Uganda - Tea Growers Corporation Project

RESTRICTED FILE JUl'1 Report No. P-567 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE STATE OF UGANDA FOR A UGANDA TEA GROWERS CORPORATION PROJECT August 30, 1967  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A FROPCSED DEVELORENT CREDIT TO THE STATE OF UGANDA FCR A UGANDA TEA GROVERS CORPORATION PROJFCT L. I submit the following report and recommendation on a proposed c.edit in an amount in various currencies equivalent to U.S. $3.4 million to the State of Uganda. PART I - HISTORICAL 2. In late 1964, the Uganda Government requested assistance from IDA and the Commonwealth Development Corporation (CDC) to help finance its program for the development of tea production by African smallholders. An appraisal mission visited Uganda in April/May 1965 and recommended that the proposed tea development program would be suitable for an IDA credit. Credit negotiations were held in Washington in October/November 1965 with a Uganda Government delegation headed by lMr. M. M. Ngobi, the Minister of Agriculture. Representatives of CDC conducted simultaneous loan negotiations in Washing- ton with the same delegation. It was agreed that IDA would lend exclusively for field development, while CDC would lend for both field development and for processing facilities. 3. There were initial difficulties during negotiations with the Ugandan authorities, for whom this was the first experience after independence of doing business with the Bank. The further delay in bringing forward this project to the xcecutive Directors was mainly due to constitutional problems in Uganda and difficulties experienced in appointing key project staff. M1issions to update the appraisal report were sent to Uganda in July 1966 and February 1967. 4. This is the first tea development project proposed for IDA financing in Uganda and would be the third IDA credit to Uganda, increas- ing the total IDA financing in that country to $18.4 million. Prior to becoming independent, Uganda had received a loan from the Bank amounting to $8.4 million which was guaranteed by the United Kingdom. The follow- ing is a summary statement of the Bank loan and IDA credits to Uganda as of July 31, 1967: Loan or Amount (US $ million) Credit No. Year Borrower Purpose Bank IDA Undisbursed 279-UG 1961 Uganda Electric Power 8. - 101-UJG 1967 Uganda Education 10.0 10.0 108-UG 1967 Uganda Roads 5.0 5.0 Total (less cancellations) W7- _1. of which has been repaid 1.1 Total now outstanding 7.3 Amount sold 8.3 of which has been repaid 1.1 7.2 Total now held by Bank and IDA 0.1 15.0 Total undisbursed 15.0  - 2 - 5. In addition to the above loan and credits, the Bank has made three loans to the East African Common Services Authority (FACSA), of which two were for Railways and Harbors and the third for Telecommunications. Each one is guaranteed jointly and severally by Kenya, Tanzania and Uganda, with the United Kingdom also as guarantor for the first loan. The status of these three loans as of July 31, 1967 was as follows: (US $ million) Nio. Year Borrower Purpose Bank Undisbursed 110-EPA 1955 EACSA Railways and Harbors 24.0 428-EA 1965 EACSA Railways and Harbors 38.0 22.3 483-EA 1967 EACSA Telecommunications 13.0 13.0 Total (less cancellations) of which has been repaid 11.8 Total now outstanding 63.2 Amount sold 23.7 of which has been repaid 11.6 12.1 Total now held by Bank 51.1 Total undisbursed 35.3 6. Disbursements of the 1965 loan for railways and harbors (No. 428-EA) have been rather slow so far because most of them are made on delivery of the wagons and other equipment, some 12 to 18 months after the orders are placed. These deliveries will begin shortly and the entire loan is expected to be disbursed by mid-1968 as originally planned. 7. IFC has made one investment in Uganda in M.ulco Textiles Ltd., in 1964. The investment totalled U.S. $3.51 million equivalent, of which $2.80 million was loan and $0.65 million equity. As of June 30, 1967, $3.1 million had been disbursed. $70,000 is a standby commitment. 8. A ranching project has recently been appraised and an application for assistance for an agricultural credit project is under study. Applica- tions are also likely for further education and roads projects. PART II - DESCRIPTION CF THE PROPCSED CREDIT 9. Borrower: State of Uganda Beneficiary: Uganda Tea Growers Corporation (UTGC) Amount: The equivalent in various currencies of $3.4 million. Purpose: To help finance (a) the planting of some 9,700 acres of smallholder tea in the period 1966-1970, and (b) the provision of services to these smallholdings and to some 4,000 acres of smallholder tea planted prior to 1966.  -3- Amortization: 50 years, including 10-year period of grace; repayment to be in 80 installments, 1/2t of the principal amount to be repaid semi-annually beginning August 1, 1977 and ending February 1, 1987 and 1-1/2% semi- annually thereafter to February 1, 2017. Service CharRe: 3/4 of 1% per annum on the principal amount of the credit withdrawn and outstanding. Relending Terms: $2.6 million will be relent to UTGC at 5% interest per annum. Repayment will be over 20 years, including a 6-year grace period. PART III - THE PROJECT 10. An appraisal report entitled "Uganda Tea Growers Corporation Project - Uganda" (tJo. TO-500b) on the proposed project is attached (No. 1). 11. Nearly 90 percent of the present tea acreage of about 26,000 acres in Uganda has been planted by large estates owned and managed by Drivate companies and by Agricultural Enterprises Limited (AEL), a sub- sidiary of the Government-owned Uganda Development Corporation (UDC). However, emphasis is now being given by the Government to expanding tea growing in the African smallholder areas: in many regions tea is the only practicable cash crop that will enable subsistence farmers to achieve a better standard of living. The project for which the IDA credit is proposed will provide for the Dlanting of some 9,700 acres of tea over the five- year period 1966-70. About 5,500 smallholder African farmers are expected to participate in the scheme. It is estimated that, when the tea bushes are mature, the project would contribute annually about 10 million pounds of tea to Uganda's total tea output, which was 25 million pounds in 1966. 12. The principal responsibility for the execution of the project would rest with the Uganda Tea Growers Corporation, a statutory body established in 1966 for this purpose. Under its constitution, UTGC has wide powers to organize and supervise tea planting by smallholders. The Government has, under a Supervision Agreement with UTOC, undertaken to ensure that it has an experienced and competent field staff. UTGC secures the supply of planting material and fertilizer for irmature tea, and makes this available to smallholders under credit arrangements. It supervises smallholders' tea cultivation and organizes and supervises tea growers' cooperatives. UTGC arranges for the processing of the smallholders' leaf and organizes and finances its collection, inspection and transportation to the factories. The Government has undertaken to construct and maintain the roads needed to enable UTGC to collect green leaf from growers and to deliver it to the factories.  - 4 - 13. The estimated total investment cost of the field sector of the project (including the capital equipment for leaf collection, nurseries expenses, planting material and fertilizers during the initial four-year development period after each planting, the cost of a training center, and UJTGC's head office expenditures) is US $6.4 million equivalent. Of this the IDA credit would cover US $3.4 million and a loan from the CDC