Zambia - Industrial Forestry Project

RESTRICTED FLE COPY Report No. P-638 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ZAMBIA FOR A FORESTRY PROJECT September 12, 1968  REPORT AND RECOMMENDATION OF THE PRESID)ENT TO THE EXECUTIVE DIRETORS ON A PROPOSED LQAN TO THE REPUBLIC OF ZAMBIA FOR A FORESTRY PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$5.3 million to the Republic of Zambia. PART I - HISTORICAL 2. In January 1967, the Government of Zambia applied for a Bank loan to help finance a portion of a long-term afforestation program pre- pared by the Forest Department of Zambia's Ministry of Natural Resources and Tourism. The loan application was prepared with the assistance of the FAO/IBRD Cooperative Program. The program which provides for the gradual establishment (up to 1993) of 75,000 acres of pine and 30,000 acres of eucalypt plantations was appraised by a Bank mission in July 1967. The project now recommended provides for Bank financing of the estimated foreign exchange cost of an eight-year period of plantation establishment. 3. Progress in preparation of the documents was delayed until proper arrangements could be worked out concerning organization and manage- ment. The Government prepared its proposals concerning project adminis- tration (see para 13) which were investigated by a Bank mission in May 1968 and found satisfactory. 4. Formal negotiations took place in Washington in August 1968. The borrower was represented by a delegation led by Mr. E. G. Kasonde, Permanent Secretary of the Ministry of Finance, and including Mr. A. Hamilton, Chief Conservatory of Forests, Mr. V. A. McInnes from the Ministry of Finance, Mr. D. Crapper from the Office of National Development and Plan- ning, and Mr. D. Gray from the Department of Legal Affairs; Mr. P. K. Musukwa from the Zambian Embassy also attended 5. The first lending by the Bank in independent Zambia was a road loan (h69-ZA) made in 1966. Previously the Bank made two loans for rail- ways in Northern Rhodesia (now Zambia) and Southern Rhodesia and two loans for power to the Central African Power Corporation, jointly owned by Zambia and Southern Rhodesia. Zambia has since assumed responsibility for its share of these loans. Each of the pre-independence loans is guaranteed by the United Kingdom. There have been no IDA operations in Zambia. The following is a summary statement of Bank loans in Zambia as of August 31, 1968:  -2- Amount (US$ million) Loan No. Year Borrower Purpose Bank Undisbursed 74-NR 1953 Zambia Railways 14.0 - 145-RN 1956 Central African Electric power 40.0- - Power Corporation- 1/ 197-RN 1958 Zambia7 Railways 9.5 - 392-RNS 1964 Central African Electric power 3.852/ - Power Corporation 469-ZA 1966 Zambia Roads 17.5 10.4 Total (less cancellations) 84.8 of which has been repaid to Bank and others 21.6 Total now outstanding 63.2 Amount sold: 37.6 of which has been repaid 18.2 19.4 Total now held by Bank 43.8 Total undisbursed 10.4 10.4 6. Since June 1, 1966, the Central African Power Corporation has been unable to obtain the foreign exchange from the governments of Southern Rhodesia and Zambia for payments under the 1956 and 1964 loans. Zambia and the United Kingdom have each made one-half of these payments as guarantor. 7. I am submitting simultaneously a proposed loan of US$10.7 million for a second road project. It is expected that an educat.on loan of about US$17 million will be ready for negotiations within the next few months, and a livestock development project may be ready for presentation by the end of this fiscal year. I may also submit proposals for the financing of an extension to the power installations at Kariba which were financed by Loan 145-RN of 1956. PART II - DESCRIPTION OF THE PROPOSED LOAN 8. Borrower: Republic of Zambia Amount: Various currencies equivalent to US$5.3 million 1/ As a result of Loan Assumption Agreements entered into in connection with the dissolution of the Federation of Rhodesia and Nyasaland at the end of 1963. 2/ Amount guaranteed by Zambia, i.e., one-half of loan.  -3 - Purpose: To help finance an eight-year portion of Zambia's long term industrial afforestation program, including the planting of 2,500 acres of pine and 2,500 acres of eucalypt per year. Amortization: In 25 years including a ten-year period of grace, through semi-annual install- ments beginning July 15, 1978 and end- ing July 15, 1993. Interest Rate: 0i9 per annum. Commitment Charge: 3/4 of 1%. PART III - THE PROJECT 9. A report on the proposed project entitled "Industrial Forestry Project - Zambia" (TO-605c, dated September 11, 1968) is attached. 10. Zambia has always been a net importer of forest products. Apart from some teak forests, exploitable local forest reserves are limited to a slow-growing, low-yielding wood which is being used mainly in the copper industry and for firewood. Economically accessible reserves of this type will have been largely exhausted by the late 1970's. The project aims at replacing them with fast-growing,high-yielding wood species, suitable for various uses. Demand projections foresee attractive market prospects for the output in the mining and building industries ard as transmission poles. 11. The project is part of the borrower's forest development program which is designed to establish by 1993 30,000 acres of eucalypt and 75,000 acres of pine plantations in three main blocks located within the copper mining region of Zambia. The project commences January 1, 1969 and consists of an eight-year portion of the program including the planting of 2,500 acres of eucalypt and 2,500 acres of pine each year, and the maintenance of the plantations. The Project would contribute to a diversification of Zambia's primary production, result in substantial foreign exchange savings, and is expected to stimulate the establishment of secondary wood-using industries. The rate of return to the economy is estimated at 13 percent. The financial rate of return would be about 10 percent. 12. The cost of the project is estimated at US $11.1 million equivalent, including adequate provision for contingencies to cover possible price and wage increases. The proposed loan would cover the estimated foreign exchange component of $5.3 million. The Government will cover the local currency requirements.  13. The project will be managed by the Industrial Plantations Division of the Forest Department of the Ministry of Na-tural Resources and Tourism. The Government has taken measures to ensure that the activities of the Division will be carried out on a commercial basis. A separate budget will be maintained for the Division and allocations from the Government Budget will be entirely distinct from other Forest Department or other Ministry allocations. The project accounts will be audited by independent auditors satisfactory to the Bank. The Government has also modified its normal regulations relating to staffing, purchasing procedures and sale of produce in order to assure the Division sufficient freedom of action. The above procedures will allow the Division to run on commercial lines, while retaining the benefits of various common services shared by the Division with other entities of the Forest Department. The Government will also undertake in lieu of insuring the plantations against fire, insect or fungal attack, disease or climatic abnormality, that if in any calendar year more than 100 but less than 1,000 acres are destroyed, they will be replaced within four years; should the destruction be more extensive, the Government will consult with the Bank about remedial measures. 14. Contracts amounting to $15,000 or more for the purchase of tractors, bulldozers, graders, trucks and personnel vehicles and for land clearing will be awarded on the basis of international competitive bidding. Contracts for the purchase of fire tenders and other small items of plantation equipment and for materials for the construction of buildings and roads would not be subject to international competitive bidding since the tenders would be too small and the equipment too diversified; for these, com- petitive local bidding procedures would be applied. Construction of buildings and roads and planting and maintenance of trees would be done by the Industrial Plantations Division using its own labor. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Loan Agreement between the Bank and the Republic of Zambia and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 16. 1fthile this is the first loan agreement for a forestry project, it conforms substantially to the pattern of agreements used for certain compara'ble agricultural projects. PART V - THE ECONOMY 17. An economic report entitled "Economic Position and Prospects of Zambia" (AF-81a) dated August 8, 1968, was distributed to the Executive Directors on August 27, 1968.  18. The Zambian economy is heavily dependent on copper, which produces nearly half of the GDP, two-thirds of Government revenues and comprises over 90 percent of exports. The sharp increases in copper prices since 1964 have more than offset the increase in costs of production and a tem- porary reduction in output, and have mitigated the adverse oconomic effects of Rhodesia's Unilateral Declaration of Independence (UDI) in November 1965. 19. Copper prices are now falling, howJever, while production costs may rise further. As a result, even assuming an increased volume of production, government receipts from copper are likely to decline, at the same time as public expenditures increase. Consequently, budget and external deficits are virtually certain to appear in the next years. These factors qualify ZambiaK short and medium term prospects. The long term outlook for economic development, however, is good. Export prospects for copper are reasonable, while tobacco, poultry and confectionery groundnuts have good export potential. Import substitutes in the agricultural sector, such as beef, cotton, sugar, and dairy products, have substantial opportunities for growth, as have a range of manufactures including cement, timber products and metal products. Zambiats basic economic strength and long range growth potential, combined with the present low level of external public debt, justifies her borrowing abroad to help finance important development projects. PART VI - CO0TLTANCE W4ITH ARTICLES OF AGREEMENT 20. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECMENDATION 21. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to Republic of Zambia in an amount equivalent to US $5,300,000.00 RESOLVED: THAT the Bank shall grant a loan to the Republic of Zambia in an amount in various currencies equivalent to five million three hundred thousand United States dollars (US $5,300,000.00), to mature on and prior to July 15, 1993, to bear intQrest at the rate of six and a half percenb (6g) per annm, and to  - 6 - be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Industrial Forestry Project) between the Republic of Zambia and the Bank, which has been presented to this meeting. Robert S. McNamara President Attachment: Washington, D.C. September 12, 1968