Cameroon - East Cameroon Oil Palm Project

RESTRICTED FILE COY Report No. P-671 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 The report may not be published nor may it be quoted as representing their views.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 SOCIETE DES PALMERAIES DE MBONGO ET D'ESEKA FOR AN OIL PALM PROJECT IN EAST CAMEROON February 5, 1969  R E S T R iC T E D Reporl No. P-671 This report was prepared for use within the Bank end its cffiliated organizations. They do noi accept responsibility tor its ac;urocy or cornpleteness. The report may not be published nior may it be quoted as represenfinqc their views. INTEPNATIONAL BANK FOR IECON STRUC OINT AND DEVELOPMEINT REPORT AND RECO:MMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TIE SOCIETE DES PALMERAIES DE MBONGO ET D'ESEKA FOR AN OIL PALM PROJECT IN EAST CAMEROON February 5, 1969  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMIEJT REPORT AUND RECOET'ENDATICN CF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CN A PROPOSED LOAN TO THE SOCIETE DES PAI2ERAIES' DE MBONGO ET DtESEKA FOR AN OIL PAU4 PROJECT IN EAST CAIEROON 1. I submit the followning report and recommendation on a proposed loan in an amount in various currencies equivalent to US$ 7.9 million to the Societe des Palmeraies de Mbongo et dtEseka (SOPAME) to assist in financing an oil palm project in East Cameroon. The loan would be guar- anteed by the Federal Government of Cameroon. PART I - HISTORICAL 2. The Federal Republic of Cameroon is a federation of the states of East and West Cameroon, and was established in October 1961. East Cameroon, a former French-administered trust territory, gained independence in 1960 as the Republic of Cameroon. WMest Cameroon, the former United Kingdom trust territory of Southern Cameroons, joined the newly independent Republic of Cameroon as a result of a plebiscite in 1961. The Federal Republic of Cameroon became a member of the Bank in 1963 and of IDA in 1964. 3. In 1965 the Government of Cameroon asked IDA and two French public agencies, the Fonds d'Aide et de Cooperation (FAC) and the Caisse Centrale de Cooperation Economique (CCCE), to join in financing part of the cost of an oil palm development project in East Cameroon. This project was prepared by consultants with financial assistance from the French Govern- ment. The Bankts permanent mission in Wiest Africa provided guidance in project preparation. The project was appraised in February and March 1968 by a Bank mission which worked closely with the French aid agencies. Sub- sequently, in view of the shortage of IDA funds, and taking into account the capacity of Cameroon to incur some external debt on conventional terms, it was agreed to finance the project with a Bank loan. Negotiations with FAC and the Caisse Centrale, and with a delegation of the Cameroon Govern- ment led by Mr. Joseph N. Owonop Ambassador of Cameroon, were completed in Wlashington on October 22, 1968. 4. The following is a summary statement of Bank loans and IDA credits to Cameroon as of January 31, 1969: Amount ($ millicn) Loan or Credit Undis- Number Year Borrower Purpose Bank IDA bursed 100 CM 1967 Cameroon CAIJDEV - 11.0 8.3 490 CM 1967 CAIDEV CAYTEV 7.0 - 6.9 S3 Cli 1968 Cameroon Roads - o.6 0.5 Total now held by Bank and IDA 7.0 11.6 Total undisbursed 6.9 8.8 15.7  -2- 5. In July 1964 the Executive Directors approved two Bank technical assistance grants of US$ 200,000 and US$ 100,000 for feasibility studies of road and agricultural projects. The Bank has under consideration a US$ 4.9 million loan for a water supply project in Yaounde and Douala, an education project, and a road project for which the final engineering is being prepared under the US$ 0.55 million project preparation credit approved in 1968. PART II - DESCRIPTION OF PROPOSED LOAN 6. Borrower: Societe des Palmeraies de Mbongo et d'Eseka (SOPAI4E) Guarantor: The Federal Republic of Cameroon Amount: US$ 7.9 million equivalent in various currencies Purpose: The development of about 9,000 hectares of oil palms on twro estates, thie construction of two oil mills, and the provision of infrastructure and ancillary facilities. Amortization: In 30 years including a ten-year period of grace through semi-annual installments beginning January 15, 1979 and ending January 15, 1999. Interest rate: 6 1/2 per cent Coimitment charge: 3/4 of one per cent Economic rate of return: 9 - 10 per cent PART III - THE PROJECT 7. An appraisal report (TO-654a) entitled "East *.ameroon Qil Pala Pro- ject - Federal Republic of Cameroon' is attached. Agriculture is the-main occupation of the population and accounts for about 37 percent of GDP. In addition to subsistence food crops, Cameroon produces a well diversi- fied range of export crops including coffee, cocoa, bananas and cotton. However, the expansion of many crops is limited by climatic, soil and marketing conditions, and the extent of agricultural development varies from one region to another. Some parts of the country are at an early stage of development, and it is important to introduce new crops which will be well adapted to local conditions. 8. The Societe des Palmeraies de lbongo et d'Eseka (SOPANE), a pub- licly-owned development corporation, is set up expressly to carry out this project, with a capital of CFAF 811 million (US$ 3.3 million). The Government owns 48 percent of the capital, the balance being held by three public agencies. The General I4anager, an experienced expatriate, has been  - 3 - chosen, and at the outset, all other key managerial positions will be held by expatriates. A technical assistance contract w^Jill be concluded with the French Institut de Recherche pour les Huiles et Oleagineux (IRHO). Although the project would be set up as an indastrial estate, it would form a nucleus for a future smallholder development which the Government has agreed to consider and prepare. 9. The project would consist of an 8-year planting program of oil palms on two estates totalling 9,000 hectares, and of the construction of two oil milJls. It would include the provision of roads, buildings and other infrastructure. At full production, to be reached in 1981, the two estates wzould prodace about 122,000 tons of fresh fruit bunch, and tlhe trwo oil mills, each with a pressing capacity of 18 tons an hour, would make possible an anmnal output of about 26,000 tons of palm oil and 6,000 tons of kernels. 10. The total cost of the project, including interest, is US$ 14.1 million (CFA2 3,472 milldion) and w-yould be financed as follous: US$ million Total IBRD CCCE/FAC Cameroon A. Land clearing 3.09 1.53 1.02 0.5 B. Oil 11ills (i) Eseka 1.18 1.18 - (ii) Mbongo 1.46 - 1.46 _ C. Plantation Development 4.52 1.92 0.90 1.70 D. Vehicles, fertilizer and - other imports 1.01 1.01 - - E. Contingencies and Interest 2.84 2.26 0.22 0.36 TOTAL 14.10 7.90 3.60 2.60 11. - The FAC contribution of $1.8 million would be on a grant basis. The $1.8 million Caisse Centrale loan would be for 21 years, with a grace period of 9 years and an average rate of interest of 4 percent. Both would be made to the Government, which would make the proceeds available to SOPAIIE on the same bases as they received them. The Caisse Centrale loan would be disbursed after the FA5 grant had been fully disbursed. 12. - The foreign exchange cost of the project is estimated at $7.8 mil- lion. Although the proposed Bank loan is only a little more than this, the Bank would in fact meet som,e of the local costs since it would disburse pai passu with the FAC and the Caisse Centrale, and would wsholly finance  the Eseka oil mill. This element of local cost financing is justified in the light of Cameroonts needs for external capital as described in paragraph 23 belmo, and the importance of providing adequate finance for this high priority project. 13. Nearly all the Cameroon cash contribution would be in the form of capital subscriptions to SOPALE: US$ 0.69 million would be from the Federal Government Budget, US$ 0.40 million wTould be subscribed by the Societ6 Nationale d'Investissement, and US$ 0.64 million would be subscribed by each of two stabilization funds. The Government has also agreed to meet the cash deficit during the first three years after the disbursement period. This deficit is not expected to exceed US$ 0. million. In addition to the Cameroon cash contribution, the Government has provided the land for the project, valued at US$ 0.8 million, and would forego revenue from duties on most of the goods imported for the project. 1L. The oil mill at Nbongo, which would be financed entirely out of the French contribution, would be reserved for procurement within the franc area, but all other goods to be procured for the project, whether financed from the Bank loan, or with the French or Cameroon contributions, would be submitted to international competitive bidding. In order to avoid delays in the execution of the project, the Government started land clear- ing in early 1968; however, it is proposed to reimburse only those expen- ditures made after November 1, 1968, which are not expected to exceed US$ 50,000. 15. The Cameroon Gcvernment attaches higll priority to this project. The country consumes a large amcunt of oil palm products, but production has been declining in recent years, and some 70 percent of the increased production from the proposed project ilAl help supply the rising local demand. The additional employment and foreign exchange receipts or savings arising from thle project will have a substantial impact on the development of the Cameroon economy, particularly in the southern region where the project is located and wihere conditions are not favorable to other agri- cultural activities. 16. The economic rate of return on the project has been calculated at around 9 - 10 percent, valuing production at export prices and discounting wage costs by some 40 percent to reflect the fact that the wage rates to be paid on the project would be substantially higher than the income which could be derived by workers in the alternative occupation of subsistence farming. Palm oil products sold locally command substantially higher prices than those sold abroad, and the financial rate of return on the investment in SOPM 3 Awill be between 8 and 13 percent, depending on the level of domestic prices. The operation is expected to become profitable in the late seventies, permitting in due course the distribution to the shareholders of dividends which, remaining in the public sector, would be available for further public investment in Cameroon.  PERT IV - LEGAL EiSTIXU1IT3 ANTD AUTHO.HITY 17. 2opies of the following documents are being distributed to the Executive rirectors separately: (i) the draft Loan Agreement between the Bank and Societe' des Palmeraies de 1lbongo et dtEseka; (ii) the draft Guarantee Agreement between the Federal Republic of Cameroon and the Bank; and (iii) the Report of the Committee provided for in Article III,- Section 4 (iii) of the Articles of Agreement of the Bank. 18. The following features of the draft Loan and Guarantee Agreements are of particular interest: (a) Section 5.01 (b) of t'ne Loan Agreement provides that the Borrower shall retain in certain senior management positions experienced and qualified persons acceptable to the Bank; (b) Section 5.07 (a) of the Loan Agreement requires the Borrower to maintain its liquid assets at a level equivalent to three months' cash operating expenditures; (c) Section 5.08 (b) of the Loan Agreement requires the Borrmoer to maintain a replanting fund for the estates at libongo and Eseka; (d) Section 5.10 of the Loan Agreement requires prior Bank approval before the Borrower shall undertake any new projects or invest- ments; (e) Section 2.02 of the Guarantee Agreement provides that, in the event that the funds available to the Borrower are insufficient, the Guarantor shall, upon the request of the Borrower, provide the Borrower with sufficient funds to-complete the project and to meet the requirements of Section 5.07 of the Loan Agreement; and (f) Section 3.05 of the Guarantee Agreement requires the Guarantor to ensure that all goods, other than petrol, diesel and lubri- cating oils, imported by the Borrower for the project prior to December 31, 1975, are exempted from import duties.  PART V - T-E. T7'CiIOY 19. An Economic Report on "Current Economic Position and Prospects of the Republic of Cameroon" (AF-79a dated August 8, 1968) was circulated to the Executive Directors on September 4, 1968 (R 68-171); the conclusions of this report remain valid. 20. The Government's management of fiscal and economic affairs has been generally good, taking into account the difficulties arising from independence, the establishment of the Federation between tiTo disparate regions, and the progressive termination of French preference for Cameroon products. 21. Since 1959, real GDP has increased by about 5 percent each year. Agriculture, which still employs three-quarters of the worling population, contributes 37 percent of GDP, providing all the foodstuffs i4hich can be economically produced in Cameroon, and 70 percent of the exports. Xanu- facturing has progressed rapidly during-the past few years, and the tertiary sector nowi represents 47 percent of GDP. Transportation should be improved; roads and railways are in a poor state of repair, and more attention should be paid to building feeder roads. 22. Even after the termination of French budgetary support in 1965, Cameroon continued to enioy generally stable finances except in 1967, when credit to the private sector expanded rapidly, entailing a sudden increase in imports. The consequent sharp fall in foreign exchange reserves, however, was reversed in the first months of 1968. Good fiscal performance is reflected by budgetary savings amounting to about $16 million in 1967/68 (10 percent of current receipts). 23. The Second Five-Year Development Plan (July 1966 - June 1971) outlines the Government's longer-term development strategy. GDP is expec- ted to double by 1980, as the reisult of increasing the rate of investment from 10 to 16 percent of GDP, divided equally between private and public sectors. The Plan leaves investment in manufacturing to private capital and the sectoral allocation of investment is sound. Cameroon can be expec- ted to finance about a quarter of public investment from its own resources during 1969 - 1971, including a substantial contribution to the cost of completing the trans-Cameroon railwvay. The remaining three-quarters iLll have to come from foreign aid, some of wrhich will have to be used for local expenditure on high-priority projects. 2h. Cameroon is regarded as eligible for assistance from IDA because of low income and limited savings capacity, despite the effective efforts which are being made by the country to mobilize domestic- resources for economic development. On the other hand, the volume of external debt is still moderate (the present debt service ratio is about 4 percent), and the country may be regarded as creditworthy for some additional borrowing on conventional terms, including the proposed loan.  PAIRT VI - COIAL1i1iC1 7JITH THE ARTICLES CF AGIM EE IT 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMIDATION 26. I recommend that the Executive Directors adopt the following resolution: IIESOWUTION No. Approval of Loan to Societe des Palmeraies de Mbongo et d'Eseka (East Cameroon Oil Palm Project) in an amount equivalent to U.S. $ 7,900,000 to be guaranteed by the Federal Republic of Cameroon. RESOLVED: THAT the Bank shall grant a loan to Societe des Palmeraies de blongo et dtEseka to be guaranteed by the Federal Republic of Cameroon in an amount in various currencies equivalent to seven million nine hundred thousand United States dollars (U.S. $ 7,900,000),vto mature on or prior to January 15, 1999, to bear interest at a rate of six and one-half per cent (6 1/2%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance writh t7he terms and conditions set fortlh in the form of Loan Agreement (East Cameroon Oil Palm Project) betwfeen the Bank and Soci6te des Palmeraies de Mbongo et dtEselka, and the form of Guarantee Agreement (East Cameroon Oil Palm Project) between the Federal Republic of Cameroon and the Bank, which have been presented to this meeting. Robert S. IcNamara President TWashington, D.C. February 5s 1969.