Document of v The World Bank FOR OFFCLAL USE ONLY Repwt No. P-4988-MAU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS FOR A PROPOSED DEVELOPMENT CREDIT IN AN AMOUNT EQUIVALENT TO US$25 MILLION TO THE ISLAMIC REPUBLIC OF MAURITANIA FOR AN AGRICULTURAL SECTOR ADJUSTMENT/INVESTMENT PROJECT DECEMBER 27, 1989 This document has a resticted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. 4.. CURRENCY EQUIVALENTS Currency Unit = Ouguiya (UH) US$1.00 - UM 75.4 UM 1,000 - US$13.7 VEIGHTS AND MEASURES The metric system is used throughout this report. ABBREVIATIONS AND ACRONYMS CCCE Caisse Centrale de Cooperation Economique (French Aid Loan+Agency) CNRADA Centre National de Recherches Agricoles (National Agricultural Research Center) CP Cellule de Planification (Planning Unit of MDR) CSA Commissariat pour la securite alimentaire (Agency for Food Security) DANIDA Danish International Development Agency FADES Ponds arabe pour le developpement Economique et social (Arab Fund for Economic and Social Development) IFAD International Fund for Agricultural Development KfW Kreditanstalt for Wiederaufbau (Federal Republic of Germany Aid Agency) MDR Ministere du developpement rural (Ministry of Rural Development) MTSA Medium-Term Agricultural Sector Adjustment PCR Programme de consolidation et de relance (1989-91 Structural Adjustment Program) PREF Programme de redressement economique et financier (1985-88 Structural Adjustment Program) SAL Structural Adjustment Credit SONADER Socidt6 nationale de developpement rural (National Agency for Rural Development of MDR) SONIMEX Societe nationale dlimport-export (Import-Export Agency) UBD Union des banques de dEveloppement (Government Development Bank) UNDP United Nations Development Program UNSO United Nations Office for the Sudan-Sahel Region WFP United Nations World Food Program FISCAL YEAR January 1 - December 31 FOR OFFICIAL UE ONLY - ii - ISLAMIC REPUBLIC OF MAURITANIA AGRICULTURAL SECTOR ADJUSTMENT/INVESTMENT PROJECT TABLE OF CONTENTS PaRe PROJECT SUt9MARY ..................***................ ....**. iv PART I. THE ECONONY .........*..............* ............... 1 PART II. THE AGRICULTURAL SECTOR ............ ...... .. ...* ..... 6 PART III. *THE AGRICULTURAL SECTOR ADJUSTMN PROGRAM .. ....... 9 A. Policy Agendas Origin and Objectives .................... 9 B. Improving Incentives to Farnmers and the Private Sector .. 10 C. Improving the Effectiveness of the Public Sector ........ 16 PART IV. THE PROPOSBr. PROJECT .. ... ... ... ........ ...... . .......... 20 A. Origin, Rationale and Objectives ........................ 20 B. Project Description ..................................... 21 C. Other Project Features ........................... , 25 PART V. IMPACT AND RISKS .......................... 31 A. Impact and Risks of the Adjustment Component ............ 31 B. Impact and Risks of the Investment Component ............ 33 PART VI. BANK GROUP OPERATIONS ... * * ** * ...................... *# ..... 35 A. Support for Adjustment ............. .. 35 B. Sectoral Strategies ....................... 36 C. Relations with the IM .................................. 38 PART VII. SUMMARY OF PROJECT CONDITIONS ....................... 38 PART VIII. RECOMMENDATION 0 ............. ....... .... 40 IThis document has a rstnced distribution and may be useP to, -p%l,ts only in the perfoinnanc of Ohei offua dutesL s contnts may not othewis be d4 scImd 'hbout WOW Bank autorkiun SUPPORTING TABLES AND ANNEXES 1. Economic Data Sheets 2. Status of Bank Operations 3. Supplementary Project Data Sheet 4. Government Statement of Sector Development Policy 5. Policy Actions Matrix of Medium-term Sector Adjustment Program 6. Supplementary Information on Institutional Strengthening and on the Investment Component 7. Cost Estimates of the Investment Component 8. Schedule of Disbursements MAPS IBRD 21196 and 21197 ANNEXES (In Implementation Volume) A. The Adiustment Component 1. Agricultural Development 2. Livestock Development 3. Forestry and Desertification Control 4. Prices and Marketing 5. Agricultural Credit 6. Land Tenure 7. Private Sector Promotion B. The Investment Component 8. FAOICP Preparation Report (Updated) 9. Detailed Cost Estimates and Implementation Schedule - iv - ISLAMIC REPUBLIC OF MAURITANIA AGRICULTURAL SECTOR .aAUSTHEZNTINVESTMENT PROJECT PROJECT SUMMARY Borrower: Islamic Republic of Mauritania Beneficiar:t Ministry of Rural Development (MDR), Soci6t4 Nationale de DWveloppement Rural (SONADER), and Union des Banques de D4veloppement (UBD) Credit Amounts SDR 19.4 million (US$25 million equivalent) Termes Standard IDA terms, with a maturity of 40 years Co-lenders: The French CCCE (with a loan of US$8.0 million equivalent). The Government of the Federal Republic of Germany (with a grant of US$2.0 million equivalent). The World Food Program (with a grant of US$1.0 million equivalent). Project The proposed project is a hybrid consisting of a sector Description: adjustment component and an investment component. The adjustment component would support the Government's medium-term sector adjustment and specifically: (a) deepen and extend the liberalization of cereals marketing and price policy initiated under the Structural Adjustment Credit completed in November 1988; (b) support new reforms designed to improve land tenure legislation and administration, and build institutional and financial capacity for agricultural credit; and (c) support improved effectiveness of the public sector, by restructuring SONADER, improving the public investment program in agriculture, and increasing MDR's capacity for planning anc policy analysis. This component would create an economic framework particularly favorable to viable irrigation, consisting of (a) privately funded and managed perimeters; and (b) publicly funded perimeters to be managed by smallholders. In addition to monitoring the adjustment reforms, the project would provide for institutional strengthening by financing studies, staff-training and the equipment necessary to support the implementation of these reforms. The investment component would help the Government test new approaches to smallholder irrigation in the Senegal river valley, through an irrigation irprovement operation in the Gorgol area. This would include (a) agricultural development over the existing 2,000 ha of irrigated - v - land in the Gorgol perimeter, and 1,500 ha of flood- recession cropping land around the Gorgol reservoir; and (b) human and physical environment protection benefitting some 15,000 farming and fishing family members. It is the complementarity between the adjustment credit, designed to support policy and institutional reforms to promote development of private and public (smallholder) irrigation, and the investment component, designed to test new approaches to smallholder irrigation, that justa'ies the hybrid nature of this operation. Benefits The adjustment component will create a more and Risks: favorable environment for sectoral growth, in a context of very severe resource constraints. It will also ensure that the benefits of growth are spread evenly, among a broad group of economic agents, and that no single group is left to bear the potential costs of such growth. Income distribution will be improved by enhancing income opportunities in the rural sector, while at the same time adequately protecting low income urban and landless rural groups by a better targeting of food aid, enhancement of the efficiency of the marketing chain for cereals, and limiting food price increases by linking the price of rice to the world price. For the investment component, the rate of return is estimated at 292. It would have the additional benefits of generating new approaches to smallholder irrigation and promoting economic growth in a remote rural area. The risks of the adjustment component reside in the number and complexity of the measures to be taken, possible contrary interests and political pressures, and the potential inability of the private sector to fulfill adequately the new role it is being assigned by the reforms. These risks are limited by the Government's strong commitment to the reforms, as witnessed by its decisiveness in implementing the initial crucial measures (such as the sale of rice mills or the issuance of revised land tenure legislation); and the realistic goals set for the program. The investment component entails risks of low adoption rates by the farmers or deficient managing capacity by the implementing agency. However, the sensitivity analysis carried out on the basis of these adverse risks shows that the resulting EnR would remains satisfactory. - vi _ Summary ProJect Cost Estimates Local Foreign Total -----_US million ----- Quick Disbursing Component - 24.0 24.0 Institutional Strengthening Component 1.7 4.8 6.5 Irrigation Investment Component 3.2 3.3 6.5 Total Project Cost 4.9 32.1 37.0 Financins Plan Local Foreign Total -----US$ million ----- Government and Beneficiaries 1.0 - 1.0 IDA 2.1 22.9 25.0 CCCE 0.8 7.2 8.0 Federal Republic of Germany - 2.0 2.0 World Food Program 1.0 - 1.0 Total 4.9 32.1 37.0 Estimated Disbursements: --- Disbursements --- ---------------IDA Fiscal Years------------- 1990 1991 1992 1993 1994 1995 1996 (USS million) Annual - Adjustment Credit 9.0 9.0 - - - - _ - Institutional and Investment Credit 0.3 1.3 0.9 1.3 1.1 1.1 1.0 Cumulative 9.3 19.6 20.5 21.8 22.9 24.0 25.0 Appraisal This is a combined President's and Staff Appraisal Report: Report. Maps$ No. IBRD 21196 aud 21197 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE ISLAMIC REPUBLIC OF MAURITANIA FOR AN AGRICULTURAL SECTOR ADJUSTMENT/ NVESTMENT PROJECT 1. I submit the following report and recommendation on a proposed credit to the Islamic Republic of Mauritania for SDR 19.4 million (US$25 million equivalent) in support of its program for agricultural sector policy adjustment. The proposed credit would help finance a hybrid operation consisting of an agricultural sector-wide adjustment component and an investment component in the irrigation subsector. It would be on standard IDA terms with 40 years maturity. The medium-term agricultural sector adjustment program is described in a Statement of Sector Development Policy signed by the Government in April 1989 prior to project negotiations (Annex 4). The Project would be cofinanced by CCCE through a loan of F? 50 million (about US$8.0 million equivalent), the Government of the Federal Republic of Germany through a grant of DM 3.5 million (about US$2.0 million equivalent), and the World Food Program through a grant of about US$1.0 million. 11 PART I. TUE ECONOMY 2. The following assessment of the Mauritanian economy is based on the Country Brief dated December 1989, on the findings of an economic mission which visited Mauritania in June/July 1989 and on the Policy Framework Paper considered by the Committep of the Whole on May 12, 1989. Historical data and an analysis of economic development and policies up to 1984 can be found in Mauritania: Country Economic Memorandum (No. 5537-MAUl) distributed to the Executive Directors in July 1985. A sumary of social and economic data is in Annex 1. Special Country Features 3. Mauritania's economy has developed on a very narrow resource base. The country is vast (1.1 million km2) but largely composed of desert (only 0.22 ef total land is suitable for cropping under current conditions). Thus, the pop-.lation, although small (1.8 million), Id iaadequately endowed in arable land. Animal husbandry therefore far exceeds crop farming in its contribution to GDP (23.42 versus 5.4Z). Iron ore mining has traditionally represented a large part of national income, but its role has been curtailed since the 19709 due to the downturn in demand for steel in the industrial countries. This has forced a cut in iron exports by nearly 302 in 1975 and 20S in 1982, down to about 10 million tons annually. Iron ore has nevertheless remained Mauritania's second largest export industry (332 of total export earnings in 1988). In the 19809, fishing industries, on the basis of abundant fishing resources, have become a substantial source of income (8.3Z of GDP in 1987) and the foremost export-earning sector (66T of total exports in 1988). 11 This amount is part of a grant estimated at US$1.5 million that would also finance environmental protection works in the areas surrounding the project area. -2- 4. The growth of agricultural production has been severely impaired over the last 20 years by recurrent and worsening droughts. As a result, the 100 mm isohyet has moved more than 100 km south, and the Senegal river has reached record low levels. Flood recession cropping has accordingly been greatly reduced. This pattern of erratic and declining rainfall has had a severe impact on crops and livestock, to which the international community has reacted by supplying. and then institutionalizing, food aid. 5. This severe downturn in agricultural activities has accelerated migration to urban centers from all parts of the country, except the Senegal valley region. Of a total population of 1.8 million, about a half live in urban centers. About 600,000 people live in Nouakchott, the capital, whose population has doubled since 1980. Half of Noual-chott's inhabitants are housed in provisional shelters, and water supply, sanitation, waste disposal and health care are critical problems. The remaining population is largely concentrated in Nouadhibou and Zouerate (totaliing 120,000 people), the two principal economic centers for fisheries and iron ore mining, respectively. and along the Senegal river valley (500,000 people), the latter mainly for sedentary irrigation and flood recession farming. The rest of the population is mostly nomadic, living from rangeland animal husbandry. 6. T The combined effect of climatic patterns, limited and inadequately managed natural resources, and sudden urban migration has produiced a critical threat to the environment. Mauritania faces: (a) defv,restations extensive tree-cutting for fuel and construction has resulted in the gradual, but continuous, degradation of forest resources and soil erosion; (b) overgrazing, resulting from lack of alternative grazing sites for animals; (c) cultivation of marginal lands as a result of field erosion; and (d) deterioration of the urban environment. Performance of the Economy before 1985 7. Mauritania has seen its economy shift from rapid and sustained growth of about 82 during the 19609 to stagnation since the mid-1970s. In addition to the conflict over the Western Sahara, in which Mauritania is no longer involved, three main factors were responsible. The first was the frequent occurrence of droughts (para 4). The second factor was the downturn in demand for steel in industrial markets (para 3). The third factor was the Government's inappropriate macroeconomic as well as sectoral policies. The latter translated especially into large unproductive public investment programs (investment exceeded 30Z of GDP throughout the late 1970s and early 19808) and poor management of public enterprises, leading to heavy financial losses, overstaffing and operational inefficiencies. 8. These external shocks and poor economic policies have led to repeated financial crises interspersed with periods of slow growth since 1975. As a result, per capita GNP in 1987 (US$440) was no higher than ten years earlier. Mauritania's external debt service obligations substantially exceeded its payment capacity, despite the high degree of concessionality. By 1985, total outstanding debt had reached US$1.4 billion, or nearly 2002 of GDP, and the Government fiscal deficit (excluding grants) rose to 24.3S of GDP in 1985. Largely because the ratio of investment to GDP was relatively high (302), with investment almost entirely financed by external resources, the current account deficit (excluding public transfers) reached 352 of GDP in 1984. Recent Economic Developments: The 1985-88 Stabilization Program 9. In order to improve its rapidly deteriorating economic and financial situation, the Government formulated a comprehensive Economic and Financial Stabilization Program (PREF - Programme de Redressement Economique et Financier) for the 19dS-88 period, with the full endorsement and support of the Bank and the donor community. In particular, the second phase (1987- 88) of the PREF was supported by a SAL approved by the Board in June 1987 and cofinanced by the Federal Republic of Germany, the Kingdom of Saudi Arabia and the African Development Bank. The reforms initiated under the PREY are based on the recognition that despite the limited productive base of the economy, growth can be achieved by introducing an adequate incentive system into al1 areas of the economy. These reforms involved: (a) a flexible exchange rate policy; (b) stricter credit policies and the restructuring of the entire banking system; (c) the restructuring of key public enterprises, mainly in the mining, water and electricity, and post and telecommunications sectors; (d) the progressive liberalization of pricing and marketing polic'sz; te) the restoration of a viable equilibrium in public financeR through a strengthened fiscal system, improved management of current and investment expenditures and containment of the external debt; and (f) a wide range of reforms in the productive sectors of the economy, including agriculture, fisheries and energy. 10. Overall implementation of the PREP over the 1985-88 period and of the program supported by the SAL in 1987-88, was generally satisfactory, despite delays in some areas. Concerning the balance of payments, the currency was devalued by 222 against the US dollar in 1985, and a flexible exchange rate policy has been pursued since then, resulting in a real effective exchange rate depreciation of 21 percent between 1985 and 1988. In order to restore fiscal balance, the Government adopted strict measures to contain budgetary expansion, and has improved collection to increase fiscal receipts. As for the quality of public investments, the major objectives of the PREF in this respect have been achieved: the ratio of public investment to GDP was reduced by a one-third to 172 of GDP in 1986-88; investment allocations were shifted. with a greater share going to rural development; the financing of investment has become more concessional, with grants increasing from 30X of the total in 1985 to 602 in 1988; and annual consolidated investment budgets have been introduced. As regards administrative reform and the restructuring of public enterprises and the banking sector, the Ministry of Economy and Finance has been strengthened, studies are underway to improve management of public administration, and restructuring has started for the five main parastatals, -including SONADER, and for the six main Mauritanian banks. More rigorous financial policies and banking regulations were also adopted. Finally, numerous measures were taken to stimulate private sector activity, including: simplification of price controls, elimination of licensing requirements for the import of intermediate goods, increase of farm producer prices, implementation of the 1983 Land Reform Law, and measures to permit private sector entry into various sectors (urban transports, banking, education, etc). The reforms are described in more detail in the Policy Framework Paper for 1989-91. - 4 - 11. The achievements since the beginning of the adjustment process included acceleration of GDP growth to 5.46 In 1986, largely becatuse of good rainfall, higher producer prices for cereals (production was 105,000 T in 1986 or five times the 1985 level) and because the devaluation stimulated fish exports and helped maintain iron ore exports. In the last two years af the program, however, the growth rate fell to an estimated 2.8Z in 1987 and to 2.52 in 1988. This slow growth helped contain imports while fish exports continued to grow; these were the main factors contributing to the reduction in the current account deficit (excluding public transfers) from around 26Z of GDP in 1985 to 18S of GDP in 1988. Restrictive aggregate demand policies served to reduce inflation from 10.6? in 1986 to 7.0? in 1987 and further to 5.0? in 1988. 12. Despite these satisfactory results., Mauritania's economy remains vulnerable to external shocks. The large external debt payments make a balanced current account difficult to achieve and are an excessive burden on public finances (scheduled public debt service amounted to more than 90? of Government revenues in 1984-1989). As a result of repeated rescheduling of external debt obligations, the actual debt service ratio was, however, reduced from more than 40? of exports of goods and services in 1986-88 to less than 20?, but rescheduled debt has increased future obligations. The 1989-91 ..tructural Adiustment Program 13. To continue the process of structural adjustment begun under the PREF, the Government has drafted a structural adjustment program for 1989- 91, which it calls the Programme de Consolidation et de Relance (PCR). The Government discussed the first draft of the PCR with IDA in July 1988, and the final version formed the basis for discussion at a Bank-organired donors' meeting in July 1989. The PCR is based on a country strategy simin.lar in its principles to the PREF. The lines of action that underlie the PCR include (a) a commitment to preserving the gains made in economic stabilization through a further reduction of fiscal deficits and strict monetary management, including the observance of credit ceilings for the economy, positive real interest rates, along with better allocation of credit to productive sectors; tb) continued improvement in the selection of investment projects and rationalization of recurrent public expenditures; (c) improvement of the incentive system for the private sector through an improved regulatory system, pricing and tax policies, including the harmonization, lowering and rationalization of tariff rates, and legal and administrative controls on investment; and (d) continued restructuring of public sector enterprises and financial institutions, to make them more effective in generating an economic environment conducive to growth. 14. Other objectives of the PCR include the alleviation of unemployment and of the social costs of adjustment in general. A number of measures will be taken, such as improving information about new jobs, and creating labor- intensive projects in sectors with productive potential, such as agriculture. Other means of counteracting the higher costs of public goods end lower standards of living will be better targeting of Government food aid and the development of food-for-work programs. In addition, with assistance from the Bank Social Dimensions of Adjustment Project and other donors, the Government has already begun a living standards survey and related studies so as to evaluate social costs of adjustment, identify the disadvantaged groups, and better design compensating programs. 15. Government performance in implementing reforms in 1989 has been satisfactory despite the severe civil disturbances that occurred in Mauritania and neighboring Senegal in April/May 1989. An IMP mission, undertaken in October 1989 to carry out a mid-term review of the macroeconomic adjustment program, supported by access to the ESAP, found that policy reforms were progressing in all areas and that macroeconomic targets set out in the 1989-91 Policy Framework Paper would be substantially attained in 1989-91 . To deal with the influx of refugees from Senegal (estimated at 160,000 persons), the Government has begun to formulate a reinsertion program which attracted considerable donor interest at the July 1989 donors' meeting. Financing and administrative arrangements for the implementation of the reinsertion program will be discussed among the Government and donors in early 1990. To minimize the potential adverse impact of the influx of refugees on the Government's budget, the Government's policy with respect to the refugees aims at their rapid integration, relying on strong traditional family solidarity. Medium-Tera Growth Prospects 16. The targeted growth rate of GDP in 1989-91 (3.5? p.a.) is expected to result mainly from the expansion and diversification of agricultural production in the Senegal river valley, the increase in value-added in the fisheries sector and small-scale manufacturing and service activities. Further gains will be achieved through better allocation and implementation of public investment projects, and more efficient management of public enterprises. Finally, the deficit in the current account (excluding official transfers) should be lowered to 10 percent of GDP in 1991 (as opposed to 18 percent in 1988). PAR ?x TEB AGRICULTURAL SECTOR Sector Performance and Constraints 17. The key performance indicators for agriculture in Mauritania for 1985-1987, which were rather good agricultural years, averaged as follows: - Cultivated Land per Capitat --------------------------- 0.1 ha - Tropical Livestock Units (TLU) per inhabitant 2/------- 1.5 - Agricultural share of CDP: ----------------------- 29.02 Including* Crop Production ---------------------- (5.52) Livestock --------------------------- (23.52) - Agricultural share of Exports (value):(unrecorded; from livestock) - Agricultural share of Imports (value)s -------------- 20.02 - Share of local cereal production to total cereal consumption (quantity) --------------------------- 40.02 - Agricultural share of Public Investment Budget: ----- 29.02 18. Despite the extremely narrow land base for agricultural production and its great vulnerability to weather (para 4), agriculture continues to provide the livelihood of about half of the population and remains one of the three most important sectors of the economy, along with mining and fisheries. Its contribution to GDP has oscillated between 202 and 30X, depending on rainfall, with livestock contributing four times as much as crops. Crop farming is practiced in a narrow strip in the South; output has increased by only 0.6S p.a during the last 20 years, but has fluctuated widely, with total losses in some years for rainfed crops. The contribution of crops to GDP has varied between 2 and 52, with the peaks recorded during good rainfall years or since 1986, when massive private investments began to be made in irrigation (para 20). Livestock, which is also possible only in the southern part of the country, is a far larger subsector, contributing 242 to GDP and an unrecorded but significant share of exports. Although livestock output has varied with climatic changes, it has fluctuated much less than crop production. 19. Until 1970, Mauritania was self-sufficient in cereals and milk, and was a net exporter of meat. Since then, agricultural output has failed to keep pace with population growth and the country has become increasingly dependent on food imports, particularly in the form of food aid. At present, output meets 402 of local consumption needs for milk and 100? of meat, with little surplus left over for (unrecorded) exports. As for cereals, the country's demand was 300,000 tons in 1988. Food aid covered about 202 of this, about 35Z was met through commercial imports, and only 452 was produced locally. 20. Recent Expansion of Irrigation. The irrigated area has tripled over just three years, from 4,500 ha in 1984185 to 15,000 ha in 1987/88. Some 2/ TLU: Tropical Livestock Unit, a common denominator for expressing numbers of c,.ttle, small stock and camels. publicly-funded projects have come on stream, increasing the area of such perimeters from 4,000 ha to 6,500 ha. The dramatic change has come in privately-funded and managed perimeters, of which the area has increased from 500 ha to 8,500 ha, mainly in the Delta area of the Senegal River Valley. During this short period, the existing publicly-funded perimeters managed by smallholders have performed poorly and many small-scale village perimeters in remote areas of the upper Senegal Valley, where rainfed agriculture is possible, have either been only partially irrigated or abandoned by farmers. Privately-funded and managed perimeters are clearly succeeding while publicly-funded and smallholder-managed perimeters are in trouble The area that could potentially be irrigated in the Senegal Valley, using all water regulated by the recently-built Diama and Manantali dams, is estimated at 135,000 ha, or nine times the currently irrigated area. Recent Sectoral Policy Actions 21. Over the last five years, the Government has implemented a number of policies aimed at promoting growth of agriculture. Most of these actiens were defined in the Government's 1985-88 PREF and were supported by thc Bank through the first SAL (Cr. 1812-MAU), the Second Livestock Development Project (Cr 1658-MAU), and the Rural Sector Technical Assistance Project (Cr. 1414-MAU). The major policy actions included: (a) the progressive adjustment of prices of key agricultural inputs and outputss producer prices of cereals were increased by 20X to border parity in 1985, with a further 302 increase in 1986; rice consumer prices were increased by 70X between 1984 and. 1988; fertilizer and pesticide prices were increased to the point of elimination of subsidies, except for those received as grants from various donors (para 29); prices for other agricultural and livestock inputs are generally either market-determined or sold by Government (SONADER and MDR) at real cost; and water charges began to be applied for the first time in 1986 in the publicly-funded and smallholder- managed perimeters constructed and maintained by SONADER; (b) the issuance of executive orders in 1985 in application of the Land Reform Law of 1983. This has made it possible for the Government to distribute large parcels of land in the Senegal Valley, and private investors have responded more rapidly than anyone anticipated (paras 20 and 37); (c) the implementation, starting in 1987, of the Bank-financed Second Livestock Prolect, which tackles the major constraints in the livestock subsector through a program aimed at slowing the deterioration of grazing areas, boosting productivity by establishing pastoral associations, providing better services and more efficient distribution of production inputs, and deepening the knowledge of livestock production systems essential to the -planning of future interventions; (d) the preparation of a National Strategy for Desertification Control in 1986 and the creation, with the help of UNSO, DANIDA and the Bank, of a unit within MDR for the preparation of a policy and institutional action program coupled with a medium-term priority investment program for its implementation. Preparation of these programs is expected to be completed by the end of 1990; (e) the rationalization of the role of the public sectors the two major undertakings in this area concerned the creation of a semi- autonomous unit within MDR (Cellule de Planification, CP) in charge of agricultural policy analysis, planning and project monitoring and evaluation and the first phase of the restructuring of SONADER; and (f) four key sector studies, either completed or started: the first is the study on cereals marketing and pricing (completed in 1987) which helped the Government define its new food policy and related action program (para 34). The second is the master plan for agricultural development on the Senegal Valley Right Bank (begun in March 1988), of which the key objective is to make recommendations on design, operation and production criteria and on a pridrity medium-term investment program for more sustainable fully-controlled irrigation and flood recession agriculture in the Senegal valley. The third is the master plan for developing small dams and water harvesting throughout the country, which has just begun under UNDP financing. The fourth is on the organization of the MDR; only a first phase has been completed, focussing on the diagnosis of the current organization of the Ministry's central and regional offices. Potential for Increased Production 22. Irrigated production is a key potential source of growth. Other sectors of the economy which were previously engines of growth now appear limited in their prospects. This is the case of iron ore, which is dependent on industrial growth in the rest of the world; fishing, constrained by the sustainable level of yearly catch; and livestock, where excessive expansion could accelerate desertification. Irrigation, on the other hand, has a large potential for expansion. Since rainfed production is unlikely to satisfy even half the national demand for cereals, and since flood-recession cropping will decrease as a result of flood regulation brought about by the Manantali dam, irrigated agriculture represents today the only possibility for reducing the country's food deficit (para 20). PART III. TIE AGRICULTURAL SECTOR ADJUSTIENT PROGRAM A. Policy Agenda: OriRins and Objective. 23. The Government's medium-term sector adjustment (HTSA) program was developed as part of its 1989-91 structural adjustment program, PCR (para 13). For this, Bank assistance was given in the form of sector strategy discussions, assessments of the policy constraints facing the sector's development and joint involvement in the preparation of the proposed project. The MTSA was spelled out in a draft Sector Development Policy Statement (Annex 4) along the lines of a policy action matrix drawn up by the Government (Annex 5). Both documents were drafted during the Project's appraisal mission in November 1988. The main objectives of the program are stated below. 24. The first objective of the MTSA program is to improve incentives to farmers and to private investors through (a) further liberalization of marketing and prices, notably the state's withdrawal from intervention in the processing and marketing of local cereals; (b) more secure and equitable land tenure in the Senegal river valley; and (c) building up the existing banking institution (UBD) with the know-how and procedures to manage a sound agricultural credit portfolio. 25. The second oblective is to increase effectiveness of the public sector (SONADER and MDR), and improve the programming and monitoring of the public investment program for the sector. This would involve restructuring both institutions, reducing their current expenditures, and reinforcing their investment selection practices. 26. The third objective is to identify appropriate development techniques and institutional arrangements conducive to a less drought- vulnerable livestock sector (the largest single _ontributor to the economy) and more sustainable desertification control (one of the country's most critical long-term issues). 27. The measures to attain these objectives have not all been defined yet because of the complexity of some of the issues involved. Further analysis, field experiments and pilot projects must first be undertaken to define more viable techniques and institutional arrangements in the fields of rangelandilivestock development and environmental management. Such analyses and field work have started, but their completion and the building of a consensus on results will take at least two years. These are being pursued under ongoing projects, including the Bank-financed Second Livestock Development Project (Cr. 1658-MAU) and the UNSOIDANIDA Forestry Institutional Support Project for which the Bank is an executing agency. 28. The present report describes therefore only the specific elements of the MTSA related to improvement of the incentives framework for farmers and private investors and of the effectiveness of public agencies involved in agricultural development. These elements would be implemented and monitored under the adjustment component of the proposed project. - 10 - S. Improving Incentives to Farmers and Private Sector Marketing and Prices 29. Inputs. There are no major distortions in the supply and pricing of crop and livestock production inputs, nor is there any shortage of supplies. Other than seeds, virtually no inputs are used in rainfed or flood-recession croppings almost all inputs are used in irrigation. Import and marketing of inputs are done by private traders, who serve their clients directly, in the case of large private farmers, or through SONADER, in the case of smallholders. The supply and pricing system for livestock inputs was revised in 1987 under the IDA-financed Second Livestock Project (Cr. 1658- MAU)). Animal feed marketing is free, and drugs and vaccines are sold by MDR at full cost. There is no restriction on private domestic trade in veterinary drugs and vaccines or animal feeds, other than those pertaining to technical requirements and quality control. 30. SONADER and MDR distribute, however, free of charge or at low cost, inputs (mostly fertilizers and pesticides) that they receive from time to time as grants from various donors, mainly FAO. This is done to stimulate the creation of farmers' cooperatives or to promote other social objectives. In 1987, MDR distributed, free of charge, 600 tons of fertilizer to cooperatives, which in turn resold it to their members at UM 15/kg (or 602 of the regular price of UM 251kg). Although such practices represent only 8Z of the 7,300 tons of fertilizer imported in 1987, they set up false expectations from farmers and increase the risks faced by input dealers. Under the MTSA program, therefore, MDR and SONADER would sell all grants of inputs to farmers at commercial prices. 31. Outputs. Under the MTSA program, the Government would implement and complement its June 1988 policy declaration on cereals marketing and pricing (para 34). Of all agricultural products, only cereals trade is regulated to a certain degree and the essential marketing problem is with paddylrice. As regards meat, marketing and prices are essentially free and trade is unhindered, despite ostensible consumer price controls in towns. Livestock exports are officially regulated, but have in fact been free for many years. Trade in other products, such as milk, cowpeas, vegetables and cereal by-products, is completely free. Marketing of cereals is done by CSA (Coumissariat a la Securitd Alimentaire), SONDMEX (Societe Nationale d'Import-Export) and the private sector. CSA, a public sector agency, purchases and processes the marketed surplus of paddy (15,000 t in 1987), sells commercial food aid (25,000 t in 1987) and distributes free food aid (25,000 t in 1987). CSA also buys a small part of the marketed surplus of locally-produced traditional cereals (sorghum, millet and maize; only 2,000 t in 1987). SONIMEX, a public sector agenc- with 101 private capital participation, has a monopoly on rice imports (50,000 t in 1987) and buys all the local rice milled by CSA (10,000 t in 1987). The private sector handles all imports of wheat flour (40-50,000 t), markets traditional cereals not handled through CSA or SONIMEX, and handles retail distribution of rice. 32. For the past few years, the Government has attempted to regulate cereals prices at both producer and consumer levels. The present pricing system is characterized by the following distortionss (a) the margin - 11 - between the producer price of paddy (UN 19/kg, bagged and delivered to CSA processing plant) and the consumer price of rice (UM 32/kg) is insufficient for private traders to collect and mill paddy; in order for the private sector to turn a profit, the consumer price would need to be about UM 37/kg for rice, or alternatively, the producer price would need to be about UM 15/kg for paddy; (b) prices of rice and locally-produced cereals are set without regard for quality differences and are uniform throughout the year and throughout the territory, thus discouraging private sector participation in storage and transport; and (c) production and consumption of local cereals are hampered by low sale prices of food aid. 33. CSA has been incurring financial losses on its marketing and processing of domestic rice. Presently, its wholesale costs are UH 35/kg but it receives only UN 24/kg from SONIMEX. SONIMEX has also been incurring losses on domestic rice which it was able to compensate with its profits on imported rice. Its margin on domestic rice is insufficient (UM 3/kg) to cover transport, storage and overhead. As long as the quantities of domestic paddy/rice were small, the above problem remained manageable. This was true until the 1985/86 campaign, when about 5,000 tons of domestic rice were marketed through CSA. With quantities rising rapidly--10,000 tons in 1986/87 and 15,000 tons in 1987/88--losses began to exceed SONIMEX's financing, and CSA's physical and organizational capacities. An additional problem is the inadequacy of rice milling capacities, until recently all publicly-owned, between CSA, SONADER, and the state farm at M'Pourie. 34. In order to reduce inefficiencies in cereals pricing and marketing, the Government issued in June 1988, under SAL I, a policy declaration which would, by the end of 1991, lead to: (a) the withdrawal of CSA from the collection and processing of paddy and from the marketing of local cereals, with the exception of those produced by small farmers in the most remote areas, and from sales of commercial food aid in the interior; (b) a corresponding reduction in the secondary CSA distribution centers and truck fleet, to 47 trucks, and privatization of vehicle repair facilities; (c) privatization of all publicly-owned rice mills; and (d) parity between the prices of food aid and local cereals. The Government, beginning in December 1988, increased the wholesale price of rice by UN 2 to UM 29/kg and the consumer price of wheat food aid by UN 1 to UM 21.5/kg in Nouakchott and UM 20.5/kg in the interior. 35. Under its MTSA program, the Government would implement the reforms concerning the reduced role of CSA, as announced in its June 1988 food policy declaration. The Government will publish its decision to allow the private sector to buy and transform paddy, and to sell rice. To enable the private sector to assume a greater role and to reduce the scope of CSA's operations, CSA would limit its purchases of paddy to a maximum of 20,000 t in 1988/89, 13,000 t in 1989/90, 8,000 t in 1990/91, and 6,000 t thereafter. CSA would focus its actions in the remote areas where the private sector is not expected to be very active at first. During these three years, CSA would also gradually withdraw from retail sales of commercial food aid as an increasing proportion will be sold to wholesalers at a price based on the border price, plus CSA handling costs and margin which will be increased gradually so as to be equal, by 1991, to the protection rate adopted for commercial cereals imports (para 36). With respect to distribution of free - 12 - food aid, its volume would be limited to 25.000 t, except in drought emergencies, and it would be increasingly targeted to the most needy populations and used to support the *Food for Work' programs that the Government is now preparing with food aid donors. 36. The Government would, also under the MTSA, reduce distortions between prices of different products by introducing customs duties on cereal imports (including wheat flour) at a rate equal to that levied on other final products under the on-going tariff reform agreed upon with the DMF and the Bank, currently 451. For rice, the current level of nominal protection happens to be about 452, though achieved with a very different distribution between taxes and costs and profits by SONIMEX. The new system proposed under the MTSA would rule out the consumer price increases that had been planned to bring the rice price up to UK 37/kg in 1991. Instead, the Government would adopt a formula to determine a variable tariff rate that would make it possible to reach a target wholesale price, stable throughout the year, and equal to a moving average of past, current, and expected next year's CIF prices of rice, plus 45Z. The rice wholesale price of SONIMEX would thus be set at the above moving average CIF price, plus a variable tariff rate (452 on average), plus port handling, warehousing and distribution costs incurred by SONIMEX. There would be no other price- fixings the above formula would indirectly link the paddy producer price to the world rice price, thereby ensuring that the development of rice production in Mauritania proceeds along lines geared to Mauritania's potential comparative advantage. It also spares urban consumers having to bear alone the cost of increasing rice prices, as would necessarily have happened if producer prices had been maintained at their current guaranteed level. Instead, the cost of protection will be much lower for consumers, fiscal resources of the Goverument will be enhanced, and producers will be protected from short-term fluctuations of the world market price. Full liberalization of rice imports is not desirable for the time being. The Government wishes to maintain the SONINEX import monopoly for fiscal reasons, arguing that (a) liberalization of imports would lead to fraud and loss of Government revenues; and (b) if would lose the discounts that can currently be obtained because of SONIMEX's large volume purchases. Land Tenure 37. A considerable expansion of irrigation by the private sector has been made possible over the last four years (para 20) by the distribution of land in application of the 1983 Land Reform Law. 3/ Nearly 35,000 ha have reportedly been distributed, mostly in the Delta and lower Senegal valley and, to date, about 8,500 ha have been developed. The 1983 law provides that (a) any Mauritanian individual, or collective group can obtain a parcel of land to farm if it is demonstrated that this land is not privately or collectively owned or has not been cultivated by anyone else in the past; (b) any collective rightholders who wish to retain collective use of their land 3/ The Law (ordonnance) No. 83-127 of June 5, 1983, complemented by the Application Decree No. 84-009 of January 19, 1984, and Orders of the Minister of the Interior Nos. OOS/MINT of April 14, 1984, 020/MINT of July 29, 1985, and 0013/MINT of August 24, 1986. - 13 - are allowed to do so, provided that they organize themselves into a farmers' cooperative; the Law also specifies the conditions under which collective concessions can be divided into individual concessions to the members of a cooperative, if they so wish; and (c) traditional crop-sharing systems are abolished. 38. The analysis done during project preparation confirms that the 1983 Law is comprehensive and equitable. However, land distribution, as conducted so far, has attracted rich people from the north to whom large parcels of land have been allocated, sometimes hastily, without all the preliminary steps specified in the law. The Government has now decided to act quickly to improve the current land distribution procedures and outcomes. Under the MTSA program, substantial improvements would be introduced in the application of the land reform law to (a) gain better control over a rapidly evolving occupation of lands in the agriculturally productive areas; (b) ensure equitable allocation of land to the local population in the south as well as northern investors; and (c) constitute a public record of land rights. The main actions would be: (a) revision of the 1984 Application Decree and Ministerial Orders of the law along the following liness (i) the decision to distribute land would bu made on the advice of regional consultative committees on which the resident local population and the local judge are represented; (ii) specific criteria would be established for defining lands that have thus far not been cultivated and are available for possible distribution; (Lii) conditions would be set for establishing land reserves around existing villages for commercial development projects or forJpossible future distribution to the local population; (iv) land title will be given to a new holder only when it has been proven that the land has been satisfactorily developed and fully cultivated over a probatory period of five years and that this has been maintained over an additional period of five years; and (y) since the land entitlement procedure based on complete cadastral maps and land registration is cumbersome for a country with very limited land registration tradition, the 'authorization-to-crop' document given to the new holders during the probatory period wculd be legally strengthened so as to grant farmers an inalienable right to cultivate, to enjoy all revenues generated and to obtain credit from the banking system (using the land or other security, the banks may require as collateral) as long as they properly discharge all obligations pertaining to land ownership; (b) the establishment of an interministerial coordination committee responsible for initiating and monitoring improvements to land policy and institutions; (c) an inventory of all land distributed to date, on the basis of aerial photographs to be prepared under the ongoing Senegal River Right Bank Master Plan Study (para 21 (f)); td) the definition, for each agro-ecological zone in the valley, of the minimum, maximum and optimal size of parcels to be distributed to - 14 - individual farmers. Farms that are too small, as currently allocated by SONADER (0,2 to 0,75 ha each) in publicly-funded smallholder schemes, have proved financially unviable. The distribution since 1985 by regional authorities of excessively large farms (20 to 200 ha) to private investors is unfair and thus unsustainable, given the scarcity of land in relation to the large needy population of the valleyt (e) the preparation of a master plan for land distribution in the Senegal valley, which will define the areas available for distribution, taking into account the land's suitability for irrigation, the demographic situation, the areas to be set aside for collective use or public interest, etc; (f) the implementation, initially in the Delta region, of the land tenure procedures of the MTSA, includings establishment of a record of land rights and land occupation; formulation of land consolidation procedures; the settlement of disputes; attribution of concessions on identified unclaimed/ unexploited lands; identification of areas to be occupied by public infrastructure; subsequent establishment of a land-management plan for the area; and (g) the reorganization of institutions involved in land management. The present situation is characterized by a proliferation of institutions, withi as many as five ministries involved: Interior (through its regional and provincial governors); Rural Development (through its ill-equipped land reform bureau and regional services); Justice-(through its regional services); Public Works (through its topographic central department); and Economy and Finance (through its central Public Properties, cadastral and land conservation departments). In addition, the Government would reconsider its policy of distributing land free and look into new arrangements for leasing land to private investors. Agricultural Credit 39. Until recently, formal credit was provided only by SONADER, in its publicly-funded smallholder schemes, at an interest rate of 8.5Z. The average rate of recovery for all credit provided by SONADER is currently only 702, but the repayment rate varies considerably between schemes and areas. Credit recoveries depend on farm size and the volume of marketable surplus, and on location with respect to markets; small farmers and remoter schemes have lower repayment rates. The skill and discipline of local SONADER staff also play a part in determining credit recoveries. 40. Provision of agricultural credit by banks started in 1985 in support of privately-funded and managed irrigation in the Senegal River Delta. In 1987, total credit distributed by Union des Banques de Developpement (UBD) was UM 247 million (US$3.4 million), or 15 times the amount distributed in 1985. In line with the interest rate structure agreed upon with IMP and the Bank within the restructuring of the banking sector, - 15 - under SAL I, the interest rate applied is 8.52 per annum for short-term credit and 8Z for medium-term credit. The recovery rate obtained by UBD was 98? in early 1988 but dropped to 701 in mid-1989. In view of UBD's success between 1986 and 1988, it has been appointed to manage project-supplied lines of credit, such as in the IFAD/PADES Oases Development Project. 41. The major constraints of the present agricultural credit system are that: (a) SONADER is ill-equipped to manage credit; (b) many farmers in the publicly-funded schemes have plot sizes that are too small to make them creditworthy; (c) while relatively successful in financing private irrigation, UBD has not yet developed a consistent, viable approach to financirig smallholders in publicly-funded schemes. Thus UBD sometimes supplies the goods financed by the credit it provides, as in the Oases, and the terms and conditions on which it provides credit are determined more by the provisions of project-supplied lines of credit than by its own policies. 42. Under the MTSA program, the agricultural credit system of UBD would be reorganized as follows: (a) SONADER would disengage from credit and UBD would take over provision of credit in publicly-funded smallholder schemes. This change would start in the schemes close to the major towns of Rosso and Kaedi where prospects for cereal marketing are good, and would be extended to all schemes over a 5-year transition period. A contract between UBD and SONADER would define their respective responsibilities in publicly-funded smallholder schemes, with UBD managing the credit and SONADER providing technical support; (b) interest rates to be applied would be increased in agreement with IMF and the Bank as part of the ongoing banking sector reform; (c) UBD would define lending criteria, notably-with respect to downpayments, repayment periods, guarantees and penalties; (d) UBD's Agricultural Credit Department would be reorganized and key staff trained; and (e) UBD would refrain from supplying inputs and equipment as credit-in-kind. Irrigation Promotion 43. In view of the limited resources of Mauritania, irrigation is one of the few promising sources of growth (para 22). Under the MTSA program, options for more sustainable irrigation development would be pursued. Such options are being defined under the ongoing study of the master plan for agricultural developmenrt on the Senegal Valley Right Bank begun in March 1988 (para 21 (f)). 44. The main problem is that the recent, impressive private investment in irrigation can be sustained only if there is a simultaneously successful development of irrigation for the local population. The record is not good. The four large perimeters (about 4,000 ha in total) developed with public funding by SONADER for allocation to smallholders have been high cost (US$15,000 to 20,000/ha), difficult to manage and maintain, and their viability is not yet assured. About 150 village perimeters of about 20 ha each have also been developed by SOMADER with public funding and villagers' contributions in cash and/or kind. These perimeters are much lower cost (US$4,000/ha), easier to manage and maintain, with far better prospects for sustainability; but the number of sites suitable for construction of such perimeters is limited, and many of the existing perimeters have encountered similar management and maintenance problems to those observed in the larger - 16 - perimeters. A common feature in both the large and village smallholder perimeters is that, for reasons of equity in allocation of scarce irrigable land, farm size was only 0.5 ha on average; this area satisfies basic food needs, but is too small to generate much cash income and savings. 45. Under the MTSA program, and in accordance with recommendations made under the irrigation-related studies mentioned in para 21, the Government woulds (a) define the minimum viable size of irrigated plots in each area; (b) prepare action plans for upgrading existing smallholder schemes in order to develop larger irrigated farms; (c) establish new design, construction, operation and maintenance criteria for publicly-funded investments to reduce costs and permit sub-contracting of some functions; (d) plan a more diversified approach to irrigation, including fully controlled perimeters, flood-recession cropping, small dams and water harvesting. The Government would accordingly identify a 5-year priority program of investments in 'diversified' irrigation. Other issues related to irrigation, such as land tenure, credit, and cereals marketing, which are relevant to both privately and publicly funded irrigation, are addressed under the other components of the program. C_ Improving the Effectiveness of the Public Sector SONhADER Restructuring 46. Under the MTSA program, SONADER would complete its restructuring started under the 1985-88 PFE?. SONADER was created in 1975 as a state- owned, financially autonomous entity to fill a vacuum at a time when almost no institutional capacity existed in the rural sector, particularly to handle irrigation. SONADER has sucdeeded in bringing irrigation technology to small farmers with no prior expekience of irrigated farming. However, it has considerably expanded its services to farmers, many of which are of a commercial nature and were, until 1984, heavily subsidized. This led to overstaffing, excessive centralization, inefficiency and almost no cost recovery from farmers. Subsequently, a first phase restructuring was undertaken in 198S5 with a v4iew to streamlining SONADER's operations and diverting functions that could more appropriately be handled by farmers or the private sector. SONADER's regional offices have been granted full operational and financial autonomy, staff has been reduced by 10 (from 600 in 1984 to 543 at present), water charges are levied in the large perimeters where SONADER is responsible for 0 & M, and inputs are now supplied at almost full cost (para 29). 47. Despite the efforts made, SONADER still faces organizational a.d management constraints which affect its ability to dev7elop viable agriculture at the right pace. It is still overstaffed (with an average ratio of one employee for 10 irrigated ha); lacks medium- and higher-level staff; relies excessively on resident technical assistants, who make up 102 of total staff but whose cost represents about 30S of SONADER's total operating budget; and has too many functional units at the Regional Office level, mainly because its many donors insist on independent project units. Recovery of 0 & M costs is inadequate, and its budget structures make no clear distinction between investment and recurrent expenditures and between revenue-generating and non- revenue-generating services. In addition, Government procedures for the _ 17 - control of SONADE within its superviso.y role are cumbersome and inefficient. Government services are slow to review SONADER's budgets, bid evaluations and proposed contract aards (at present all contracts exceeding one million UK (only US$13,700 equivalent) must receive Government approval. Finally, the composition of the Board is inappropriatet SONADER's role is limited to that of observer and farmers are unrepresented. 48. Under the ?1TSA program, SONADER would pursue its restructuring by: (a) reducing its staff by 30? from 550 to 384 (all personnel laid off will be given severance pay as well as potential accers to land in the Valley) and resident foreign technical assistants by almost 502, from 52 to 27; instead, short-term back-up technical assistance would be developed to encourage local initiative; (b) reorganizing itself by strengthening the headquarters functions of planning, studies, coordination, monitoring and evaluation, giving greater autonomy to the regional offices, and eliminating the independent donor-financed project team approach and the resulting duplication of organization structures; (c) improving its management by streamlining internal procedures, expanding the currently embryonic cost- accounting system, implementing an appropriate staff training program, and restructuring budget procedures so as to separate public services, water management activities and commercial services which would ultimately be transferred to the private sector; (d) increasing water charges in the large perimeters from their present level of UM 10,400 per ha by 15? (to UM 12,000) in 1989190, by 3C3 (to UM 13,500) in 1990191 and to a level ensuring full recovery of 0 & M costs in 1991192, i.e., UM,15,000; (e) preparing a 5-year progressive disengagement plan for input delivery. In the interim, starting in 1989, all delivered inputs would be charged at full cost, including transport to the farmers' villages with interest rates equal to those of UBD and, starting in 1990, no credit would be provided by SONADER to farmers who had not fully repaid their debts; and (f) improving Government relations with SONADER by revising the composition of SONADER's Board to include as full members the Director General and a farmers' representative; raising the threshold amount for contracts requiring government review before final award; and signing contractual work agseemepts between SONADER and UBD for agricultural credit, CNRADA for agricultural research and CSA for cereals marketing in remote areas (para 35). As LA result of the restructuring program, SONADER93 operational deficit (exclq#ing technical assistance) would be reduced from 1988 through 1992 from UN ?1 million to UM 59 million, or 17Z. Government would increase its budgetary contribution to SONADER, presently UM 20 million, up to the levels required to cover SONADER's operating deficit, as determined by annual budgets based on implementation of SONADER's restructuring program. Public Investment Program and MDR Planning Capacity 49. Under the NTSA program, Government would continue to rationalize its agricultural investment program started under the 1985-88 PREP. The investment program planned for this period was reviewed, agreed upon and financially supported by donors, including the Bank. Project selection for the new Public Investment Program will be made, as agreed under SAL I, on the basis of good preparation, acceptable economic rates of return, adequate management capabilities and operating and maintenance funds. Also taken into account vill be the MTSA program's objective of transfering to the private - 18 - sector all activities of a commercial nature. The major objectives of the PREF with respect to public investment have been achieved. The ratio of public investment to GDP was reduced by a third, to about 20?, and the sectoral allocation was shifted, with a greater share going to rural development. The financing of investments has been on more concessional terms, with grants increasing from 302 of the total in 1985 to about 602 in 1988. In addition, the Government has made significant progress in building up institutional capacity for the planning and monitoring of investments in the sector. It established in 1986 a planning unit (Cellule de Planification, CP) within the MDR, which is now fully operational. It also upgraded the planning department in the Ministry of Economy and Finance, which now has a full-time professional in charge of reviewing investment proposals made by MDR and monitoring disbursements for all public investments in the sector. In addition to medium-term investment programs, Government established in 1987 an annual consolidated budget that includes all public investments, whether financed from the national budget or by external donors. The consolidated investment budget process has led to much greater knowledge of present commitments and future obligations, and is a major step towards rationalizing decisions on public expenditures. The Government still needs to rationalize recurrent expenditures in the sector, however, as a large proportion of expenditures is spent for personnel and inadequate provisions are made for materials and supplies. c0. The structure of public investments reflects the priority accorded by the Government to the agricultural sector. From 1985 to 1988, 29Z of total investments were in agricultural projects. In the investment program proposed under the 1989-91 PCR, this siare is to be increased to 32Z of the core program of UM 45 billion. The overall allocation among subsectors is reasonables irrigation and water harvesting will receive the largest share of investments (362), followed by rural water supply projects (21?), eavironment projects (132), training, extension and research projects (102) and livestock (9?). The relatively small share of investments devoted to environment and livestock can be explained by the absence thus far of viable techniques and institutional arrangements for large-scale environmental management and intensive livestock development (para 27), as well as by the active role of the private sector in animal husbandry, which makes greater Government intervention unnecessary. 51. Under the MTSA program, further improvements would be introduced into the planning, monitoring and evaluation of the public investment program and the recurrent expenditure requirement and allocation for the rural sector would be evaluated. On the institutional side, the Government would strengthen the role of MDR's Cellule de Planification (CP) in sector policy analysis, in preparing the investment program and in monitoring the physical implementation of projects by: (a) creating within the CP a new full-time unit responsible for preparing decisions, identifying options for key policy issues and for ensuring the coherence of the investment program with the overall sectoral strategy; (b) establishing formal administrative links allowing the CP to have more substantive input into project selection and preparation by the technical departments of MDR or by SONADER; and (c) reviewing the objectives, role and output of CP and submitting its detailed work program for 1989-91. Regarding the structure of the investment program: (a) the revised 1989-91 irnestment priorities and program for the sector - 19 - would be reviewed jointly with the Bank before its submission to the next Consultahive Group meeting; (b) new irrigation. flood-recession, snall dams and vater harvesting projects included in the program will be carefully designed in accordance with criteria defined under the irrigation-related master pl8ns (para 20 (f)) and investments in this subsector will be included in the annual consolidated budgets only if their design conforms to these criteria; (c) investments in new phases of existing projects will be included in the consolidated budget only after thorough evaluation of the results of the preceding phases; this applies particularly to livestock and environmental projects; and (d) the recurrent cost implications for future budgets of the proposed investment budget would be evaluated. - 20 - PART IV. MUE PROPOSED PRJC A. OriiLn. Rationale and Objectives 52. The proposed project is a hybrid. including a sector adjustment component and an investment component. Its preparation builds on the sector discussions held during preparation and implementation of SAL I. The broad content of the proposed project was first discussed with the Government during a mission in 1987 to review progress made under SAL I prior to its effectiveness. This was followed by the preparation of the investment component with the help of PAOICP in November 1987 and the adjustment component in June 1988. The preparation process has entailed protracted analysis and discussions, exchanges of analytical work, and formulation of options and action proposals. Preparation work was carried out with a full involvement of Government officials grouped into ten different working groups. Appraisal took place in November 1988. Negotiations were held in April 1989. 53. The primary objectives of the Project are to support the implementation of the Government MTSA program described in Part III and to provide additional foreign exchange for inputs and counterpart funds for public Investment required to realize fully the benefits associated with the program. Specifically, the Project has been designed to deepen and extend the reforms initiated under SAL I, under which the only significant policy measure sought and carried out in agriculture has been the issuance by the Government of a policy declaration and an action plan on cereal marketing and prices (para 34). The importance for the Mauritanian economy of the recent favorable development of private irrigated rice production in the delta region (para 20) calls for a broader set of policy reforms. This development was sparked by the land tenure reform of 1983 and by increased producer prices guaranteed by the government. The first beneficiaries of this development, however, mostly included businessmen from the north with adequate access to capital to develop large stretches of land, which they were granted through the land redistribution process. Furthermore, the increased level of producer prices was incompatible with the unchanged level of consumer prices and therefore unsustaihable as domestic production increased. The set of further reforms supported by the Project, on the contrary, aims at ensurings (a) that the development of rice production in the delta region becomes fiscally and economically sound; (b) that the cost of protection initially needed for this development be equitably shared by producers and consumers (para 36); (c) that its benefits are not limited to a small economic and social group, but are instead more evenly distributed by a fair implementation of land tenure reform, and by broader access to capital for farmers through an improved and sound credit system; and (d) that through complete liberalization of downstream economic activities, it generates positive economic spillovers in sectors other than agriculture. The proposed project would monitor implementation of this action-plan and of other actions for further liberalization of cereal prices. It will further - 21 - support other sector policy reforms consistent with the MTSA, especially those needed for developing an economically viable irrigation subsector, consisting of (a) privately funded and managed perimeters and (b) publicly funded perimeters to be managed by smallholders. The Project would also help Government test new approaches to smallholder irrigation (para 56) in the Senegal river valley through its investment component, i.e., an irrigation improvement operation in the Gorgol area. It is the complementarity between the adjustment credit, designed to support policy and institutional reforms to promote the development of private and public (smallholder) irrigation, and the investment component, designed to test new approaches to smallholder irrigation, that justifies the hybrid nature of this operation. The results of these tests, together with those of the ongoing water master plan study (para 21 (f)) will provide the basis for the formulation of a viable long- term investment program in irrigation which could be supported by the donors in the future. D. Pro1ect Description Description of the Sector Adiustment Comnonent 54. The actions needed to fully implement the policy reforms of the MTSA program are summarized in the policy-action matrix in Annex 5. Among these, the ones regarding tariff reform, the restructuring of UBD, the revised interest rate for agricultural credit, and the annual investment and recurrent budgets were agreed in the negotiations of the Policy Framework Paper for 1989-91 between the Government, the Bank and the IMF, and would be supported by macroeconomic adjustment operations. The proposed sectoral operation would support all the other actions of the Government MTSA program. It would, in particular, closely monitor selected measures critical to achieving the objectives of the program, which are summarized in the table below (pages 23 and 24). They are more fully described in the policy action matrix in Annex 5. Satisfaction of these selected priority actions would be a condition for Board presentation or for release of the two tranches of the credit associated with the adjustment component. It is however worth noting that all the conditions for Board presentation were met before negotiations. 55. In addition to monitoring the adjustment reforms mentioned above, the Project would provide for institutional strengthening by financing (a) the studies, staff training, and data processing equipment necessary to support the reforms proposed for land tenure (para 38) and agricultural credit (para 42); and (b) the studies and staff training required to improve the management of SONADER (para 48) and of MDR (para 51). Descriltion of the Investment Component 56. The project investment component would be implemented in the Gorgol irrigated area, where the major headworks (dam and main canals) have been built and 550 ha have been irrigated under the IDA-financed Gorgol Irrigation Project (completed in December 1987), and where the development of a second -22 - installment (1,400 ha) was completed in mid-i989, right before the start of the proposed project. The project investment component would includes (a) an agricultural development component, includings (i) a program of Improved operation and maintenance of the irrigation scheme; (ii) the construction of an unpaved access road (8km) to connect the project area with the closest major road. of a foot-bridge across the existing irrigation feeder canal, and of farmer village infrastructure; (iii) crop/livestock integration (over 2,000 ha of irrigated lands and 1,500 ha of flood-recession cropping around the Gorgol dam reservoir) through improved extension and training services, supported by an adaptive research program for crop and livestock production; and (iv) the introduction of UBD credit, including short-term credit for inputs and medium-term credit to farmers, fishermen and private entrepreneurs; and (b) protection of the human and physical environment, including (i) settlement of farmers in new villages and their organization into cooperatives; (ii) reforestation through the planting of windbreaks, wooded zones and orchards; (iii) consolidation of fishing activities in the Gorgol dam reservoir, fostered by credit and training for fishermen; and (iv) health services, including training of para-medical personnel, health equipment and epidemiological surveys and expenses; 57. Annex 6 includes detailed lnformation on the Gorgol project area, lessons learned from the completion report of the Gorgol Irrigation Project, and a detailed description of the investment component of the proposed project. A further detailed description of this component is included in Annex 8 of the Implementation Volume. AGUCUTURAL SEOR ADJUSTN3TIIWETEN PROET SECTOR ADJUSIHUT COMPONENT sE mz ACTIONS to a NoEO uN ?a PROJECT Condition of Negotiations/Board Conditions of Credit Conditions of Second Subsector Presentation Effectiveness (04/90) Tranche Release t04191) 1. General -Gvt to issue the Sector -Satisfactory Review by IDA 1/ -Satisfactory Review by IDA Development Policy of progress made in of progress made in Implementation Statement implementation of the MTSA of the MT program progras A. laDroviam Inenatives to Fraenr anm Private Sector 2. Marketing -Gvt to issue a decree setting -Gvt to start implementing custom and Prices all the measuret described duties on cereal imports and the (para 35 in para 35 S 36 regarding formula linking the wholesale price and 36) freedom of private sector In of rice to the world price W marketing of local rice, CSA - withdrawal from rice and food aid marketing, new cereal prices for 1988/89 and the new foroula for setting cereal prices thereafter, and programming of food Imports -Gvt to complete bidding -Gvt to complete transfer of rice procedure for sales of the mills to the private sector four public sector rice mills to the private sector , 3S Land Tenure -MDR to complete inventory -Gvt to issue the revised -Satisfactory implementation of all (para 38) of all land distributed to application decrees and the provisions of the revised date In application of the ministerial orders of application decree and minister- 11 satisfactory review by IDA is put as a general condition with the aim of avoiding the possibility that the detailed implementation of the reforms, while satisfying each of the punctual measures that follow, does not betray the objectives of the whole program by thq inadequacy or insufficiency of accompanying measures that cannot be covered in detail under the project's conditionalities. Land Reform Law the Land Reform Law lal orders of the Land Refonm Law -Gvt to establish the inter- -Gvt to complete study of reorgan- ministerial land reform ization of land tenure-related coordination committee public sector services and start implementing its recoQmendations -Gvt to specify minimum and -Gvt to complete land distribution maximsm sizes of parcels to plan (with schedule) in the be distributed to individual Senegal valley and start farmers in application of implementation of this Plan the Land Reform Law in the Delta region 4. Agricultural -SONADERIUDB to sign -UBD to complete reorganization of Credit (para 42) contractual agreement its agricultural credit department including action plan for -UBD to issue new lending SOADER withdrawal from criteria for credit in rntral credit delivery areas 5. Irrigation -SONADER to issue and implement new i Development (para 45) design, construction and 0 & K W criteria for publicly- funded irrigation perimeters -MDR to issue and implement action plan and medium-term priority investment program for irrigation development B. ImDrovint Public Sector Role 6. SONADER -SONADER to reduce its staff -SONADER to further increase -SORADER to further increase water Restructuring by 10?, to increase water water charges by 152 charges to full recovery of 0 & M and MDR charges by 151, and to costs Reorganization declare that, starting in -SONADER to issue and implement (para 48) 1990, no credit will be a 3-year action program for its -SOADER to complete its staff provided to farmers that gradual withdrawal from reduction and its reorganization have not repaid lOOt of input delivery and management reforms their debts vis-a-vis -Gvt to issue a decree revising SONADER -Govt to finance SONADER''s composition of the Board of budget deficit for 1990 SONADER, and its procurement procedures, and to finance its budget deficit for 1991 7. Public Investment -MDR to agree with IDA on its -MDR to complete reorganization Program (para 51) 1989-91 investment program of Cellule de Planification and definition of its 1991-92 work program - 25 - C. Other Prolect Features Cost Estimates 58. Proposed project costs would be US$37 million, includings (a) a quick disbursing credit of US$24 million to finance general imports in support of the Government's sector adjustment program. The principal selected actions shown in the table above (page 23-24) would be indispensable for the disbursement of this credit; (b) the costs of the institutional strengthening component, including the SONADER restructuring, MDR reorganization and sectoral studies, estimated at US$6.5 million and (c) the costs of the investment component, estimated at US$6.5 million equivalent, for the irrigation actions described in para 56, including (i) civil works, equipment, vehicles, technical assistance and training; (ii) incremental operating costs; and (iii) incremental short and medium-tezm credit for increased agricultural, fishing and commercial activities brought about by the proposed project in the Gorgol area. Costs of the Institutional strengthening and investment components (i.e. total project costs less the quick disbursing credit) inclt4de 62Z in foreign exchange. Base costs, valued in December 1987 prices, were derived from bidding aud appraisal estimates. Physical contingencies amount to US$1.2 million, or 9S of costs other than the quick disbursing credit. Price contingencies have been calculated on the basis of projected annual price increases Al applied to local and foreign costs including physical contingencies. They amount to US$1.8 million or 14Z of total project costs other than the quick disbursing credit. Project cost estimates are presented by component in Annex 7 and detailed in Annex 9 of the Implementation Volume. They can be summarized as follows: PRECT COST SUMM =--iM million- - IS lliton X X Totel Foreign Be" Compononte Local Foreign Total Local Foreign Total Exchang Cost. A. Oorgol Inveet met Component 28a.9 248.0 474.5 S.2 8.8 6.5 51 18 8. Institutional Strengtehning Component 126.1 848.4 474.5 1.7 4.6 6.5 78 18 C. quick Diebursing Component - 1.72.0 1.7C2.0 - 24.6 24.0 10 64 Total 859.0 2,842.6 2,701.0 4.9 82.1 87.0 67 10 41 Annual projected price increases are as follows: 1988 1989 1990 1991 1992 1993 1994 1995 Local Costs (2) 6.4 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Foreign Costs (X) 5.3 5.3 5.3 4.1 4.1 4.1 4.1 4.1 - 26 - Loan Amount and Financing 59. Total external financing would amount to US$36.0 million equivalent. Government and beneficiaries contributions would be limited to the remaining US$1.0 million of the total project cost, given the Government's tight financial situation. Mauritania's financing needs in 1990 and 1991 are estimated at US$50 million and US$48 million, respectively, after disbursements from existing and expected project- related commitments and the impact of ezpected debt rescheduling have been taken into account. The proposed adjustment credit would, therefore, cover 242 of the financing gap. The IDA credit amount would be US$25 million (US$18 million for the sector adjustment component and US$7 million for the institutional strengthening and investment components). Co-financing needs amount to US$11.0 million. The French Caisse Centrale de Cooperation Econamique (CCCE), the GoverAment of the Federal Republic of Germany (FRG) and the Uhited Nations WFP have confirmed their interest in co-financing. The financing plan would be as followss FINANCING PLAN (US$ million) Institutional Adjustment Strengthening Investment Component Component Comnonent Total IDA 18.0 2.5 4.5 25.0 CCCE 4.0 4.0 - 8.0 niG 2.0 - - 2.0 wPP /a - - 1.0 1.0 Govt and benefi- ciaries _ 1.0 1.0 2-4.0 6.5 6.5 37.0 la In fact, WFP financing is about US$1.5 million, including cost of works not included in the project (maintenance of main canals, erosion control of the hills surrounding the project area). IDA and CCCE would finance in parallel the cost of different sub-components of the studies, technical assistance and training to be carried out under the institutional strengthening component. IDA and mIP would finance in parallel the cost of different sub-components of the works in the Gorgol area, involving road rehabilitation, water supply, tree plantation and village infrastructure. Disbursements. Retroactive Financing and Administration of Funds 60. The IDA adjustment credit of US$18 million would be disbursed in tw tranches of equal amounts, the first at credit effectiveness, expected in April 1990, and the second within the following year once the conditions of tranche release have been met (pp. 23-24). Financing of imports of petroleum products and foodstuff would not exceed US$3.6 million. Retroactive financing of up to a total - 27 _ of US$3.6 million would be permitted for imports taking place prior to Credit signature, but after November 1, 1989. The IDA investment and institutional strengthening credit of US$7 million is expected to be disbursed over a 6-year period. This period is shorter than the 7-year disbursement profile for IDA credits in Mauritania because no major construction work involving large contracts is foreseen under the proposed project. 61. The proposed IDA credit for the investment component would be disbursed in a manner closely following the profile for IDA projects in Mauritania. The closing date of the credit would be December 31, 1995, or one year after project completion. This time period is required for final acceptance of works and the processing of the disbursement applications for the last project expenses. The expected schedule of disbursements is given in Annex 8 and summarized below. DISBURSEMENT SCHEDULE ----- Disbursements ----- ------------------IDA Fiscal Years----------------- 1990 1991 1992 1993 1994 1995 1996 (US$ million) Annual - Adjustment Credit 9.0 9.0 - - - - - - Institutional and Investment Credit 0.3 1.3 0.9 1.3 1.1 1.1 1.0 Cumulative 9.3 19.6 20.5 21.8 22.9 24.0 25.0 62. Disbursement categories, credit amount and the share of expenditures to be financed by IDA would be as follows: DISBURSEMENT CATEGORIES Categories Amount of the I of Total Credit Allocated Expenditures (US$ million) 1. Civil Works 1.0 70 2. Equipment and Vehicles 0.8 100- 3. Agricultural Credit 1.5 100 4. Technical Assistance Studies and Training 2.2 50 5. Incremental Operating Costs 0.6 50 6. Adjustment Credit 18.0 100 7. Unallocated 0.9 _ 25.0 - 28 - 63, The proceeds of IDA credit for the Institutional strengthening and the investment components would be passed on by the Government to SONADER and to UBD in grant fonm, and the signing of subsidiary grant agreements between the Government and SONADER and UBD would be a condition of credit effectiveness. Funds for agricultural credit would then be on-lent by UBD to farmers under the prevailing conditions agreed upon by IDA, Present interest rates established in agreement with IMP and IDA for Agriculture and Livestock are 8.52 for short-term credit and 8.0? for medium-term credit. 64. Special Accounts. To facilitate disbursement and procurement, two special accounts will be established by the Government: one for the adjustment credit and one for the inveostment credit. The special account for the adjustment credit would be established in the Central Bank. Upon credit effectiveness, IDA would make an initial disbursement of U0S2.5 million into the account. This account will be replenished monthly, subject to a minimum replenishment application of US$500,000, up to the limit of the amount of each of the two tranches on the basis of s (a) filly documented reimbursement applications for contracts exceeding US$100,000; and (b) statements of expenditure for items between US$5,000 and US$100,000. The Central Bank of Mauritania would indicate on the statements of expenditure the nature and origin of the goods, as well as the payment date, and would maintain all relevant supporting documentation (invoices, customs declarations and evidence of payment) for review by supervision missions. The special account for the institutional strengthening and the investment components would be established at a commercial bank and upon credit effectiveness, IDA would make an initial disbursement of US$0.5 million Into this account. IDA would also replenish this account quarterly, subject to a minimum replenishment application of US$100,000, upon receipt of satisfactory evidence that all expenditures were eligible for financing, together with a bank statement reconciled with invoices and/or statements of expenditure submitted. Full documentation would be retained for inspection in the course of normal project supervision and by independent auditors. Assurances would be sought at negotiations that the Borrower would operate the special accounts according to these procedures. Procurement 65. Procurement procedures for the project components can be described as follows: (a) The quick disbursing adjustment credit would finance 100? of the CIF costs of eligible goods (excluding luxury consumer goods, defense items and goods intended for military use). It would not be possible to disbutse this credit against a positive list because the total amount of agricultural inputs imported by Mauritania is small (less than U&$8 million p.a.) and is largely financed by other donors. Imports by Government and the private sector would follow international competitive bidding for amounts exceeding US$1.5 million equivalent. For amounts below US$1.5 million: (i) Government would follow public procurement procedures and seek three price quotations, a procedure generally followed In Mauritania; the public procurement procedures have been reviewed and are deemed acceptable since they include advertising, public - i9 - bid opening and award to the lowest evaluated bidder; and (ii) private sector purchases would follow established comercial practices, and wherever possible, quotations from eligible suppliers from at least two countries should be sought. Direct contracting (single source purchase) could be used only for proprietary equipment or where icompatibility with existing equipment would call for standardized equipment and spare parts. Verification of Imports has been limited to physical inspection by the Customs Service. Government is planning to define options to improve the system of certifying goods in respect of quality, quantity, and price of shipments. The option of engaging an expert agency for preshipment verification -of price, quality and quantity was discussed with Government at the time of negotiations. Contracts for imports of less than- iS$5,000 in value will not be eligible for financing; and (b) Procuroment of goods, works and services under the institutional strengthening and investment components are described below and summarized in the following table: Rm_sw Sms /a Fl TE FROJE 1T*011018 sunt/n1m cmeom Project E""i, Prrmnt "Ild O M. To Con.truti.n 1erb 0.9 0.3 0.0 - 1.7 EQUInt and Vehicles 0. P -0' - "0.8 Awicultural Credit 0) (0.2) ,;.e Technical t_ ,ance. (1.6) (1.6) Stfudies and Training .5s - 0. Incremeantal(.)- .) Oprting Costs - 2.4 2.4 Total 1.5 0.4 7.1 4.0 18.0 (1.8) (0.4) (.8) (3.6) (7.0) /a FPleure in PtrenteMW arm t. reepestiVe *_mant finANd by M. 66. Contracts for civil works, equipment and vehicles estimated to cost US$100,000 equivalent or more each and valued at a total of about US$1.5 million, would be awarded through international competitive bidding (ICB) in accordance with Bank guidelines. Qualifying domestic civil works contractors under ICB will receive a 7.5Z preference in bid evaluation in accordance with said guidelines. Contracts for construction works, equipment and vehicles estimated to cost less than US$100,000 each and aggregating to about US$0.4 million, would be awarded on the basis of local competitive bidding (Z
Groupe de la Banque mondiale · President's Report
Mauritania - Agricultural Sector Adjustment - Investment Project
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President's Report
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Mauritanie
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