Uganda - Sugar Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-466G-UG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR18.9 MILLION TO UGANDA FOR A SUGAR REHABILITATION PROJECT March 7, 1988 This document has a resticted distribution and may be used by reipiets only in the prformance of thewr official dufies. Its contents may not otherwise be diclosed without Wodd Bank authorfation  CURRENCY EQUIVALENTS Exchange Rate: US$1.00 - Uganda Shillings (USh) 60.00 USh 1.00 T US$0.167 WEIGHTS AND MEASURES Metric System CALENDAR KSW Fiscal Year: May 1 - April 30 IDA Fiscal Year: JUly 1 - June 30 Project Year: May 1 - April 30  FOR OmCaL USE ONLY UGANDA SUGAR REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of Uganda Beneficiaries: Kakira Sugar Works (1985) Ltd., (KSW) and Ministry of Industry and Technology (MOI) Amount: SDR 18.9 million ((US$24.9 million equivalent) Terms: Standard, with 40 years maturity On Lending Terms: US$24.6 million to KSW at an interest rate of 8.71%, repayable over 15 years including a 5 year moratorium on interest and capital payments with KSW to bear the foreign exchange risk. The balance of .JS$0.3 million through budgetary transfer to MOI. Financint Plan: KSW US$ 11.1 million AfDB US$ 8.7 million AfDF US$ 9.4 million IDA (ongoing) USS 7.4 million IDA (new) LISS 24.9 million TOTAL USS 61.5 million Economic Rate of Return: 281 Staff Appraisal Report: Report No. 6987-UG Map: IBRD No. .. '.OR r This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its conterts may not otherwise be disclosed without World Ban, 4.-orization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECJTIVE DIRECTORS ON A PROPOSED CREDIT TO UGANDA FOR A SUGAR REHABILITATION PROJECT 1. The following report on a proposed development credit to Uganda for SDR 18.9 million (US$24.9 million equivalent) is submitted for approval. The proposed credit would be on IDA terms with 40 years maturity and help finance a Sugar Rehabilitation Project. The project would be cofinanced with the African Development Bank and the African Development Fund, who would provide loans of BUA 6.86 million (US$8.7 million equivalent) and FUA 7.97 million (US$9.4 million equivalent), respectively. 2. Background. Sugar processing developed as the largest industry in Uganda before 1972 and performed at a high level of efficiency. Political instability caused large scale physical deterioration of plant and equipment and loss of qualified personnel in the industry. Subsequently, domestic production declined sharply and sugar imports rose. The industry has a nominal capacity of 175,000 tons of sugar a year, including the Kakira estate, but can in its current state not produce any sugar. The main reasons for underutilization of the domestic capacity have been: (i) inadequate maintenance of factories and estates due to political instability and lack of operational funds; (ii) internal management problems; (iii) lack of comprehensive and adequately financed rehabilitation programs; and (iv) unresolved ownership of the Kakira complex until March 1985, when the Government entered into a Joint Venture Agreement with East Africa Holdings, Ltd. (former Uganda-Asian owners) establishing Kakira Sugar Works Ltd. (KSW). In 1983, the Government requested IDA assistance for rehabilitation of the Kakira complex. A project was prepared in 1984, pre-appraised and partially appraised in April 1985. Appraisal was completed in July 1987 following the finalization of KSW's financial structure and agreement with the Government on an appropriate pricing policy. During project preparation IDA has been closely associated with Government efforts to resolve problems facing the Kakira complex through an intensive dialogue supported by IDA-financed studies and pre-project activities. 3. Proiect Obiectives: The proposed project would, over a six-year period, rehabilitate the Kakira sugar estate and re-establish its historical production levels, thereby saving the country significant amounts of foreign exchange. It would also strengthen the institutional capability of the Government for monitoring performance of the sugar industry in Uganda, involve the adoption by the Government of an import parity-based sugar pricing policy and provide a mechanism for liberalizing sugar marketing and pricing.  -2- 4. .> t i1rtion; The proposed project would involve (i) reclaimirng and tp'planting a 7,900 ha estate and development of 4,100 ha of outgrower cane production (US$12.0 million); (ii) rehabilitation of serviceable factory equipment and replacement of remaining equipment (US$20.0 millior); (iii) rehabilitatiort and provision of estate infrastructure (US$7.3 million); (iv) strengthening manpower, training and management systems in KSW (US$9.9 million); and (v) financing part of KSW's incremental working capital requirements (US$11.0 million). The project would strengthen the ability of the Ministry of Industry and Technology to monitor the performance of the sugar industry and render advice to the Government on sugar policy matters (US$0.3 million). 5. Rationale for IDA Involvement. The project forms an integral part of the Government's program for rehabilitating traditional agricultural and agro-industrz.al enterprises. Restoration of the domestic sugar industry has been given high priority in the Government's Economic Recovery Program. IDA's dialogue with the Government has facilitated resolution between the Government and its joint venture partner of issues relating to KSW's financial structure. IDA has been instrumental in mobilizing cofinancing for the project, including reactivating an earlier grant from the Government of Italy. The Droposed project would complement and help bring to fruition certain investments under the ongoing IDA-financed Agricultural Rehabilitation and Industrial Rehabilitation projects. 6. Key Actions Agreed On. The policy agenda under the Government's Economic Recovery Program, as agreed with the Bank and IMF, provides for the gradual liberalization of sugar marketing and pricing. The Government has agreed to import parity-based pricing during a transitional period of administered pricing. During negotiations, agreement was obtained on a pricing formula involving the use of h.storical moving averages of international sugar prices which would be subject to annual reviews between the Government and IDA. The Government has announced a sugar price for 1988 satisfactory to IDA. Arrangements for the phasing out of Government involvement in sugar distribution were confirmed. A Sugar Industry Unit (SIU) is being established in the Ministry of Industry to advise the Government on policy matters concerning the sugar industry and to monitor the industry's performance. The SIU would submit producer price proposals to IDA each year for review. IDA would also have the opportunity to comment on any future proposals for expanding sugar processing capacity. 7. KSW would need to initially employ a sizeable number of expatriates in managerial and technical positions to ensure effective implementation of the rehabilitation program. The company has selected an international firm to recruit qualified persons and second them to KSW for limited periods. To allow flexibility in the number and duration of assignments, the firm would enter into contracts with individuals selected by KSW's Board or management from a shortlist submitted by the firm. All contracts would be approved by RSW. To facilitate eventual replacement of expatriates by local staff, a comprehensive training program for Ugandan nationals is being instituted.  8. Justification. Uganda currently imports US$15-20 million worth of sugar annually, which ranks second only to petroleum imports. Import substitution through restoration of domestic production capacity is therefore a high priority and eminently justified given the considerable comparative advantage Uganda enjoys as a result of its landlocked situation. Conditions for sugar production at Kakira are highly favorable. Cane growing benefits from excellent soils, good rainfall distribution (requiring only limited sunplementary irrigation) and relatively low levels of inputs of fertilkzers and pesticides. The project brings back to the Kakira complex the original owners who have a demonstrated ability to manage sugar operations at Kakira and elsewhere. 9. Economic benefits a-e expected from significant savings in foreign exchange through import substitution and efficient utilization of factory capacity. The internal economic rate of return has been estimated at 28 percent. Other benefits include the crection of employment for about 4,300 persons, the improvement of incomes for 1,400 outgrowers, and substantial linkage effects associated with transport, marketing, distribution and auxillary industries. Last but not least, the rehabilitation of KSW would improve the climate for private investment in Uganda and thereby boost the Government's efforts to rebuild the economy. 10. Risks. The sustainability of KSW operations would be threatened if the company is not provided with foreign exchange for importation of spares and inputs. The Government, as a shareholder in KSW, has agreed to provide the necessary foreign exchange and the Association will obtain the Gover-ment's consent to include the sugar industry among priority sectors covered by the Open Licensing System to be established under the Economic Reform Program. Sustainability of operations could also be threatened if disagreements between the Government and its shareholding partner are allowed to impede effective management, a risk which the Joint Venture Agreement is designed to minimize. 11. "elays in replacing expatriate staff by Ugandan nationals would raise the foreign expendicure component of operating costs. However, progress by KSW in implementing a comprehensive program for training of Ugandans to assume increased responsibility would be carefully monitored through Annual Work Programs. 12. Recommendations. I am satisfied that the proposed credit would comply with the Articles of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. March 7, 1988  -4- SCHEDULE A UGANDA SUGAR EEHADILITATION PROJECT Summary of Pvoiect Cost Estimates and Financina Plan a/ ------------USS million--------- ComDonent Cost Local Foreign Total Rehabilitation KSW: Agricultural Development 0.3 10.5 10.8 Factory Rehabilitation 1.3 16.9 18.2 Infrastructure Development 1.0 5.2 6.3 Staffing and Training 1.2 7.6 8.8 Sub-total 3.9 40.1 44.0 Support to Ministry of Industry and Technology 0.3 0.3 Total Baseline Cost (excl. Inc. Working Capital) 3.9 40.4 44.3 Physical Contigencies 0.2 2.5 2.7 Price Contigencies 2.1 1.3 3.5 Total Cost (escl. Inc. Working Capital) 6.2 44.3 50.5 KSW Inc. Working Capital e 5 2.5 11.0 TOTAL PROJECT COST 14.7 46.8 61.5 a/ Numbers may not add due to rounding. Financging lan IDA Cr. 1248-UG 3.3 3.3 Cr. 1328-UG 3.8 3.8 Cr. 1434-UG _ .3 .3 Proposed Project 1.9 23.0 24.9 Sub-total 1.9 30.4 32.3 AfDF 1.6 7.8 9.4 AfDB .1 8.6 8.7 KSW 11.1 _ 11.1 TOTAL 14.7 46.8 61.5 BD ~~=a== ummn  -5- SCHEDULE B Page 1 OF 2 UGANDA SUGAR REHABILITATION PROJECT Proposed Procurement Methods 11 --Proposed IDA Credit-- Other2/ All Proiect Element ICB Other Total Sources Sources (US$ million) Civil Works and Utilities 6.9 6.9 Agric. Machinery, Plant and Equipment 10.6 10.6 Factory Rehabilitation 13.5 1.5 15.0 5.0 20.0 and Equipment (13.5) (1.5) (15.0) (15.0) Vehicles and Misc. 0.1 0.1 1.2 1.3 Equipment (0.1) (0.1) (0.1) Tech. Assistance 1.0 1.0 1.0 2.0 (1.0) (1.0) (1.0) Staffing Services 9.3 9.3 9.3 (7.4) (7.4) (7.4) Training 0.4 0.4 0.4 (0.4) (0.4) (0.4) Incremental Working Capital (imported 1.0 1.0 10.0 11.0 inputs) (1.0) (1.0) (1.0) -----------------------------------------------------------------__--- Total 13.5 13.1 26.8 34.7 61.5 (13.5) (11.4) (24.9) (24.9) 1/ Figures in parentheses are estimated amounts to be financed under the proposed IDA credit. 2/ Figures show total costs of project elements to be entirely financed by ongoing IDA credits, AfDBlAfDF and KSW.  -6- SCGEDULE B Page 2 of 2 UGANDA SUGAR REHABILITATION PROJECT Allocation of IDA Credit by Disbursement Categories and Estimated Disbursements Amount Category Allocated Expenditures Financed (US$ mtllion) 1. Factory Rehabilitation 13.50 2. Vehicles and misc. equipment (HO!) .05 100? of foreign and 652 of local expenditures for imported items procured locally 3. Factory inputs .87 1002 of foreign expen- ditures 4. Consultant services (KUW) .70 100Z of foreign expen- ditures 5. Managerial and technical staff remuneration (1SW) 6.65 100? of foreign expen- ditures 6. Overseas training (RSW) .35 100? 7. Consultant services (MOI) .28 1002 8. Unallocatd, 2.50 Total 24.90 Estimated Disbursements (AfDBIAfDF within brackets), USS million) IDA FY 89 90 91 92 93 94 Annual 8.4 9.9 3.4 1.5 1.3 .4 (6.0) (5.9) (3.5) (1.7) (.9) (.1) Cummulative 8.4 18.3 21.7 23.2 24.5 24.9 (6.0) (11.9) (15.4) (17.1) (18.0) (18.1)  -7- SChEDULE C UGANDA SUGAR REHABILITATION PROJECT Timetable of ?.ey Proiect Processing Events (a) Time taken to prepare: 3.5 years (b) Prepared bys Government through International Consultants financed under Cr. 1328-UG (c) First IDA mission: February 1984 (d) Appraisal mission dep&rture: April 1985 (preappraisallappraisal) April 1987 (completion appraisal) (e) Negotiations: December 1987 (f) Planned date of effectiveness: July 15. 1988  -8- SCHEDULE D Page 1 of 2 UGANDA SUGAM REHABILITATION PROJECT THE STATUS :;F BANK GROUP OPERATIONS IN UGANDA A. Statement of Bank Loans and IDA Credits As of Septemter 30, 1987 Amount in US$ million (Less Cancellations) Loan or Credit No. Year 3orrower Purpose Bank IDA Undisbured One >1) loan and thirteen (13) credits fully disbursed 8.40 261.451/ 1248-UG 1982- Uganda Industrial Rehabilitation 35.00 25.16 1328-UG 1983 Uganda Agricultural Rehabilitation 70.00 41.46 1329-UG 1983 Uganda Third Education 32.00 1.34 1376-UG 1983 Uganda Posts and Telecommunications Rehabilitation 22.00 1.3 1434-UG 1984 Uganda Second Technical Assistance 15.00 13.70 1445-UG 1984 Uganda Third Highway 58.00 66.91 1510-UG 1985 Uganda Waier Supply and Sanitation Program 28.00 18.98 1539-UG 1985 Uganda Agricultural Development 10.00 11.96 1560-UG 1985 Uganda Second Power 28.80 35.27 1561-UG 1985 Uganda Petroleum Exploration Promotion 5.10 6.21 1803-UG 1987 Uganda Fourth Highway 18.00 18.14 1844-UG 19R7 Uganda Economic Recovery Pro!Sram 65.00 65.00 A.34-UG 1987 Uganda Economic Recovery Pro&ram 24.00 24.00 Total 8.40 672.35 329.43 of which has been repaid 0.08 3.85 Total now outstanding 8.32 668.50 IDA amount sold: 1'.50 of which has been repaid 17.50 TOTAL NOW HELD BY BANK AND IDA 8.32 468.501/ TOTAL UNDISBURSED 0.00 329.43 1/ Includes exchange rate adjustment  -9- SCHEDULE D Page 2 of 2 SUGAR REHABILITATION PROJECT B. STATEMENT OF IFC INVESTMENTS As of September 30, 1987 Fiscal Year ObliUor Type of Business Loan Equity Total 1983 Toro and Mityana Tea Food and Food Co., Ltd., (TAMTECO) Processing 1.76 - 1.76 1983 Sugar Corp. of Uganda Food and Food Processing 8.00 - 8.00 1984 Uganda Tea Corp. Ltd. Food and Food Processing 2.75 - 2.75 1984 Development Finance Development Company of Uganda Finance - 0.38 0.38 Total gross commitments now held by IFC 12.51 0.38 i..89 Total undisbursed (including participants portion) 6.74 0.27 7.01 Source: IFC Disbursement Section  320 - S U D A N 4 UGANDA KnoboosK9 Mator Roods KIor Railroods V ARt/A rOTm/| Rivers KOTIDO * Distfict Copitals _.- District Boundories ( 0 GULU Internationol Boundaries t / MOROTO \o m IN~ ~ ~ ~ ~ ~~ o 25 so 75 wo0 KILOMETERS -' APCc . MORO ro - 20 40 60 MILES A A 2 AIAC dd re. f UIA i~KPHO~ j LUWERO\~~~~~~~~~~~~~~~~~~~~~~~~~% KAt S OROIRO .0 b Z.' MASIDNDB t m. .o isol \ t / /2 j M4tNDr r TUROJSOROT S . 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