Malawi - Agricultural Marketing and Estate Development Project

Docuent of The World Bank 6, *FOR OmCIL USE ONLY Report No. P-4868-&I MEMORANDUM AND RE.COMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO LHE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 14.2 MILLION TO THE REPUBLIC OF MALAWI FOR AN AGRICULTURAL MARKETING AND ESTATE DEVELOPMENT PROJECT October 31, 1988 Southern Africa Department Agriculture Operations Division This document hss a restdrted disribution and may be used by recipients only in te performance of tbeir official dutis Its contents may not otherwie be dislosed without World Bank aothorization.  CURRENCY EQUIVALENTS Currency Unit - Malawi Kvacha (MK) US$ 1.00 = MK 2.50 ACRONYMS ADMARC Agricultural Development and Marketing Corporation AfDB African Development Bank EEC European Economic Community FRG Federal Republic of Germany IFAD International Fund for Agricultural Development KFW Kreditanstalt Fuer Viederaufbau IBRD International Bank far Reconstruction and Development IDA International Development Association MOA Ministry of Agriculture NRDP National Rural Development Program ODA Overseas Development Administration RBM The Reserve Bank of Malavi SEDOM Small Enterprise Development Organization of Malawi UK United Kingdom USAID United States Agency for International Development GOVERNMENT FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY MAIAWI AGRICULTURAL MARKETING AND ESTATE DEVELOPMENT PROJECT Credit and Proiect Summary Borrowert The Republic of Malawi. Beneficiaries: Ministry of Agriculture, Ministry of Local Government, Malawi Bureau of Standards, Investment and Development Bank of Malwi (INDEBANK), National Bank of Malawi (NIM), Commercial Bank Of Malawi (CBM), Small Enterprise Development Agency of Malawi (SEDOM). Amount: SDR 14.2 million (US$18.3 million equivalent). Terms: Standard. with 40 years maturity. Financing Plan: (US$ million) Government 0.5 Sub-borrower 6.3 Participating Banks 3.2 IDA 18.3 Total 28.3 Staff Appraisal Reportt No. 7401-MAI Map: IBRD 21033 This document has a restricted distributi' -. a.i' nay be used by recipients only in the perfomance of their offici duties. Its contents may not other vise be disclosed Without World Bank authozan.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF MALAWI FOR AN AGRICULTURAL MARESTING AND ESTATE DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed development credit to Malawi for SDR14.2 million (US$18.3 million equivalent) is submitted for approval.. The proposed credit would be on standard IDA terms with 40 years maturity and would help finance an agricultural marketing and estate development project. 2. Background. Malawi is heavily dependent on agriculture which supports about 85? of the population of over 7.5 million people, and in 1986 accounted for 37? of total GDP and 912 of all exports. Smallholders cultivating customary lands produce 80? of all agricultural output, mainly maize, groundnuts and cassava for domestic copsumption. The estates cultivating freehold or leasehold lands produce tobacco, tea and sugar, largely for the export market. After two decades of impressive growth, agricultural production stagnated in the 1980s in both smallholder and estate sectors. Growth in smallholder output slowed due to increasing land pressures, poor price incentives and marketing inefficiencies in ADMARC, the Government's market parastatal. Also, existing techniques and farm services have been unable to sustain the productivity gains needed to keep pace with population growth and increased land scarcity. As a result, rural incomes have declined, many farm households are in food deficit, and malnutrition is pervasive. Growth in estate output, especially in smaller estates, is also disappointing due mainly to poor land utilization and a lack of credit and extension services. 3. In the medium to long-term, Government's objectives are to: ti) raise nutritional levels, improve income distribution and ensure national food self- sufficiency through increased smallholder production of food crops; (ii) improve the balance of payments and lessen Malawi's heavy dependence on tobacco through the expansion and diversification of agricultural exports.; and (iii) improve efficiency of resource use by strengthening the role of the private sector in marketing domestic and export crops and improving the viability of ADMARC. For the first objective, Government is focussing research priorities on developing acceptable improved maize varieties. Until these packages are ready, Government is continuing efforts to raise productivity of existing varieties through adequate price incentives and expanded access to credit and fertilizer, particularly for those in food deficit. To meet the second objective, Government will strengthen estate performance through better land policies, the establishment of estate extension services and increased credit availability. For the third objective, Government will continue development of a multi-channel marketing system and review ADMARC's role in price stabilization and other development functions; as part of its Structural Adjustment Program the Government is encouraging greater private sector participation in the marketing of smallholder produce. The private sector responded enthusiastically to the liberalization of smallholder marketing. 4. The Bank supports the Government's agricultural strategy through its existing and planned operations. Other donors, as well, lend strong support. The USAID, EEC, FRG, ODA, AfDB, and IFAD provide significant support to the National Rural Development Program (NRDP) and national level institutions and services. In addition, the UK, USAID, FRG, the Netherlands and Japan provide co-financing for the Government's Structural Adjustment Program. In-the past,  the Bank and other donors focused on the NRDP which has been the main Gover.ument channel for developing smallholder agriculture. Projects under NRDP are arsa oriented and though they provide smallholders with extension, research, marketing, inputs and credit services, these projects reach only a small number of farmers due to shortcomings in the provision of these services. Recently there hat been a change in the emphasis away from area development projects under the NRDP program to nationally oriented projects. These include projects in extension. research, credit, and now marketing and estate development and are designed to meet a larger number of farmers and provide better planning, coordination, monitoring and funding of these services. Also, an in-depth review of the ongoing area oriented projects under NRDP is now being conducted and will provide recommendations for making'these projects more effect4ve. The present project, along with the proposed Agricultural Sector Adjustment Credit, would.build on earlier initiatives launched under SAL III in support of improved efficiency and increased private sector participation in agricultural marketing. It also continues the Bank's efforts under the Industrial and Agricultural Credit Project to promote estate development. 5. Proisect Obiectives. The proposed project is designed to improve the marketing of smallbolder crops by supporting the Government's efforts to develop a multi-channel marketing system through encouraging increased private sector participation in agricultural trade. During the first year of the liberalization program, 3 major constraint were observed: (i) lack of adequate financing; (ii) lack of marketing infrastructure and institutional support; (iii) lack of an appropriate regulatory environment, including adequate inspection of agricultural exports. The project aims to strengthen Government market support and policy analysis and to improve efficiency in agricultural marketing by removing impediments to increased participation by private traders. It would develop mechanisms for financing private marketing and processing of smallholder crops. Another objective of the project is to improve resource utilization and productivity in the estate sub-sector by providing support for sub-projects aimad at intensifying and expanding estate production and, where possible, diversifying the export base. The project would be complemented by Government plans to establish an estate extension service, which is expected to begin operations in 1989. 6. Proiect Description. The Project would be Implemented over a seven- year period and would include: (a) funds to be channeled through the commercial banks, INDEBANK, and the Small Enterprise Development Organization of Malawi (SEDOM) in support of estate development and agroprocessing and marketing subprojects, including a pilot credit for rural traders; (b) support to the Government, including technical assistance, training, and equipment to improve its market information, quality control and regulatory systems; and (c) financing for improvement of rural marketing infrastructure and training for private traders. The support for estate development would follow the US$4.5 million IBRD loan under the Industrial and Agricultural Credit Project which will soon be fully utilized. Unlike that facility, whose proceeds went almost entirely to large estates, this component would be targeted to smaller estates that now have limited access to credit. Funds would be provided for expanded cultivation, irrigation, improved infrastructure, and farm machinery. The credit for agroprocessing and marketing would support processing, storage, and transport. The pilot credit for rural traders would also provide working capital in addition to funds for small-scale storage, transport, and processing subprojects in rural areas. SEDOM, a Government trust with funding and technical assistance from KFW and EEC, will handle the pilot because of its expertise in assisting small enterprises. 7. Rationale for IDA Involvement. IDA's involvement in the project is required to strengthen the process of policy reform begun under the Government's Structural Adjustment Program. The proposed project deepens the market reform  - 3 - effort initiated under SAL III by :.urther developing Government's capacity to support and monitor private sector participation in agricultural marketing. IDA's support is also required to help the existing rural credit system expand lending to the estates and to develop mechanisms for lending to market enterprises. Finally IDA involvement in the project is an important element of the coordinated program of donor assistance in support of the Government's strategy for agriculture. 8. Actions Agreed. At negotiations, agreement was reached that: (a) two Coordinating Committees to oversee the marketing component and the estates and agro-industries component would be established as a condition of credit effectiveness; (b) four existing vacancies of the Planning Departmsent of MOA would be filled by March 31, 1989; (c) the Halawi Bureau of Standards would assume tull responsibility for agricultural export quality control by October 31, 1989; (d) MOA would undertake an analysis of the impact of its market reform measures, including the effects of existing regulations. The results of this analysis would be reviewed with IDA and agreed changes in the regulations would be implemented by March 31, 1990; (e) any subsequent proposals to change market regulations would be reviewed and agreed with IDA prior to their implementation; and (f) at least 502 of the credit proceeds earmarked for estate development would be targeted to small estates (less than US$200,000 in annual turnover). The credit lines would operate as followss the loans to participating banks would be in Kwacha and would have a duration similar to the sub-loans being financed. Interest rates have been recently deregulated and are now market determined. Sub-loans would carry market interest rates, which are currently 162. The spreads between the sub-loan interest rates and the rates at which the participating Banks would borrow project funds from tae Government would be maintained at 52 for larger estates and agroprocessors and 7Z for smaller estates. SEDOM would borrow from Government at 3.0X, which is consistent with costs of operating the pilot scheme. Annual reviews of on-lending rates to the banks and final borrowers would be conducted to ensure consistency with the overall interest rate structure. Each bank would be required to sign a subsidiary loan agreement with the Government as a condition of disbursement to that bank. 9. Justification and Risk. The Project would contribute to increased production, higher export earnings, and improved rural incomes through efficiency gains in agricultural marketing and increased estate productivity. The potential risks include the ability of Government to implement its market reform program effectively. So far the Government has demonstrated firm resolve in impflementing market reform measures but it is concerned about the impact of the program, particularly on vulnerable groups. The institutional component addresses this concern by improving Government's capacity to monitor market developments, and implement appropriate measures. Another risk for the marketing support element of the project is the ability of participating banks to identify and finance viable subprojects, especially for raral traders. This risk has been covered by including a pilot component to test subprojects aimed at rural traders. -he technical assistance to the Government will help to guide the implementation and design of the pilot. For the estates, a potential uncertainty is future price levels for estate exports. Bank forecasts show prices for Malawi's export crop as holding steady in the medium term. Also the subprojects financed by the credit are expected to make the estates more productive and better able to withstand price declines. 10. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber Conable President Attachments October 31, 1988  -4- Schedule A maim AGRICULTURAL MRUXSTING AND ESTATE DEVELOMtENT PROJECT Fstimated Cost and Financina Plan Estimated Cost A/ Local Foreign Total ------------(US$ 000)----------- Technical Assistance 668.0 668.0 Civil Works 235.7 353.5 589.2 Vehicles and Equipment - 174.4 174.4 Office Supplies 6.2 24.6 30.8 Oversees Training 116.0 116.0 Local Training 185.6 0 185.6 Estate Survey 120.0 120.0 240.0 Studies 35.9 554.1 590.0 Estate Credit Line 7,360.0 11,040.0 18,400.0 Agroindustries Credit line 1,617.0 3,003.0 4,620.0 Pilot Credit for Rural Traders 1,400.0 600.0 2,000.0 Recurreft costs 242.4 174.0 416.4 Total Baseline 11,202.8 16,827.6 28,030.4 Physical Contingencies 35.4 53.0 88.4 Price Conti, jencies 80.9 109.7 190.6 Total Project Costs 11,319.1 16,990.3 28,309.4 Financina Plan Local Foreign Total S e_S-__---VS $ million--------------- IDA 1.3 17.0 18.3 64 Participating Banks 3.2 - 3.2 12 Sub-Borrower 6.3 - 6.3 22 Government 0.5 - 0.5 2 Total 11.3 17.0 28.3 100 a/ Taxes and duties included in Project cost are negligible.  NW - 5 - AUOICt.ALL M1X ID NO ETATIE OLr I PROJECT Technical aelte - - .09 .69 _ _ (.69) G.M0) Civil work - 0.78 - 0.73 _ C(0.6) - (0.68) Over... ttaining - - .18 .18 _ - (.18) (.13) Loel training . (0.21) (0.21) _ _ (0.00) (0.00) Studies aPP financing) - - 0.60 0.60 * -~ - (.60) (.60) Information, NM - - 0.25 0.26 _ . (.25) (.25) Vehicles, qripment aud office supplies 0.22 - - 0.22 (0.22) _ _ (0.22) credit - - 25.0 26.0 - - ,(15.65) (16.66) Operating cot - - 0.47 0.47 t~~~~~0.20) tO.201 ToU l 0.22 0.78 27.85 25.80 (0.22) (0.66) (17.42) (18.80) Note: Figures in'perenthesis ore thpe rsctive aseunt financed by The value of *0ther to hlgb as moat o bto ltem sIll be procred i ysi lholders through the cradit component. Olebursemente USI l Ill on mDA Propoed Dilsbumet Porcentae Ciedit 15.80 1005 of subloans Vehicles equipent and of fce sulitoes 0.20 1001 of exponditures Technical asltan.. 0.80 1001 of expenditures and Ovrseas Training Operating cost 0.20 42X of expdniturs Information, UK 0.20 1001 of expendtures Civil works O." SOX of expndlture Refinaningl of PPf utillzd 0.70 1001 of epnditure Unallocaed 0.25 1O00 of expenitures Total .- Estimated IDA Disbursemnts by Fiscal Year FYM9 FY90 FY91 FY92 FY98 FY94 FY95 ~~~-1 ml II I on- _ Annual 8.3 2.7 2.6 2.6 2.4 2.$ 2.3 Cumulative 8.3 6.0 6.6 11.8 18.7 18.0 16.8  -6- AGRICULTURAL MARKTING aN ESATE DEVELOMENlT POJEC 7 {T @ 0t ft M AN IA RO (As Of SOPt,5e1' 50. 3153G) Asunt Lone Loan or Flesl Canellations Closing Crdilt Year Borower Purpose MUSC o IIlionv) Undlebur rOa 26 Loan(s) and Credit(s) have bee slosed 862.59 CREDITS Cr. 11630 12 * NRW III 7.80 2.56 09/80/6 Cr. 1800 168 a Education V 34.00 15.29 09/80/60 Cr. 18480 18 a * MDP IV 19.60 6.905 080/19 Cr. 18610 1#S * Health/Nutrition 6.60 1.97 12/31/6 Ct. s0 1904 a "Igh 13.60 4.$9 09/80/60 Cr. 14280 1964 a Highwy 3S.10 2.06 09/80/00 Cr. 14260 1064 * Tech. Assit. I1 1.60 0.06 06/30/99 Cr. 15280 1065 a Urban I 15.00 16.36 06/30/91 Cr. 15490 106o ss Agr. Research 23.60 22.903 10/8/90 Cr. 16260 106 a Ext. Planning 11.00 12.73 09/01/01 Cr. 16440 1906 * SAL III S0.00 0.14 00/3/66 Cr. 17420 1907 a LIlonge Water 20.00 15.92 06/30/03 Cr. 17670 1987 a Educatlon VI 27.00 21.76 12/15/03 Cr. 17680 1687 a Health/Pop. II 11.00 9.29 06/30/06 Cr. 16610 t1" a Agricultural Ce. 5.90 5.94 06/301 Cr. 16790 1909 a Transport S 13.40 10.48 06/304 Cr. 19200 1080 a IndiTrade Pol Adj 70.00 a.29 12/1/0 Total numbr ot credits = 17 815 16 Ln. 2380 1904 a Highways V 16.00 2.72 09/80/90 La 2460 1065 a Wood li Rebr 6.40 2.25 0/81/91 La. 26480 1060 a Ind A Agric Cr. 7.00 6.09 06/30/90 Ln. 26700 1906 a Wood Eneg II 1 0.1 06/S0/90 Total number of loans a 4 46.00 26.17 TAL 123.65 67.30 of which repaid 10 l42. O.S6 TOTAL held by &nk & MA Amount sold .80 of which repald TOTAL UNDISWRSED 245.65  -7- SLATUEMI Of 11C nVISMNTS (as of September $0, 1986) Investment Fiscal Typ of Number Year Obligor Business S tauty Total 326-MAX 1976 David Ulitehead Textiles 10.6 - 10.B 618-MAX 1982 & Son* (Halawi) Limited 362-MA 1977/1981 Dwangwa Sugar Sugar 11.3 11.3 Corporation Ltd 434-MAX 1979 Investment and Developmnt - 0.6 0.6 Development Bank Finance Coqmpy of Malawi 502-MAX 1980/1984 M(alawi Hotels Tourism 2.1 - 2.1 L_mited 543-MAI 1981 Ethanol Company Manufacturing 2.2 0.3 2.5 614-MAX 1982 Limited of Malvi Alcohol Ilrom Molasses 832-MAX 1986 Leasing & Finance Money & Capital 0.9 0.1 1.0 Corp. of Malawi Market 741-MAX 1985 Viphya Plywood 4.1 0.5 4.6 872-hiAd 1987 Viphya Plywood Total Gross Comitments 31.4 1.5 32.9 Less Cancellations, Terminations, Repayment and Sales 13.6 - 11.6 Total Commitments Now Held By IFC 17.8 1.S 19;3 Total Undisbursed 0.7 0.0 0.7 Total Disbursed 17.1 1.5 18.6  -8- Sedule 3 AGJCUTURAL N&RK_LN_G AND TATI DlVISLOT PROJECT Tiet#kle of Key Pro *et Proseim v_ents 1. Tim Taken To Prepares 9 mths 2. Prepared lys Goverment with IDA Assistance 3. Pirst IDA Mission* October 1987 4. Appraisal Misson Departures may 1988 5. Negotiations October 1988 6. Plumed Date of Zffectiveneass January 15, 1989 7. List of Relevant PCRe and PPARs PCR NRDP-I (Cr. 857-MA)  AMD 2103s r ow MALAWI KARONGA AD. X\ 0 0 AGRICULTURAL MARKETING 100 AND ESTATE DEVELOPMENT z.et, JX -<g * A < PROJECT &4~ "I ;1 NY9y b sMarketing -Infrastructure Sites 3 4 8UMHi S b 9 0 Project Sites Agricultural Developt Division Boundaries MZUZU A.0O. Lake Principal Roads MZUZU A. D.S D. -J% xAL-a Rivera %t g f t vaW \