Cameroon - Cocoa Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4699-CM MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$103 MILLION TO THE REPUBLIC OF CAMEROON FOR A COCOA REHABILITATION PROJECT - January 25, 1988 Ib documelt has a reAd dislibeon 80d any be used by apeS the pexionnQem of1 their officiad dud Its contents may no dmoise be discosed w wdBank _ahodm |on  CURRENCY EQUIVALENTS Currency Unit = CFAF Franc (CFAF) US$1 = 314 CFAF (May 1987) US$1 - 267 CFAF (January 1988) WEIGH-TS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CENADEC Centre national de developpement des cooperatives FONADER Fonds national de developpement rural GTZ Gesellschaft fUr Technische Zusammenarbeit IRA Institut de recherches agronomiques MINAGRI Ministbre de 1'agriculture SODECAO Societe de developpement du cacao  FOR OMCIAL USE ONLY REPUBLIC OF CAMEROON COCOA REHABILITATION PROJECT T' N AND PROJECT SUMMARY Borrower: The Republic of Cameroon Beneficiaries: The Cocoa Development Agency, SODECAO; the National Center for the Development of Cooperatives, CENADEC; the Ministry of Agriculture, MINAGRI; and the National Rural Development Fund, FONADER. Amount: US$103 million equivalent. Termst 20 years, including a five-year grace period at the Bank's standard variable interest rate. Financing Plans IBRD US$103.0 million GTZ US$- 3.0 million Government US$150.6 million Beneficiaries USS 28.8 million TOTAL US$285.4 million Economic Rate of Return: 18?. Staff Appraisal Report: Report No. 6293-CM Maps: Nos 19725R and 19726R This document has a restricted distribution and may be used by recipients only *n tSh p.fornance of their offlcial duties. Its contents may not otherwise be discosed without Work 0tk authoration.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF CAMEROON FOR A COCOA REHABILITATION PROJECT 1. The following memorandum and recommendation on a proposed development loan to the Republic of Cameroon for US$103 million equivalent is submitted for approval. The proposed loan would be on standard IBRD terms and would assist the Government of Cameroon in financing a project to help modernize the cocoa industry through reforms in the incentive and institutional systems. 2. Background. Cameroon is relatively well endowed with natural resources evenly distributed across the country. The growth of the economy in the 1960s and 1970s (about 5? per annum) was fostered mainly by the agriculture sector. With the advent of oil production in the late 1970s, the rate of growth accelerated significantly to about 102 per annum from 1978 to 1985. The economy has taken a sharp downturn since 1986 due to the severe drop in oil prices, the decline in oil production, depressed world agricultural commodity prices, and real appreciation of the exchange rate against the U.S. dollar. Although Cameroon has been exemplary in insulating the economy from the adverse impact of windfall profits from oil, internal demand and imports have adjusted upward to oil revenues, and significant structural imbalances have been built into the economy. The main challenge for the Government in the short term will be to adopt the austerity measures to offset the revenue losses from oil. In the longer term, it will have to adjust the economy to lay foundations for a sustained growth in the advent of declining importance of oil; the reserves are projected to be exhausted by the mid-1990s. This will require a medium-term strategy of accelerating the developrint of other sectors, of which agriculture is considered the cornerstonae for promoting economic growth. 3. Agriculture has been the backbone of the economy in the past. Before the expansion of oil production since the late 1970s, agriculture accounted for 322 of GDP, 852 of export receipts (coffee and cocoa alone accounted for 652), and 351 of tax revenue. Although agriculture still employed about 751 of the labor force in 1985, it accounted for only 211 of GDP and 27? of export earnings. After a period of reasonable growth of 4.72 (1960-73), the sector has become more sluggish with growth averaging about 21 in recent years. The unfavorable weather during the period 1982-84 partly accounted for this poor performance, but the slow growth can largely be explained by stagnant or declining cash crop production. The sector is dominated by smallholder farming, producing much of the country's two main cash crops, coffee and cocoa, and most of the food crops. The Government's policy has been to raise smallholders' productivity and to promote the modernization of the private sector. 4. Cocoa, Cameroon's second largest agricultural export commodity after coffee, accounted f,r 10? of value of total exports in 1985. Its production increased steadily until the late 1960s when it reached about  -2- 100,000 tons a year (about 82 of world production). Since then it has stagnated around that level, although there have been a few peaks of 120,000 tons. Cameroon's share of world production is now only 6.52. The Cameroonian stock of cocoa trees is relatively old (average age is about 30 years) because of insufficient replantings and few new plantings between 1970 and 1985. The stagnation in cocoa output is a result of inadequate producer incentives for both production and replanting; ineffectual organization for providing production support and marketing services to farmers; and declining yields (about 250 kg per ha) resulting from black pod disease and old cocoa trees. Given the comparative advantage of Cameroon in producing cocoa, the special quality of its cocoa products which commands a premium in buying markets (France and the Netherlands), and the importance of the commodity to the economy, the Government has decided to step up its efforts to overcome constraints to higher cocoa production. The measures to be taken include provision of adequate producer incentives, increased efficiency in institutional support to the cocoa subsector, and delivery of affordable agronomic packages with high yielding 3rieties. These measures are addressed under the proposed project. 5. Project Objectives. The project's main objective is to overcome the current stagnation in cocoa output by helping modernize the cocoa industry so that it becomes once again an important source of foreign exchange which could be used to offset fast declining oil revenues. This objective can be reached through policy/institutional changes and measures aimed at alleviating production constraints and at strengthening the main cocoa development agency, SODECAO. 6. Proiect Description. Over a five-year period (1989-93), the project will contribute to: (a) improving the producer incentive system; (b) increasing SODECAO efficiency and supporting its ongoing cocoa development program; (c) reorganizing the cocoa marketing system and strengthening the National Center for the Development of Cooperatives, CENADEC; (d) establishing a private, medium-size cocoa plantation program; and (e) strengthening the Ministry of Agriculture's capacity for implementing the cocoa development strategy and monitoring its execution. Reforms related to producer incentive policy, cocoa marketing and cooperative policy, and institutional support to cocoa production are described in the Government's Statement of Policy for the cocoa subsector, agreed upon by the Government and presented in Annex 4-1 of the Staff Appraisal Report. The Government has agreed to a pricing formula which links domestic producer prices to world market prices and a system to pass on surplus of export revenues to farmers. In addition, planting bonus will be given to farmers to encourage new plantings, and subsidy on black pod fungicides will be gradually removed. The Government will reform its marketing and cooperative policy by reducing its parastatal marketing cost and increasing the efficiency of cooperatives in marketing cocoa for their members. The role of the various institutions providing production support, and implementing and monitoring the cocoa development strategy is also clarified. In addition, SODECAO's efficiency will be enhanced through the strengthening of its Administrative and Financial Department and a reduction in personnel and operating costs by respectively two and three percent per annum in real terms.  7. The total cost of the project over the five-year period has been estimated at US$285.4 million, with a foreign exchange component of US$106.3 million (372). A breakdown of costs and the financing plan are presented in Schedule A. Procurement methods and disbursements are given in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Cameroon are given respectively in Schedule C and Schedule D. Two maps showing the SODECAO Region and the project * location are also attached. The Staff Appraisal Report No. 6293-CM dated January 25, 1988, is being distributed separately. 8. Rationale for TDA Involvement. The major rationale for Bank support is that the project would revitalize Cameroon's most important agricultural subsector, vital to stimulating ecor.omic growth, exports and employment, offsetting to some extent the decline in oil production. Because the cocoa development strategy involves a combination of policy reform, investment, and institutional development in the cocoa subsector, the Bank is in a position to contribute. Without the project, it is likely that cocoa replantings and new plantings will come tc a halt. This will further reduce Cameroon's share in the world market, despite its considerable comparative advantage in cocoa production. 9. Actions Agreed Upon. Besides the Statement of Policy for the cocoa subsector, the Government has agreed on the following actions: (a) the signature of an agreement with GTZ, SODECAO and CENADEC and the employment of SODECAO's general director, deputy general director and financial controller as conditions of effectiveness; (b) the opening of bank accounts held by SODECAO and CENADEC in which the Government will deposit an advance corresponding to three months of estimated expenditures as a condition of effectiveness; 'c) the preparation of an agreement between SODECAO and the Agricultural Research Institute, IRA, for adaptive research before 30-June 1988, on terms and conditions satisfactory to the Bank; (d) the adequate supply to SODECAO of planting materials from the government seed farms; and (e) the procurement of required crop protection chemicais by SODECAO. i0. Conditions for Loan Disbursement are that: (a) the agreement will be signed between the Government, credit agency (to replace FONADER), and SODECAO specifying the role of each in implementing the medium-size plantation program; (b) by October 15 of each year SODECAO will have achieved agreed personnel and operating cost reduction targets; and  -4- (c) the cocoa price and prices for fungicide treatment corresponding to the following 12-month period will have been determined in a manner satisfactory to the Bank. and formally announced. 11. Benefits. A more dynamic cocoa industry will translate into increased production, estimated at 38,000 tons per year incrementally by the year 2000, an improved balance of payments, and curtailed migration due to a 502 to 75Z increase in the manday incomes of participating families. The pilot plantation program will attract inrestors and young farmers. The new pricing system will improve farmer incentives, and SODECAO's increased efficiency will result in budgetary savings and improved planning and management. The impact on the environment will be positive because plantings of cocoa on the contour will reduce scil erosion. Insecticides will be quantitatively controlled, and only low-toxicity pesticides will be used. The reduction in fungicide subsidies will sharpen farmer awareness of the need to reduce waste of such chemicals. 12. Risks. The project will take into account the lessons learned during the First Cocoa Project. Risks associated with the technical packages extended under the First Project have been reduced through improvement and field testing; the strengthening of SODECAO's extension services will enhance their efficiency and performance; the replanting program is prudent in that it barely exceeds SODECAO's current program and is financially viable. The risk of the country losing its comparative advantage in cocoa production due to a drop in international prices is minimal; future prices will have to be consistently 20? below Bank forecast for new investment in cocoa to become uneconomic. Cameroon's cocoa growing conditions ire excellent; the fundamentals of cocoa production permit Cameroon to compete with any other producer in the world. The risk of SODECAO not improving its efficiency has been minimized by including personnel policy reforms linking remuneration to performance. The risk associated with the posLibility of weak marketing cooperatives has been reduced by using an organization, CENADEC, which has proved successful in reorganizing marketing cooperatives in other parts of Cameroon. 13. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the International Bank for Reconstruction and Development and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. February 16, 1988  Schedule A REPUBLIC OF CAMEROON COCOA REHABILITATION PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Costs 2 of Local Foreign Total Base Cost -----(Us$ million)----- SODECAO Operaticns Management & Administration 13.5 2.8 16.3 7 Field Development (Office) 3.5 1.3 4.8 2 Extension 41.6 11.4 53.0 23 Training 2.6 3.3 5.9 3 Crop Protection 22.6 45.7 68.3 30 Adaptive/Applied Research 3.6 0.9 4.5 2 Rural Infrastructure 29.3 19.1 48.4 21 Monitoring and Evaluation 1.9 0.2 2.1 1 Subtotal 118.6 84.7 203.3 89 Cooperative Development 3.4 4.8 8.2 4 MINAGRI 0.4 0.7 1.1 0 Medium-Size Plantation Program 12.5 4.4 16.9 7 Base Cost 134.9 94.6 229.5 100 Physical Contingencies 3.2 5.6 8.8 Price Contingencies 41.0 6.1 47 1 Total Project Costs 179.1 106.3 285.4 Financing Plan Local Foreign Total -------(US$ million)------- IBRD 0.0 103.0 103.0 GTZ 0.0 3.0 3.0 Government 150.3 0.3 150.6 Beneficiaries 28.8 0.0 28.8 Total 179.1 106.3 285.4  _ 7 _ Schedule B REPUBLIC OF Cn_EROON COCOA REHABILITATION PROJECT PRO