Burundi - Agribusiness Promotion Project

D _ uet of The World Bank FOR OFCIAL USE ONLY bpOPVt NO. P-5800-BU NMORANDUN AND RECOMDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO TEE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 2.3 MILLION TO THE REPUBLIC OF BURUNIDI FOR AN AGRIBUSINESS PROMOTION PROJECT July 21, 1992 MICROFICHE COPY Report No. :P- 5800 BU Type: (PM) Title: AGRIBUSINESS PROMOTION PROJECT Author: BARRES, J. Ext.:34255 Room:J7U97 Dept.:AF3AG This document has a restricted distribuion and may be used by reipients only in the performance of their official duties. Its contents may not otherwise be disdosed without World Bank authorization.  CUkRENCY EOUIVALENTS Penod A rW Curency unit Burundi Franc (FBu) 1992 US$1.00 FBU 200 (as of March 1992) 1991 US$1.00 = FPu 181.5 1990 US$1.00 = PBu 171 1989 US$1.00 = FBu 159 1988 US$1.00 FBu 140 1987 US$1.00 = FBu 124 WEIGHTS AND MEASUR1S Metic International Standard System GLOSSARY OF ABBREVIATIONS APDF = Africa Project Development Facility CCCE = Caisse Centale de Coopwration Economique (French Aid Agency) COGERCO Compagnic de gdrance du coton (Cotton Company) EC European Communites ICP Intemfiniterisl Committee for Privatizaon -FC = nteational Finance Corporation 0TB = Office du th6 du Burundi (Tea Board) P = Public Entepris PA = Project Administrator SAC = Structural Adjustment Credit SCEP Service Chargd des Entrepnses Publiques (Public Enterprise Reform Office) 51D1 = Socidt6 d'investissement et de ddveloppement international (Infterational Investment and Development Company) SOSUMO = Soci6te sucribre du Mosso (Mosso Sugar Company) SRDI = Soci6te rdgionale do ddveloppement de l'Imbo (Imbo Regional Development Company) GOVERNMENT OF BURUNDI FISCAL YEAR January 1 to December31  FOR OMCIL USE ONLY REPUBLIC OF BURUNI) AGRIBUSINESS PROMOTION PROJECT Credit and Project Summary Borrower: Republic of Burundi Amwunt: SDR 2.3 million (US$3.096 million equivalent) Terms: Standard 3 r A terms, with 40 years maturity Financing Plan Amounts Percentages (US$ million) Government 0.3 4 Private Enterprises 1.4 23 IDA 3.1 49 Belgium 0.1 2 EC 1.2 20 CCCE 0.1 2 TOTAL 6.2 100 Rate of Return: not calculated Staff Appraisal Report Number: 10628-BU Map: IBRD 23199 This document has a restricted distribution and may be used by recipients only in the perform. once c' -heir official duties. Its contents may not otherwise be disclosed without World Bank authori t.ation.  MEMORANDTJM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOL MENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BURLTNDI FOR AN AGRIBUSINESS PROMOTION PROJECT 1. I submit for your approval the following report and recommendation on a proposed development credit to the Renublic of Burundi for SDR 2.3 million, the equivalent of US$3.096 million, on standard IDA terms with a maturity of 40 years to help finance a project ior an agribusiness promotion project. 2. BackgrunA. Burundi is a small, landlocked country in East-Central Africa (27,b34 km2). Its per capita GDP was about US$215 in 1991. With a population of just over 5 million and a population growth rate of 3 percent, Burur.di has the second highest density in Africa, estimated at 193 persons per square kilometer. Social indicators are comparable to the average for sub Saharan Africa. Despite the demographic pressure on already constrained land, rural migration has been limited: only 6 percent of the total population is urban. The country has limited natural resources other than relatively fertile agricultural land. Agriculture is the predominant activity, contributing half of GDP and 90 percent of employment and of export earnings. The most important export crop is coffee, which on average accounts for about 80 percent of total exports. Burundi is one of the few African countries that is self-sufficient in food. The secondary sector (mining and manufacturing) is still small, accounting for about 14 percent of GDP and 5 percent of exports in 1990. The private sector, whose share of gross fixed investment is about 18 percent (1990), plays a major role in agricultural production and transport. By comparison, the public sector dominates manufacturing, energy and infrastructure and contributes half of the country's formal employment. As a landlocked country, Burundi is vulnerable to transportation problems in neighboring countries. 3. Burundi's adjustment program, which began in 1985, has made substantial progress towards stabilizing the economy and laying the foundations for its structural transformation. However, it has not yet stimulated as strong a supply response as had been expected, pardy because of the remaining rigidities of the Public Enterprise (PE) sector and also because of the mixed signals given by the government to the private sector. Public enterprises account for 84 percent of resourcebased industrial output. Most of them are in a monopsonistic situation and have little incentive to respond to market signals or to seek new market opportunities and product lines. Perceived as an integral part of the government, they lack managerial autonomy and benefit from a number of advantages, such as customs exemptions, tariff protection, favorable tax treatment and preferred access to credit. The reform of PEs was a major objective of the First and Second Structural Adjustment Program. A special Public Enterprise Reform Office (SCEP) was created to handle this task, but its performance in supporting reform has been poor due to weak management and inadequate organization. Hence, with the exception of the privatization of coffee exports and the management of the coffee processing industry under the Coffee Sector Project (Credit 2123-BU), results so far have been slow and disappointing. 4. Resource-based agro-industries (agro-industries plus textile and leather) account for two-thirds of total industrial output and for 60 percent of industrial employment. Private firms represent only 25 percent of output of resource-based industries, but 42 percent of employment in the same sector. There are only about 300 formal, mostly small, such enterprises in the country. Structural adjustment reforms have already led to an improved enabling environment for private sector development in non- traditional products (e.g. fruits, vegetables, cut-flowers, dairy products), where producers generally  2 receive a higher share of the world market price than state-administered crops. The number of fruit and vegetable exporters has increased from 5 to 15 in the last thre -ars. However, these emerging businesses continue to face serious obstacles to achieve internationa. .petitiveness. Many obstacles result from internal and regulatory constraints, including lack of mark,dng skills and poor knowledge of foreign markets, while others stem from the geographical location of the country and its low level of development. in recognition of these constraints, the governmem is pursuing its reform program to improve the private sector's legal and regulatory framework and overall operating environment, as well as shifting the role of the State from producdon and processing to that of a regulator and promoter of private sector development. 5. The Bank intends to support the government's strategy with three operations. The recently approved Third Structural Adjustment Credit (SAC III), bui'.ding on the lessons learned from the implementation of tfie first two SACs, supports a full deregulation in the agricultural sector and the removal of remaining policy constraints to private sector development. The also recently approved Private Sector Development operation is to provide an APFX line of credit for private entrepreneurs, together with additional reforms in the regulatory and legal framework as well as in the financial sector. In parallel to these two operations, the proposed Agribusiness Promotion Project would support: (a) the break up of monopolies and accelerated privatization of agricultural PI,s; and (b) the development of small pr vate agribusinesses. 6. Proiect Obiectives and Description. The project would help to diversify the production and marketing of agricultural produce (including exports) and stimulate efficiency improvements by expanding the role of the private sector and actively supporting competition. To this end, the project would have two components- (i) assistance, to government in privatizing publicly held agro-industries; (ii) assistance to private entrepreneurs in developing agribusinesses. (a) Privatization of Public Agro-Industries. In supporting the government's plan to privatize agricultural PEs, the project would give special attention to the largest of these agro-industries, namely: the Burundi Tea Company (OTB); the Cotton Management Company (COGERCO); the Mosso Sugar Company (SOSUMO), and the Imbo Regional Development Company (SRDI), a rice producer. It would fund technical assistance to provide specialized services (e.g. socio-economic evaluation, assets valuation; bidding documents for management contracts, leasing and sale of assets; and organization of public offerings) to facilitate the privatization process. Technical assistance would be provided to the Interministerial Committee for privatization (ICP) and to the Technical Evaluation Commissions (MC). The project would also finance training activities to prepare employees for privatization and complement management reforms implemented through on-going projects funded by Belgium, France and the European Communities (EC). (b) Development of Private Agribusiness. An Agribusiness Development Fund designed to motivate and assist private firms and their professional associations in the expansion of their business would provide financing for commercial services to improve their marketing, product development and technological development. The fund would finance up to 50 percent of related expenses through a matching fund mechanism which has been successfully introduced in India and Indonesia with Bank support as an alternative to supply-driven public exports promotion schemes. Eligible expenses for commercial services to individual firms would be recovered over a period of five years, but local training organized by professional associations would be financed on a 50:50 basis. Eligible firms include an estimated 300 firms ir. agribusiness and other resource based industries. Beneficiaries would typically be small enterprises seeking to develop export markets and diversify the range of goods produced. Eligible activities would include any activity within a properly formulated export expansion or import-substitution plan covering: market prospection, product development and  3 adaptation, and sales promotion. The fund would also organize regular entrepreneurship seminars to reinforce management skills. 7. Poject Cost and Financin . Total estimated cost is US$6.2 million, subdivided as follows: technical assistance for PE privatization: US$1.9 million; Agribusiness Development Fund: US$3.2 million; Project administration: US$0.3 million; and contingencies: US$.07 million. IDA financing would be about US$3.1 million. Co-financing and parallel financing would be provided by the government, Belgium, France and the EC. The private sector would participate through cost-sharing of services. Project costs as well as financing arrangements are summarized in Schedule A. Procurement and disbursement arrangements are summarized in Schedule B. A timetable of key processing events and the status of IDA operations in Burundi are given in Schedule C and D respectively. A note on projects with significant disbursement lags is provided in the attachment to Schedule D. 8. rject Implementation and Management. The privatization component would be implemented by the SCEP after completion of its reorganization under SAC III. The Agribusiness Promotion Fund would be managed by an existing financial or commercial institution assisted by international expertise. A Project Administrator would be appointed by the Ministry of Agriculture for the duration of the project to handle procurement, disbursements and maintain project accounts. 9. Lessons from Previous Bank/IDA Involvement. The PCR for the First and Second Structural Adjustment Credits identified weak linkages between macro reforms and micro/sectoral policies as one of the reasons for the mixed performance of the adjustment program, especially as regards public enterprise reform. Limited achievements on PE restructuring and divestiture were compounded by SCEP's poor performance, insufficient coordination with other donors and lack of a privatization strategy. On the other hand, the creation of private sector coffee processing management companies and the privatization of coffee exports are being successfully promoted under the Coffee Sector Project (Cr. 2123-BU). The project would provide sector-specific support to the government's privatization program of other key agro-industries. It would also help small private agribusinesses to help them overcome marketing obstacles, particularly at the early stages of their development. The financing of market development and other professional services through the matching fund principle have been successfully introduced in India and Indonesia and are now being introduced in Kenya with Bank support. This component would complement services currently provided by IFC's African Project Development Facility (APDF) which target larger enterprises than those under the proposed project. 10. Rationale for IDA Involvement. Taking account of the major findings of the Agricultural Sector Memorandum, the project was designed as a major contribution to public enterprise reform, a key objective in the country assistance strategy. The government is committed to the privatization of agro-industries, but lacks the specialized expertise required. MTe project is part of a package designed to strengthen the supply response to structural adjustment reforms supported by IDA. Policy measures to address legal and regulatory constraints are included in the recently approved Third Structural Adjustment Credit (Cr. 2376-BU) and Private Sector Development Project (Cr. 2359-BU). By providing technical and financial support to private initiatives in agro-industries, a crucial growth sector in Burundi, the project would help create entrepreneurial talent and develop an incipient private sector culture. The political sensitivity of privatization in a sector where smallholder producers are involved and the consequent need for the government to ensure that the process is transparent and continuous, justifies IDA's coordination of the necessary technical assistance.  4 11. Project Sustainability. The privatization process is expected to be completed at the end of the project. The sustainability of the Agribusiness Development Plnd will be assessed during the mid- term review of project implementation. Cost recovery of commercial services on a revolving fund basis would contribute to sustainability of the fund. The fund beneficiaries would be invited to create a professional organization which would take over the management of the fund from the managing firm. Operating costs of the fund would be progressively recovered by membership fees. 12. Agreements Reached. This operation is part of a package which includes the Third Structural Adjustment Credit and the Private Sector Development Project. Accordingly, many policy conditions identified as critical for the success of the proposed project have already been included in those two operations, in particular, the following measures: (i) price liberalization for export crops and for inputs; (ii) liberalization of coffee, tea and cotton cultivation; (iii) clarification of tiie land code on pastures and irrigated land; (i-.) simplificatien of regulations for enterprise creation and operation, and for import-export activities; (v) elimination of Central Bank role in the administration of procedures for import and export licensing of business firms and individuals in favor of increased delegation of responsibilities to commercial banks; (vi) elimination of prior accreditation of exporters and importers by the Ministry of Commerce and Industry; (vii) liberalization of controls limiting the international transfers of dividends and of salaries of foreign workers in Burundi; (viii) increased foreign exchange allowances for business travel and tourism; (ix) liberalized international transport and insurai.ce; and (x) elimination of distinctions in allocating credits, such as between priority and non-priority sectors, and between rediscountable and non-rediscountable credits. The removal of these constraints contributes to the establishment of a more favorable working environment for the private sector and opeLs the way to the privatization and private sector promotion measures to be implemented under the project. 13. In addition, the following agreements were reached during negotiations: (i) a letter of development policy on the agribusiness sector which spells out government divestiture policy in agro- industries and scope and timetable for privatization; (ii) statement of policies and operating procedures of the agribusiness development fund, including cost recovery mechanism; (iii) terms of reference for technical assistance for preparation and implementation of privatization; (iv) terms of reference of the Project Administrator; and scope, timing and terms of reference of the mid-term review. Conditions of effectiveness include: (i) the establishment of the Technical Evaluation Commission for SOSUMO; (ii) the appointment of the Project Administrator and of the accountant, both with qualifications and experience acceptable to IDA; (iii) completion of the reorganization of SCEP, including the appointment of a financial analyst, a management specialist and a legal advisor; and (iv) commencement of the recruitment procedure for the consultants services to prepare the privatization. Conditions of disbursement are the following: (i) submission of a detailed training program acceptable to IDA; (ii) recruitment of an independent firm to administer the Agribusiness Development Fund; and (iii) execution of the Fund agreement. 14. Environmental Aspects. Profit maximization objectives by private agro-industries are likely to induce the development of more efficient use of pesticide (cotton) and fertilizers (tea, cotton and sugar). This would have a positive effect on the environment and reduce pollution in Lake Tanganyika. Therefore, the project was assigned Environment Assessment Category C. However, compliance with existing environmental regulations would be a condition of eligibility for services to private companies. The introduction of new technologies will be subject to environmental assessments fully financed by the project. 15. Program Objective Categories. The project would contribute to the following Bank Program Objective categories: (i) public sector reform, privatization and private sector development; and (ii)  5 poverty reduction through employment creation in the private sector. The Technical Assistance component of this project would contribute to institut.onal development by providing support to public enterprise restructuring. 16. Benefits and Risks. The project would address constraints that have so far inhibited an adequate supply response to the macro-economic reforms undertaken and would expand the private sector's involvement in trade and processing of both traditional and non-traditional products. The assistance proposed above is designed to improve the capacity of private businesses to compete, particularly in the early stages of development. 17. The privatization component would transfer to private ownership or management, companies generating most of export earnings outside coffee and providing income to about 90,000 rural families. Privatization of agro-industries would contribute to increased value-added in tea and cotton (30% and 40% respectively over present levels representing additional value-added amounting to US$ 1 million and US$ 0.4 million respectively). For sugar it is expected that private management of SOSUMO would reduce production costs and lead to the capture of a larger share of a growing local market. The Agribusiness Development Fund component would support small enterprises in preparing and implementing appropriate development plans which will increase their competitiveness on international markets. It is expected that these services would generate additional value-added amounting to ten times its cost over a five year period. Experience with similar funds in other countries shows that these results are attainable. Over the duration of the project some 150 firms are expected to benefit from matching funds. Over a five year period, additional fiscal revenues generated by the increase in value-added would amount to a minimum of 1.5 times the value of the grant. A special effort would be made in favor of enterprises led by women through the training seminars. 18. Risks are inherent to the pilot and innovative nature of the project. Demand-driven support services are new in Burundi and disbursements on the Agribusiness Development Fund are expected to be slow in the beginning. The implementation of the privatization component will depend on the successful implementation of the government reform supported by the third SAC and the Private Sector Development Project. The emergence of an active secondary market, to be supported by SAC Im, would facilitate implementation of the government objective to offer part of the capital of the agro-industries to the public and employees. Privatization will also be dependent on SCEP's performance, which has not been satisfactory in the past but is now expected to improve after a comprehensive reorganization to which the g.vernment has agreed. External risks would include setbacks in the government's policy on national unity that could delay privatization of industries. Any serious disruption would affect demand for the matching funds and new investments. 19. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and I recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washingtn, D.C. July 13, 1992  6 Schedule A ESTIMATED PROJECT COSTS AND FINANCING PLAN PrOect COSTS, Local Foreign Total Foreign as X of Total USS thousands Privatization Preparation OTB 17 146 164 89 COGERCO 9 84 93 91 SOSUMO 4 90 93 96 SRDI 10 80 90 8B Training 204 816 1,020 80 Sub-Total 244 1,216 1,460 33 Privatization Implementation TEC OTB 28 122 150 81 TEC COGERCO 11 76 86 88 TEC SOSUIO 28 99 12? 78 TEC SRDI 11 32 43 76 Sub-Total 77 329 406 81 Agribusiness Development Fund Matching Fund 923 1,480 2,402 62 Training 100 300 400 75 Management Unit 173 302 474 64 Sub-Total 1,195 2,082 3,277 64 Project Administration 296 37 333 11 TOTAL Baseline Costs 1,813 3.663 5,476 67 Physical Contingenc-es 60 188 248 75 Price Contingencies 198 310 508 61 TOTAL Project Cost 2,070 4.161 6,231 67 J/ Totals may not ad up due to rounding. Project FinancingPlan IDA Pri- GC8 8el- CCCE EC Total X of vate gifum Total Assistance to 1.5 0.0 0.2 0.1 0.1 0.2 2.1 34 privatization Agribusiness 1.4 1.4 0.07 0.0 0.0 0.8 3.7 60 Development Fund Project Administratfon 0.1 0.0 0.03 0.0 0.0 0.2 0.4 6 TOTAL 3.1 1.4 0.3 O.1 0.1 1.2 6.2 100 X 49.7 22.9 4.4 1.6 1.6 19.8 100.0  7 Schedule Page 1 of 2 BURllNDI AGRIUSINES ?ROMOTION PROJEA =UCIREMENT MEI9HD AbD DISBURSEIN Pouremnent Metod Project Etement ICB LCB Other N.S.F. TOTAL 1. Vehicles, Equipment .03 .03 (.03) (.03) 2. Consultancies .7(a) .9tb) 1.6 (.7) (.7) 3. Training grants and 2.7 2.7 advances for comercial (.8) (.8) services 4. Training 1.6Cc) 1.5 (1.3) (1.3) 5. Increauntal operating .4 .4 costs (-3) ('3) TOTAL .03 5.3 .9 6.2 (.03) (3.1) (3.1) Note: Figures in parentheses are the respective amounts financed by the credit. N.8.F.: Not Sank-Financed. (a) Services should be procured in accordance 1ith World Bank Guidelines: Use of Consltants by World Bank Borrowers and by the World Bank as Executing Agency (Washington, D.C., August 1981). (b) Co-fiancd in parallel by Belgiun, CCCE, and the EC. (c) Selective international and local con4etitive bidding.  8 page 2 of 2 Amon of the Credit Alocated Caeory (S X 100) * of pendlr to be Finae (1) Vehicles and Equipment 24 100% of forei aiedtm and 80% of loc1a - (2) Consulan services 4 100% (3) Trining 867 100% of forn _pemtu NaW 0% of (4) Optang cos of PA 94 100% of foeig expenditures NW 80% of icxal (5) Trainng grts 200 30% (6) Advances for commmcdl 530 30% (7) Taining 276 100% of orig ependitures and 80% ot lowa (8) Environmental Studie 100 100% (9) Operating cos 129 I/ (10) Unallocatd 380 TOTAL 3,096 / Note: e Mowing pR e _apply as pecetae to be nanced fbr cateor 9 (opqatig cos): a) 100% for the 24 calendar months fowing th Effective Dat; b) 70% for the 24 caendar months fowing tw period referred to in a) above; o) 30% for the 12 calendar monts lowing the period r d to in b) above. IDA F1 Year FY 93 94 95 96 97 98 99 Annual 0.2 0.4 0.6 0.7 0.6 0.5 0.1 Cumulafive 0.2 0.6 1.2 1.9 2.5 3.0 3.1  9 Schdule C Page 1 of 1 Thlde Mffe of Key Poessing Events Time taken to prepare: fourteen months Prepared by: Government with IDA assistance First IDA Mission: July 1991 Appraisa Mission Departure: March 1992 Negotiatons: May 1992 Planned Effictiveness: December 1992 Relevant PCRs/PPARs: Burundi - First and Second Structurd Adji-stment Credits: PCR and PPAR (report no. 10685) Ihis report is based on the findings of an appraisal mission which visited Burundi from March 9 to 30, 1992. The mission consisted of Messrs. Jean-Frangois Barrws, Sr. Agricutir Economist (AF3AG, mission leader and task manager), Jean-Claude Fayd'Herbe, Senior Financial Analyst (AF3AG - finmcial sector) and Mr. Charles Bolduc, Sr. Finncial Analyst (AF3AG).  PAGE 1 Annex D Page 1 of 3 fm Tim: 07/08/ at 15.33.14 AfRICA - lWEtR OEPAMW III Status Of Ur WM OpratIum In 5811 KO - SurY Sbtat Of Loain and IDA Crdits (LOA dMt4 4 of 512- MIS data as Of 07/0/ BYOowmtry Dai:ty: Bawt Aumt In US9 lliton (lam nsi latlam) Laon or Final UrdI- ClosIrg Credit NO. Year Borrow lpDe Baki IDA burid Date credits 26 Credits(s) closed 307.77 C15830M-I 1985 UN I HIYS. IV 18.40 .52 080/391(R) C15983UI 1985 TURNI lRANS 8 DISTR.SYSMI. 12.30 5.94 12//311(R) C1200-UI 1988 WWI FORES 1I 12.80 4.83 09/3092(R) C17950-U1 1987 BUNICI EC0.*.ATY.E1TER. 7.50 3.80 V31/92 C18-u1 1987 NEI MUNIC. I 4.80 4.00 12M/93 C18570-8UI 1988 UNi ARIC.IYINBA 10.00 8.10 0/94 c1882la-I 1888 BLEI EALTH1POP. 14.00 5.11 0O830/93 C18810-BUI 1988 DUImI WUC.SEC.Dl 31.02 11.95 08/94 C1889mUI 1988 WWI AMEX 8.00 5.78 1231/94 C19680-8U1 1989 WmICI UIBAN II 21.00 18.83 12(31/95 C20240-BUI(S) 1989 8DI A;RIC.SVS. 33.10 30.83 12(31/98 C21050-SU1 1990 WRliNI RAOMRT SECTI 43.20 40.22 12/31/95 C21230-11I 1990 BWINI CfFEE SECTOR 28.00 19.89 07/31/98 C22M3 Iu 1991 W10WI OERMY SECTMR REW8I 22.80 21.83 0/30/98 C228O-W8UI 1992 WWI WATER OP SECTOR 32.70 31.88 08098 C235901 1992 BURUNI FRIV SEC 17.Q0 17.18 12V31/97 C238=0-UI(S) 1992 W8 DIIO SAL III 30.00 30.00 TOTAL mwr Credits - 17 348.32 257.88 Loams 1 Loam(s) closed 4.80 All clued for 8Il1 TOTAL r*rr Lams - 0 TOTAL" 4.80 854.08 of shich reaid 4.80 10.29 TOTAL hold by Bu & IDA 843.79 Paunt sold .2.97 of hich reild 2.97 TOTAL trlddined 257.88 Notes: * Not etfftive