Uganda - Smallholder Tobacco Project

RESTRICTED Report No. P-S50 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 The report may not be published nor may it be quoted as representing their views.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 CREDIT TO THE REPUBLIC OF UGANDA FOR A SMALLHOLDER TOBACCO PROJECT July 8, 1970  INTERNATIONAL DEVELOPMET ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF UGANDA FOR A SMALLHOLDER TOBACCO PROJECT 1. I submit the following report and recommendation on a proposed Development Credit in an amount in various currencies equivalent to US$4 million to the Republic of Uganda to assist in financing a Small- holder Tobacco Project and technical assistance required for preparing further agricultural projects. PART I - HISTORICAL 2. The Government of Uganda submitted an agricultural credit project to the Association in March 1968. An appraisal in October 1968 showed that the project, which envisaged credit for a range of crops and concentrated heavily on short term credit requirements, was not suitable for IDA financing as it stood. After discussions with the Government on the need, at least in an initial phase, to focus on more limited objectives, a tobacco development project was prepared with the Association's assistance. That project was appraised in August 1969 and is the subject of this report. 3. Negotiations were held in Washington from March 9 to 13, 1970. Uganda was represented by Mr. C. H. M. Barlow, Permanent Secretary, Ministry of Marketing and Cooperatives, Mr. A.Ocaya, Commissioner of Economic Affairs, Ministry of Finance, I/r. M. Okai, Ministry of Agri- culture and Forestry, Mr. C. 0. Nyeko, Ministry of Marketing and Coop- eratives and Mr. V. W. K. Nyakabwa, Principal State Attorney. 4. The proposed Credit would be the sixth IDA credit to Uganda and the third for agriculture. Before independence Uganda received a Bank loan of $8.4 million for power development, which was guaranteed by the United Kingdom. The following is a summary statement of Bank loans and IDA credits to Uganda as of May 31, 1970.  -2- Amount (US $ million) No. Year Borrower Purpose Bank IDA Undisbursed 279 UG 1961 Uganda-/ Power 8.4 _ 101 UG 1967 Uganda Education 10.0 4.7 108 UG 1967 Uganda Roads 5.0 3.3 109 UG 1967 Uganda Tea 3.4 1.8 130 UG 1968 Uganda Ranch Development 3.0 1.5 164 UG 1969 Uganda Roads 11.6 11.6 Total 8.4 of which has been repaid to the Bank and others 2.0 Total now outstanding 7 Amount sold: 8.3 of which has been repaid 2.0 6.3 Total now held by Bank and IDA 0.1 33.0 Total undisbursed - 22.9 22.9 1/ Guaranteed by the United Kingdom Disbursement of the Fducation Credit (No. 101 UG) was delayed in the first instance by changes in design details of school buildings. Con- struction is now going ahead satisfactorily, but procurement of furniture and equipment has been slow. The matter is expected to be resolved shortly. The Smallholder Tea project financed under Credit No. 109 UG began more slowly than was expected, but performance under the Credit is improving. The principal problem is the timely provision of adequate processing facilities, which are to be financed outside the Credit, and of supporting transportation and housing facilities for extension staff. The Association is following both problems closely. The combined effect of lower costs and higher tea prices than were assumed in appraisal is likely to lead to a substantial undisbursed balance in the credit account. The Government may request that the balance be applied to the cost of extending the project to cover one additional planting season. The performance of the Government and the Consultants under the Roads Credit (No. 108 UG) has been satisfactory, but the contractors are behind schedule and the closing date has had to be extended. Progress of the Beef Ranching and Second Highways projects (Credits No. 130 and 164 UG) is satisfactory. 5. In addition to the lending set out in paragraph 4, the Bank had, as at Nay 31, 1970 made four loans for common services in East Africa, three of them for railways and harbors and one for telecommunica- tions. All of these loans are guaranteed jointly and severally by Kenya, Tanzania and Uganda; the United Kingdom is also guarantor of the first loan for railways. A loan of $42.4 million for railways, and a loan of  - 3 - $10.4 million for telecommunications, both guaranteed by Kenya, Tanzania and Uganda jointly and severally, were signed on May 25, 1970 but are not yet effective. The following is a summary statement of effective Bank loans for East African Community projects as of IvIay 31, 1970: No. Year Borrower Purpose Amount (US $ million) Bank Undisbursed 110 EA 1955 East African Railways Railways 24.0 Corporation 1/ 3/ 428 EA 1966 East African Railways Corporation 2/ 4/ Railways 32.4 2.1 1966 East African Harbours Corporation 2/ I/ Harbours 5.6 1.5 483 EA 1967 East African Posts & Telecommunications Corporation 2/ 4/ Telecommunications 13.0 4.5 638 EA 1969 East African Harbours Corporation 4/ Harbours 35.0 34.0 Total 110.0 of which has been repaid to the Bank and others 15.7 Total now outstanding 94.3 Amount sold: 23.8 of which has been repaid 15.6 8.2 Total now held by Bank 86.1 Total undisbursed 42.1 1/ Loan made originally to East Africa High Commission 2/ Loan made originally to East African Common Services Authority 3/ Guaranteed jointly and severally by the United Kingdom, Kenya, Tanzania and Uganda 41 Guaranteed jointly and severally by Kenya, Tanzania and Uganda 6. IFC has made one investment in Uganda, in Nulco Textiles Limited in 1964. The investment totalled US$3.51 million equivalent of which $2.8 million was loan and $0.64 million was equity with $70,000 as a standby commitment. As of iay 31, 1970 $3.4 million had been disbursed. 7. Later in this fiscal year I expect to recommend a second education project in Uganda, which would emphasize technical and agricultural educa- tion.  - 4 - PART II - DESCRIPTION OF THE PROPOSED CREDIT 8. BORROIER: The Republic of Uganda. PURPOSE: To help finance tobacco production, storage and marketing facilities; technical assistance for preparation of further agricultural projects. AMOUNT: US$4 million equivalent in various currencies. AMORTIZATION: In 50 years, including a ten-year period of grace, through semiannual installments of one-half of one percent from September 15, 1980 through March 15, 1990 and of one and one-half percent from September 15, 1990 through March 15, 2020. SERVICE CHARGE: 3/4 of one percent per annum. ESTIMATED ECONOMIC RETURN: 21 percent per annum. PART III - THE PROJECT 9. A report entitled 'Uganda - Appraisal of the Smallholder Tobacco Project" (PA33a) is attached. 10. The proposed project consists of the construction of tobacco curing barns by growers; the construction of baling centers, tobacco stores and office facilities, and the establishment of fuel-wood planta- tions by the regional Unions of Cooperative Tobacco Societies and by their constituent primary societies; the construction and equipment of additional storage facilities by the Produce Marketing Board; the provision of a revolving fund to finance, through the Cooperative Unions, seasonal production inputs required by new growers; and the retention of consultants by the Government to prepare possible further agricultural projects. 11. The total cost of the project is estimated at US$7.26 million, of which about US$2.6 million (about 36%) would be in foreign exchange. The proposed credit would finance 55% of the total project cost, including about $1.4 million equivalent of local currency costs (see paragraph 22 below). 12. The project would be administered by a Project Director under the overall guidance of a Project Committee. The Project Committee would be made up of senior representatives of the ministries and agencies concerned  with various aspects of the project. This administrative mechanism is similar to the one established for the Beef Ranching Project (Credit No. 130 UG) and takes account of the existing structure of tobacco coop- erative societies, marketing arrangements and independently operated processing facilities already established. Considerable importance is attached to the Project Director, and the Government of Uganda and the Association have already agreed on the person who will be appointed to this position if the proposed credit is approved. 13. The proceeds of the proposed credit would be channelled largely through the existing regional Unions of Cooperative Tobacco Societies, in part in the form of loans for the construction of facilities by the Unions and the Societies, and in part for on-lending to individual tobacco growers for the construction of barns and for seasonal inputs; the balance of the proceeds would be applied by the Produce Marketing Board (PMB) to the construction and equipment of storage facilities, and by the Government itself to the costs of agricultural extension services, research and technical assistance. That part of the proceeds of the credit which is to be passed on in the form of loans would be repaid to the Government over periods up to 14 years with interest at 8 percent per annum payable by the ultimate borrowers (12 percent per annum in case of seasonal production loans). 14. The proposed project would not only benefit 6,000 new growers of tobacco but also existing growers. The project is expected almost to double the quantity of flue cured tobacco produced in Uganda both by an expansion of acreage and improved productivity. The bulk of the increased production would be exported and w-fould augment the country's foreign exchange earnings by about $2.8 million per annum. The economic rate of return of farm investment in the project, based on current estimates of tobacco prices, would be about 21 percent if the largely family labor which would be employed were costed at the going farm wage rate (or 27 percent assuming a zero shadow wage for such labor). 15. Tobacco storage equipment, vehicles and bulk-purchased con- struction materials, fertilizers and insecticides would be procured by international competitive bidding. Tenders for construction of stores and houses would be let locally, since the size of individual contracts would be too small to attract international bids. Local procurement of goods and services would be in accordance with the Government's procedures for such procurement, which permit sufficient internal competition. 16. To broaden the range of agricultural projects likely to be suitable for external financing, it is also proposed to provide funds under this Credit for the retention of consultants who would review a short list of possible agricultural projects and would then prepare in detail those considered by the Association and the Government to be the most promising.  - 6 - PART IV - LEGAL INSTRUIENTS AiD AUTHORITY 17. The draft Development Credit Agreement between the Association and the Republic of Uganda, the recommendation of the Committee provided for in Article V, Section l(d),of the Articles of Agreement and the text of a Resolution approving the proposed development credit are being distributed to the Executive Directors separately. 18. The provisions of the draft Development Credit Agreement generally conform to the pattern established for Bank and Association agricultural projects. PART V - THF ECONOiwY 19. A report entitled "Current Economic Position and Prospects of Ugandalt (AE-2) was distributed to the Executive Directors on June 24, 1969 (R69-145). An up-dated statement of Basic Data is annexed. 20. During the two years 1967-68 the growth of Uganda's economy slowed down owing to lower output of coffee and cotton, the two major crops. This was largely the result of adverse weather, although in the case of cotton the shortfall may be partly attributed to the discontinua- tion in 1966 of the policy of subsidizing the producer price. The importance of coffee and cotton in the economy is such that, despite the rapid strides made by other crops such as tea, sugar and tobacco, a sub- stantial increase in the output of manufacturing,and satisfactory growth of the other sectors with the exception of commerce, the gross domestic product increased during 1967-68 at the rate of only 3.4 percent a year. 21. In 1969, however, there was a considerable improvement. Favorable weather towards the end of 1968 was responsible for a substantial increase in the output of coffee and cotton. Coffee production was more than twice the output of the previous year, while cotton output increased by nearly 20 percent. There was a further increase in the output of tea, sugar and tobacco. These developments, combined with a steady growth in the output of the other sectors, led to an estimated increase in GDP in real terms of over 12 percent in 1969. In addition to the substantial increase in the output of various crops there have been increases in the average price for coffee (following the frost in Brazil) and for tea (as a result of lower exports from India). These favorable developments may well extend through 1970; the outlook for coffee is expected to remain good until about 1973/74. 22. Uganda's Second Five-Year Plan began on July 1, 1966, and is now nearing the end of its fourth year. The Plan got off to a slow start, but there is now evidence of some improvement. Central Government  - 7 - development expenditure rose from Sh. 230 million in 1966/67 to Sh. 340 million in 1968/69 and it is likely to be even higher in 1969/70. However, while Uganda's ability to prepare and execute projects has improved, it is facing increasing difficulties in financing the program, and in par- ticular in financing local expenditures. Although the major proportion of development expenditure during the Plan will be financed from domestic resources, mainly recurrent budget surpluses and borrowing, the total volume of investment will substantially exceed domestic savings so that development needs to be assisted by a sustained capital infloaw from abroad. The foreign exchange component of public sector projects included in the Plan which are likely to attract external financing falls substantially short of the capital inflow required from abroad. In these special cir- cumstances, and recognizing the importance of the proposed project, I consider that the financing of local expenditure which is proposed for this project is justifiable. 23. In May this year the Government announced its intention to acquire up to 60 percent shareholding in all banks, insurance, oil, bus, and major manufacturing companies, and in agricultural estates. Repre- sentatives of the Bank and IFC who visited Uganda recently to discuss this new policy report that the Government desires to settle the question of compensation as amicably and as speedily as possible, largely by nego- tiating with each company on an individual basis, and has already started consultations with some of them. In view of this, I do not consider that the recent measures in Uganda should deter action on the proposed credit. I shall, however, follow the development in this respect closely and shall present to the Executive Directors further proposals for lending to Uganda only if satisfactory progress can be observed in making arrangements for compensating those affected by the recent measures. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 24. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMEDATION 25. I recommend that the Executive Directors approve the proposed Development Credit. Robert S. McNamara President Attachment Washington, D. C. July 8, 1970  Annex U G A N D A BASIC DATA Area: 91,076 sq. miles (land area 74,412 sq. miles) Population (1969): 8.2 million Rate of growth: 2.8 percent per annum Population density (per sq. mile of land area): 110 Political Status: Independent since October 9, 1962 Member of Commonwealth Gross National Product (1967): Sh 6,350 million ($890 million)-/ GNP per capita (1967): Sh 800 ($112) Gross Domestic Product at current factor cost (1968): Sh 6,118 million-/ ($857 million) Of which Monetary Product: Sh 4,658 million Non-monetary product: Sh 1,460 million Annual rate of growth (Constant 1964 prices): 1967 1962-67 Total GDP 2.6 4.6 Monetary 2.5 4.8 Percent of total GDP (1967) 100 Agriculture, including crop processing 58 Industry 11 Transport and commerce 17 Other sectors 14 Public Sector Operations 1968/69 Rate of Change p.a. Central Government: (Sh million) 1962/63-1968/69 Current revenue 1,071 11.4% Current expenditure 1,057 11.5% Current surplus 14 Capital expenditure 425 30.9% lJ Uganda's national income accounts are currently being revised; Sh 6,350 million is a preliminary estimate of the probable revised figure. 2/ Adjusted upward from the unrevised official estimates on the basis of the revision cited in footnote 1 .  - 2- External Public Debt (US$ million) December 31 Average 1968 1962-67 Total debt outstanding 215.5 175.9 Uganda debt 148.6 lo8.4 One-third of EACSO debt3/ 66.9 67.5 Total annual debt service 18.9 9.9 Uganda debt 8.1 5.4 One-third of EACSO debt 10.8 4.5 Debt service ratio, percent 7.7 4.9 Balance of Payments (Sh million) Rate of Change p.a. 1968 1962-67 Merchandise exports 177T +10.6 M4erchandise imports 1,315 +11.8 Net invisibles 181 Of which net factor income payments -119 Balance on current account -9 Average 1968 1962-67 Commodity concentration of exports (coffee and cotton) 65% 66% April 30 1969 Gross foreign exchange reserves Sh million 350 Months' imports 3 IMF position (US$ miUlion) Average 1964-68 Quota 32 29 Drawings Rate of Exchange: 1 Uganda Shilling = US$0.14 2! As of June 30, 1968.