB. 79. Spare parts and fuel for the machinery, equipment and vehicles, amounting to approximately US$5.3 million would be purchased by quotations from the manufacturers of the equipment, other reliable parts manufacturers and dealer as appropriate. Other operating expenses include US$1.6 million for local salaries and wages and US$1.2 million for administrative  - 19 - expenses, such as travel costs and building rentals for which bidding is inapplicable. 80. The qualifications, experience and terms and conditions of employment of internationally recruited experts and consultants (US$3.6 million) would be acceptable to IDA and IFAD. Overseas training (US$1.0 million) would be by direct placement. 81. All bidding packages for services, works and goods estimated to cost over US$0.25 million equivalent would be subject to prior IDA review of procurement documentation. This would result in a coverage of about 75 percent of the total estimated value of the contracts financed by IDA. The balance of contracts would be subject to random post review by IDA after contract award. Procurement arrangements are summarized in Annex IV. Disbursement 82. The IDt. Credit and the IFAD Loan would be administered by IDA under a frame agreement. Disbursements over six years against project expenditures would be shared equally between IDA and IFAD on those goods or services which are to be jointly financed (para 65, and draft Development Credit Agreement, Schedule 1). Disbursements would be made to meet 100 percent of foreign exchange costs and 90 percent of local expenditures for: machinery, equipment, vehicles, p-re-fabricated buildings, annual farm inputs and technical assistance. Disbursement on civil works and operating expenses would be made on the basis of 100 percent of foreign exchange and on a decreasing annual percentage for the local expenditure (para. 60). The disbursement profile for IDA Eastern Africa Region 'All Loans' is nine years with about 83 percent being disbursed over the first six years. The shorter disbursement period of six years assumed for the project is justified because a major part of the project activities consists of follow-on activities from the ongoing first project and the PMU is operational and weil managed. In addition, other pre-implementation preparation has been financed uder the PPF and a significant percentage of project funds would be spent on the procurement of machinery and equipment for the follow on activities. Disbursements against all items would be based on full documentation, except operating expenses which would require only a Statement of Expenditure (SOE). 83. In order to ensure the smooth implementation of the project, it is AL importaht that the PMU should have prompt access to the r-quisite funds, particularly since the project activities are located a in-iderable distance from Mogadishu. It would be a condition of ef. -ness of the credit that Government had deposited into the Project's account with the Central Bank an advance in the amount of So.Sh. 6,000,000 (based on an average of three months expenditure) and that Government would replenish the project account to that level every quarter until project completion (draft Development Credit Agreement, Sections 4.06 and 7.01(d)). In addition, to enable the project to procure direct and to speed up disbursement during the course of the project, Government would open two special accounts in foreign exchange in the project's name with the Central Bank, one for transactions with IDA and one for transactions with IFAD  - 20 - Zdraft Development Credit Agreement, Section 3.02(c)). The opening of the speclal accounts would be a condition of credit effectLveness (draft Development Credit Agreement, Section 7.01(c)). IDA and IFAD would each make at effectiveness an LnLtLal deposlt of US$100,000 equLvalent into the special accounts. Additional ID4/IFAD disbursements to the special account would be tied to Government's timely replenishment of the Project accounts ThLs was agreed upon at negotiatlons (draft Development Credit Agreementp Schedule 4, para. 3(b)). ReportLag, Monitoring, and Evaluatlon 84. Monthly accountLng, quarterly reporting and annual budgets are already satisfactorily established and in operatlon under the fLrit project (draft Development CredLt Agreement, Section 5.03) These procedures would cont nue In effect. In addition, the PNU would also prepare a project completion report no later than six months after the completion of the project. All project components would be monitored by the Planning and Evaluation Department of the PMU to provide management with a continuing assessment of the progress made in achieving project objectives. The monitorlng and evaluation unit would gradually build up a system for gatherLig lnformation on the variables affecting farmer incomes. Such varLables lnclude farm practice, crop production, input supplLes, marketing channels available to the farmers, yLeld levels, production constraints and indicators of performauce of the Listitution. serving farmers. The monitoring and evaluatLon unit would be headed by a local soclo/economist and assisted by a short-term LiternatLonally recruited monltoring and evaluation specialist. Accounts and Audit 85. The project entity has under the first project established up-to-date accounts which are maintained in accordance with principles and practices satisfactory to the Bank. There have been no serious qualifications of the project accounts by the external audltors. The second project would continue to use thls established system of accounting. In addition, the SDB would establish a separate account within its financial records to identify the funds deposited with the SDB for lending to farmers. Independent auditors acceptable to the Association would be appointed and their reports would be provided within siL months of the close of the fiscal year. The auditor's report would Lnclude statements on the adequacy of the accounting system and internal controls, the Spec4l accounts, the SDB revolving fund and on the reliabillty of SOEs as a basis for disbursements (draft Development Credit Agreement, Section 5.01). Environmental Impact 86. The first project has already contrlbuted to arresting soil erosion in the area where on farm bunding has been completed. The bundlng has permitted retention of water not only for crop productlon, but also augmented recharge of the underground aquifers supplyLng local sprLags and wells. This together with the surface run off water yards has improved water availability in the project area. The second project vould not only extend these benefits to a larger area in the region but it would also  - 21 - address on a pilot basis the wider aspects of catchuent control in order to stabilize fragile land surfaces and protect the downstream on-farm investments. 87. All chemicals currently used on crops in Somalia are tested by residue analysis and are registered by the Plant Protection Department of the MOA. These procedures are considered adequate. The use of fertilizers has limited application. It is not expected that the use of chemicals and fertilizers in the project area would have any adverse environmental impact. Cost Recovery 88. The PMU would maintain a cost recovery unit in Its accounting division to collect data and provide the Somali Treasury Department with the information required for cost recovery for bunding works carried out on dryland farms. The cost recovery system under the project would be similar to that agreed under the first phase, and would be set at fifty percent of the total of direct bunding costs and appropriate PHU overhead charges of 20 percent. However, the scheme would be amended to include an initial down payment of 25 percent with repayments over five years including a grace period of two years during which only interest would be paid. Interest would be charged at 11 percent p.a., which is the present interest rate in Somalia for medium-term agricultural loans. Based on estimated project costs, the new linear meter charge to farmers would be about four times higher than that charged under the first phase. An assessment of the scheme, including collections, system procedures, charge per linear meter and rate of interest, would be an integral part of the mid-term review. Any revisions to the rates to be charged would be considered at that time. 89. The land development charges for the small irrigated farms would be recovered by the Somali Treasury Department on the same basis as the on-farm works for dryland farms. The land development charges would be estimated in advance and cost recovery would be 50 percent as is applicable to drylaad farms. Any difference between actual and estimated costs of development would be adjusted in the fourth year. All irrigation equipment and tcols would be provided on credit through the SDB and cost recovery would be 100 percent. Terms would be a down payment of 25 percent with the balance payable or-er 7 years with a two year grace period and interest at 11 percent p.a. Benefits 90. Yields are based on sample field measurements of the unbunded and bunded lands in the three main districts of Hargeisa, Gebiley and Boorama over the four years 1980 through 1983. There is significant variation not only between but within these areas. However, the average annual percentage yield increase is in the range of 55 to 78. No additional benefits, for either phase one or two project farms from investments in research and extension have been assumed as the level to which farmers would benefit from these services is yet to be determined.  - 22 - 91. The project would increase production of sorghum, maize, fruits and vegetables, thus helping to relieve part of the region's deficit. At full development (year 10), the net annual incremental benefits (1985 constant prices) would be about So.Sh. 90 million (US$3.4 million). 92. Project beneficiaries in the total project area (phase I and II) for the dryland farms are all small-scale subsistence farmers comprising about 42,000 persons and for the irrigated farms about 3,000 persons. Annual farm household incomes for rainfed farmers would increase from So.Sh. 12,530 (US$480) to 33,170 (US$1,260) and for farmers of the new irrigated farms would be So.Sh. 81,120 (US$3,090). In addition, the project would provide full-time and seasonal employment to about 600 persons and further employment opportunities would be created through the input supply and marketing operations. 93. The second phase project would expand the benefits to an increasLng percentage of the region's population, help reduce existing levels of under and unemployemnt, continue the process of institution building to sustain the provision of services to farmers and involve private sector participation in input supply and marketing. Other unquantifled benefits not included in the economic analysis are increased sorghum and maize yields from the introduction of improved farming practices, increased yields from the existing irrigated small farms, livestock benefits from increased straw production, the arresting of soil erosion and improvements in groundwater supplies. 94. The economic rate of return is estimated to be 16 percent. The rate of return is calculated on a 20-year economic life for about 80 percent of total project costs. The associated costs of rainfed research and extension, half the irrigated research and extension and the semi-mechanized rainfed agricultural development have been excluded. However, it has been separately estimated that an economic rate of return of 25 percent on these investments could be achieved from an additional five percent yield increase. Risks 95. Risks associated with the project have been minimized to a large degree through the first phase project by introducing low-risk farm development and through detailed feasibility studies. The major risks for project implementation concern security in the region and staff continuity. Given past experience, security problems in this area of Somalia cannot be excluded. Management and discontinuity of service of key personnel and technicians has always been of concern. Under the first project, salary incentives, housing and training have been used to good effect to provide stability in the PMU and these would continue to be provided under the second phase. Gaps would be filled if they arise by employment of short-term specialists.  - 23 - PART V - LEAL INSTRUNET AND AUTHORITY 96. The Draft Development Credit Areement between the Somali Deocratic tRepublic and the As ion and the Recommendation of the Cottee provided for in Article V, Section l(d) of the Articles of 4c_Ageet of the Aso are belng distributed to the Exective Directors separately. 97. The Draft Development Credit Agreement conforwr to the usual pattern of agreements on agriculture projects. Special conditions of the project are listed in Section 3 to Annex MII to this report. 98. I an satisfied that the proposed credit would comply with the Articles of Agreement of the Association. ,P VI - RECOMMEON 99. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President Attachments Washington, D.C. December 14, 1984  - 24 - mI.. T&BLZ 3L am SQ061A -SOCIL - sA OM 'MT7 (406t 7mma ZSmuS UIUAU~~~S- OF SAumAA Ai3I S. 06 AM C1*sA . _ TOAL 637.7 637.7 637.7 a~I0ILTU3AL W36... 236.7 2"3.7 CW PM Cos) LO.O ".. o 0mo 2".1 1uZ.9 (EIML0nA5 OF OIL 1u16EmI) 11.0 25.0 90.0 62.6 5J2.0 S~~~~~~~~~~~~~~~~~~~~~~~~~ 10PEK]MO AN VITA SENTIZZICS QIATIOX.IED-hEh C261SA5) 2450.0 32360 4515 - URBAN POPur.Ar( CS OF TOTAL) 17.3 23.1 31.. 1.2 29.7 POIULATIO ?IJZECTIO POULATIO It WAR 200 (KaJo) 6.3 STATZOEA3Y 7OSUIATOS (Mlu) 22..