Burundi - Coffee Sector Project

tkoument of The World Bank FOR OMCLAL USE ONLY Report No. P-5245-BU MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE InTERNATIONAL DEv-sLOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 21.3 MILLION TO THE REPUBLIC OF BURUNDI FOR A COFFEE SECTOR PROJECT MARCH 14, 1990 This docmen busa rewrced distkbuon and may be asd by ripleuls ody In the perfomnum of thir offical duties. Its contnts may not otherwise be discosed wbitout World Bank uthodzation.  CURReNCY EC ALE S Curregy Unit Burundi Franc (Fnu) US $1.00 FBu 173 Flu 100 - US $0.578 WEIGHTS AND M mAUE Metric . itS.sh/US Equivalents I motor S3.28 feet 1 cubic metor - 35.3 cubic feet I.bectare - 100 area - 2.47 acres 1 kilometer 0 0.64 miles 1 square kilometer - 0.386 square mile 1 liter - 0.26 U.S. gallon 0.22 imperial gallon 1 metric tonne - 2,204 pounds GLOSSARY OF ABIRVTIONS AND ACRONYMS ASSP - Agricultural Sector Services Project BCC - Burundi Coffee Company BRB Banque de 18 Ripublique du Burundi CCCE Caisse Centrale de Cooperation Economique CIRAD Centre di cooperation internationale pour la recherche agricole et le developpemont -- -*(French coordinating authority for trOpical agricultural research) COOPEC Cooperative d'epargne at de credit (Savings and Credit Cooperative) FAC Fonds d'aide et de coopiration (French Assistance) ICA International Coffee Agreement ICO International Coffee Organization ISABU Institut des sciences agronomiques du Burundi HOAL Ministry of Agriculture and Livestock OCIBU Office des cultures industrielles du Burundi RDC Regional Development Company SODECO Societe de deparchage et de conditionnement SOGESTAL Societe de gestion de stations de lavage GOVERNMENT OF BURUNDI FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY BURUNDI COFFEE SECTOR PROJECT Credit and Proiect Summary Borrower: Republic of Burundi Beneficiariess The coffee industry; Bt.rundi coffee farmers; private investors; Banque do la Republique du Burundi (BRB); participating financial intermediaries; the Government (the Ministries of Agriculture and Livestock, of Commerce, and of Public Works). Amount: SDR 21.3 million (US$ 28.0 million equivalent) Terms: Standard IDA, with 40 years maturity On-lending terms: Credit funds to finance coffee washing stations to be built by private investors will be passed on by the Borrower to BRB at 112 of 1X below the rate for Treasury Cetificates for 30 years, including a grace period of 10 years. BRB will onlend the funds to participating financial intermediaries at a rate equal to that of the Treasury certificates. Interest rates charged by participating intermediaries to beneficiary private borrowers will be variable and market determined. Financint Plan: ----- US$ million ---- Total IDA Credit 28.0 Government 9.3 Caisse Centrale 6.1 French Assistance (FAC) 1.5 CIRAD 0.4 Belgian Assistance 1.0 46.3 Economic Rate of Return: 22 percent Staff Appraisal Report: Burundi Coffee Sector Project Report No. 8347-BU Mars% IBRD 22033, 22247 This document has a restricted distribution and may be used by mvipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMNENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BURUNDI FOR A COFFEE SECTOR PROJECT 1. The following memorandum and recomendation on a proposed development credit to the Republic of Burundi for SDR 21.3 million (USS 28.0 million equivalent) is submitted for approval. The proposed credit vill be on standard IDA terms and 40 years maturity and will help finance institutional restructuring and investments in the coffee sector. Parallel financing will be provided by France (USS 8.0 million equivalent) und Belgium (US$ 1.0 million equivalent). 2. Background. The Burundi Government's strategy for growth and foreign exchange earnings is critically dependent on its agricultural sector. Agriculture, which accounts for about 502 of GDP, also generates about 88% of the country's export earnings, 801 of which is from coffee. The Government's agricultural strategy, while focusing on strengthening services and increasing fooderop proAuction, also includes measures to develop promising export crops. Coi-_-e, however, is likely to remain the country's most important economic activity, at least for the next decade. Because of its favorable agro-climatic conditions sad relatively low costs of production, Burundi has a strong comparative advaitage to produce high quality arasica coffee. Recognizing this potential, the Government has, with the assistance of IDA and other donors, invested substantial sums in modernizing its processing capacity to enhance the quality and export value of its coffee. These measures have had encouraging results at-the marketing end, where buyers are willing to pay premium prices for Burundi's fully washed coffee, and at the production end where farmers have responded positively to washing station discipline. About one-third of the country's production is now fully washed. The Government intends to continue developing this potential while, at the same time, improving the efficiency and competitiveness of the industry by opening it to private sector participation and implementing important struc:ural reforms. 3. Coffee Policy and Strategy. The objective of the Government's coffee policy is to maximize earnings from the sector by exploiting the country's comparative advantage as a relatively low cost producer of high quality coffee and to improve the efficiency of the sector by opening it to the private sector. The Government's strategy to do so starts with the break-up of the de facto monopoly of BCC on exports. It remains constrained by the politically justifiable decision to maintain a floor producer price. The rationale is that quality premiums obtained by private exporters of fully washed coffee should allow them to offer more competitive prices to washing stations, which in turn would compete for higher quality coffee by offering premiums to farmers over the Government guaranteed floor price. This introduction of economic incentives will increase the return on investment in coffee stations and other processing facilities and make them attractive to private investors, which they are not under the present administered pricing system. 4. The major elements of the Government's strategy compriset (a) investing in the technology and the facilities which ensure this quality; (b) improving the efficiency at processing level through greater  2 specialization, private investor involvement, competition and market-based prices; (c) introducing quality incentives at producer level; (d) improving the efficiency at marketing level through the introduction of competition by means of an auction facility for private exporters; and (e) rationalizing the regulatory function through the establishment of the Office du Cali, whose membership would include representatives of all participants in the industry as well a Governmont, and by so doing reducing the latter's direct involvement at the operational level of the industry. S. Rationale for Bank Group Su