Uganda - Smallholder Tobacco Project

RESTRICTED Report No. PA-33a 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 The report may not be published nor may it be quoted as representing their views.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 RECONSTRUCIlON AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION SMALLHOLDER TOBACCO PROJECT UGANDA April 13, 1970 Agriculture Projects Department  cOMa QmVALTS Us$ 1.00 Uganda Shillings 7.00 U Sh - 100 conts - US$ 0.14 W=WS AND MKES* (Imperial system for length, area and volume) (Metric system for weights) 1 inch (in) - 2.54 centimeters 1 foot (ft) a 0.30 meters 1 mile (ed) - 1.61 ldlometers 1 square mile (sq mi) - 2.59 kilometers2 1 acre (ac) a 0.40 hectares 1 kilogra (kg) 2.20 pounds 1 metric ton (ton) 0 0.98 long tons *Uganda is in the course of introducing the metric system. ABMIIEATIO5N BAT : British-American Tobacco Compamy P1B : Produce Marketing Board UCB : Uganda Commercial Bank  UGANDA SMALLHOLDER TOBACCO PROJECT TABLE OF CONTENTS Page No. SUJMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . i I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 1 II. BACKGROUND . . . . . . . . . . . . . . . 1 . . . . . . . 1 A. Aericultu-re in the Economy of Uganda . . . . . . . - 1 B. Growth of Tohacco Cultivation . . . . . . . . . . . 2 C. Tobacco Development Policy and Institutions . . . 2 III. PROJECT AREAS . . . . . . . . . . . . . . . . . . . . . 3 At Location, Population, Soils and Climate . . . . . . 3 B. Farmir.g Patterns and Land Tenure ... . . . . . . . 5 C. Production of Flue-Cured Tobacco . . . . . . . . . . 6 IV. THE PROJECT . ................. / A. rDefinition . . . . . . . . . . . . . . . . . . . . . 7 B. Detailed Features ... . . . . . . . . . . . . . . 8 V. COST ESTIMATES AND FINANCIAL ARRANGEMENTS . . . . . . . 11 A. Project Cost..11 B. Proposed Financing ... . . . . . . . . . . . . . . 13 C. Procurement . . . . . . . . . . . . . . . . . . . . 15 D. Disbursement . . . . . . . . . . . . . . . . . . . . 15 E. Accounts and Audit ... . . . . . . . . . . . . . . 16 VI. ORGANIZATION AND MANAGEMENT . . . . . . . . . . . . . . 16 A. Organization of the Project . . . . . . . . . . . . 16 B. Staffing and Training . . . . . . . . . . . . . . . 19 C. Marketing Organization . . . . . . . . . . . . . . . 19 VII. YIELDS, OUTPUT, MARKETS, PRICES, OPERATING RESULTS AND GOVERNMENT REVENUES ... . . . . . . . . . . . . . . . 20 A. Yields and Output ... . . . . . ...... . . . 20 B. Markets and Prices . . .............. . 21 C. Operating Results . . . . . . . 22 D. Government Revenue . . . . . . . . . . . . . . . . . 23 This report is based on the findings of a Bank appraisal mission to Uganda in August 1969, composed of Messrs. M. van Gent, C. Walton, P. Grosjean (Bank) and B. Hartley (Consultant).  -2- VIII. BENEFITS AND JUSTIFICATION . . . . . . . . . . . . . . . 24 IX. RECOMMENDATIONS . . . . . . . . . . . . . 24 ANNEXES 1. History and Development of Flue-Cured Tobacco 2. The Cooperative Movement, Agricultural Credit and Banking Table 1 Summarized Financial Statements of Cooperative Movement Table 2 Uganda Commercial Bank: Comparative Balance Sheets 3. Development Programs 4. Project Cost 5. Sources and Application of Funds and Disbursements 6. Terms of Loans 7. Farm Budget for One Acre of Tobacco 8. Unions' Operating Budgets 9. Organization Chart 10. Details of Staff Requirements 11. Responsibilities of the Project Director 12. Tobacco Development Fund - Cash Flow 13. Project Cash Flow 14. Tobacco Yields 15. Price Calculation of Flue-Cured Tobacco 16. Tobacco Marketing Prospects 17. Economic Rate of Return 18. Estimated Disbursement Schedule of IDA Credit MAP  UGANDA SM'ALLHOLDER TOBACCO PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for the further development of Uganda's tobacco growing industry for which a credit of US$4.0 million equivalent is proposed. After coffee, cotton and tea, tobacco is Uganda's most important smallholder cash crop and provides a livelihood for some 20,000 small farmers most of whom grow less than half an acre of the crop. As a result of the project the number of growers would be increas- ed by 6,000, annual production would be raised from a current 2.7 million kg of flue-cured leaf to about 5.3 million kg, and annual exports of to- bacco would be increased from about 0.7 million kg valued at US$1 million at present to 3.1 million kg valued at US$3.8 million by 1975. Production increases would be brought about by both an expansion in the area under the crop and by improved productivity. ii. The project involves strengthening the cooperative movement, to which all tobacco growers belong, in order to provide a suitable channel for providing credit to such growers. It would include the provision of short- and medium-term production credits to tobacco growers, aand medium- term credits to cooperatives for the establishment of the facilities re- quired to service their members efficiently. Provision also would be made for the establishment of additional central tobacco storage facilities, for the improvement of Government's extension services for tobacco farmers, and for the preparation of further agricultural projects aimed at a larger number of farmers and a wider range of agricultural production. iii. Project costs are estimated at US$7.3 million equivalent. The proposed credit of US$4.0 million would finance 55S of project costs in- cluding some US$1.4 million local currency financing. The Government would meet 16% of project costs, and farmers and cooperatives the remaining 29%. Government would on-lend most of the proceeds of the credit to coop- eratives and the Produce Marketing Board, retaining the balance to finance other project costs. Where practical project procurement would be by inter- national competitive bidding, and goods and services obtained in this vay would have an estimated value of US$1 million. iv. The project would be carried out by a unit established for this purpose within the Ministry of Marketing and Cooperatives. Project poli- cies would be determined by a project committee, and day to day management would be in the hands of a Project Director responsible to the Minister through the Permanent Secretary. v. Marketing prospects, which are considered satisfactory, have taken into account the possible re-entry of Rhodesian tobacco onto the world market and a reduction of consumption increase in industrialised countries.  - ii - vi. The project would make a significant contribution to Uganda's economy, to its foreign exchange earnings; and would improve its agri- culture, and the livelihood of many thousand small farmers. It would also demonstrate how credit may be made available to other agricultural activities. The economic rate of return from investment in the project, based on current estimates of long term tobacco prices would be about 27%. A sensitivity analysis shows that even were prices to fall 20% be- low these estimates the rate of return would be satisfactory at 16%. The project is suitable for an IDA credit of US$4.0 million.  UGANDA SMALLHOLDER TOBACCO PROJECT I. INTRODUCTION 1.01 In March 1968 the Government of Uganda applied to the Association for a credit to assist in financing a general agricultural credit project. The project was appraised in October 1968, but was found to be insufficient- ly prepared. In view of the time needed to prepare a satisfactory general agricultural credit project the Government, with the assistance of the Bank's Permanent Mission in Eastern Africa (PMEA), proceeded to prepare a smaller project concerned solely with tobacco production. The new project proposal was submitted to the Association in May 1969. 1.02 Under the project, credit would be provided to tobacco cooperatives and rhrough these to tobacco growers. The proposed IDA credit would finance also the managerial and extension services needed to improve the productivity of tobacco production in Uganda and to extend the area under the crop and storage facilities. Tobacco production is expected to about double its pre- sent level as a consequence of the project. 1.03 This report is based on the findings of a Bank mission, composed of Messrs. M. van Gent, C. Walton, P. Grosjean and B. Hartley (Consultant), which visited Uganda in August 1969. 1.04 The Association has made two credits in the Uganda agricultural sector. In 1967, a credit (109-UG) of US$3.4 million for a smallholder tea production project was made. Field work under this project is progressing satisfactorily but decision making by Government is slow and has led to pro- blems with tea processing. In 1968 the second credit (130-UG) of US$3.0 million was made for beef ranching development. After a slow start, progress on this project is now ahead of schedule, although some staffing problems re- main to be resolved. II. BACKGROUND A. Agriculture in the Economy of Uganda 2.01 Uganda is a landlocked country of about 75 thousand square miles of which more than 80% lies at altitudes of between 3,000 and 5,000 feet. Its soils and climate are generally favorable for agricultural production. Population in 1969 was about 9.5 million, and estimated to be increasing at about 3% annually. About 80% of the population is wholly or partially de- pendent on agriculture, which contributes about 60% of GDP. GNP per capita is about US$115. After a rapid increase in the period 1962 to 1964, agri- cultural exports, valued in 1967 at about US$173 million and equivalent to 80% of total exports, have leveled off. Coffee is the most important ex- port crop, accounting in 1968 for 55% of all exports, followed by cotton with 23%. Tobacco exports in 1968 were valued at US$1 million and repre- sented less than 2% of total exports.  -2 2.02 Both coffee and cotton have received setbacks during the last two years, partly arising from the 1966 civil disturbances and partly from in- ternational marketing difficulties. Thus, despite the growing importance of other crops, such as sugar, tea and tobacco, the agricultural sector's production increased by only 2-1/2X a year in the period 1966 to 1968, and this has been the major factor in the slow growth of the country's economv in recent years. Government is now making efforts to improve the perfor- mance of the agricultural sector, in particular by increasing efficiency in the Ministries of Agriculture and of Marketing and Cooperatives. B. Growth of Tobacco Cultivation 2.03 Although tobacco growing has been carried out on a small scale since the 1920's, a significant flue-cured tobacco industry was not estab- lished until the 1940's. Production of flue-cured tobacco increased sllOTr- to 0.77 million kg in 1961, and then grew rapidly to over 2.7 million kg l! 1968 when the estimated value of the crop was about USh 20 million (US*...8 million equivalent). The crop (about 7,000 acres were grown in 1968) is produced by small growers, who each cultivate an average of half an acre. While a small quantity of fire-cured tobacco is also produced in Uganda, production has tended to stagnate and now averages about 0.9 million kg a year. Most fire-cured tobacco is used domestically. 2.04 Flue-cured tobacco production was encouraged initially to meet the requirements of domestic cigarette manufacture. The British-American Tobacco Company (BAT), the manufacturer, provided extension and managerial services to registered growers who contracted to sell their leaf to BAT. BAT continues this type of operation in the West Nile and Kigezi areas. However, supplies of flue-cured tobacco now outstrip domestic demand, esti- mated at about 2 million kg, and the production of tobacco for export is becoming of greater importance. BAT is not interested in export and with its supplies for domestic manufacture assured, is expected to withdraw from field operations within the next year. The responsibility for replacing the BAT service is being taken up by the Government, whose plans include an expansion of tobacco production for export. Under the new arrangements BAT would continue to own and operate its cured leaf handling plants and ciga- rette factories, and the Government would be responsible for production and export marketing. More details on Ugandan flue-cured tobacco production are contained in Annex 1. C. Tobacco Development Policy and Institutions 2.05 Over the next four years Government plans to extend the area under flue-cured tobacco by about 4,700 acres, and thus increase production from 2.7 million kg to about 5.3 million kg. The expansion would take place in the three areas where tobacco growing is already well established, West Nile,  Middle North and Kigezi. Government proposes to replace BAT field supervi- sion with Government services and to reorganize and strengthen the tobacco growers' cooperatives to which all producers belong. As the requirements of local cigarette manufacture are unlikely to expand significantly, in- creased tobacco production will entail increased exports and thus augment Uganda's foreign exchange earnings. 2.06 Government policy is to allocate a large measure of responsibility for the agricultural development program to cooperatives. In recent years, the cooperative movement has become responsible for providing credit and other production, processing and marketing facilities for Uganda's major agricultural projects. Although defaults on cooperative repayments in- creased markedly in 1966 as a result of the civil disturbances, the causes were exceptional, and since then Government has strengthened its control of cooperatives. A result of this has been a considerable improvement in the financial position of the cooperative movement. 2.07 Credit for cooperative activity is supplied mainly by Government, through the Department of Cooperative Development of the recently established Ministry of Marketing and Cooperatives and, to a lesser extent from commer- cial banks. One of these, the wholly Government owned Uganda Commercial Bank (UCB) now handles most of government commercial banking business. Despite its growth, primarily from increases in savings and deposits, UCB has con- tinued its policy of concentrating on short-term lending rather than medium- and long-term lending. It acts, however, as Government lending agent in the administration of various medium and long term loan schemes, and it is Go- vernment policy that UCB should be similarly employed in lending operations concerned with the tobacco development program. In due course, its functions as Government agent in this and other programs may be taken over by a deve- lopment bank, formation of which the Government is now considering. Annex 2 gives further details on UCB. 2.08 The Produce Marketing Board (PMB), was established in 1967, but at present is responsible only for the marketing of tobacco (cotton and coffee are marketed by separate boards), though it is carrying out marketing sur- veys for other crops. PMB employs an experienced commercial firm, Trans- Continental Leaf Tobacco Corporation Ltd. (Trans-Continental), a Uganda registered company, subsidiary of a Liechtenstein based firm, as its agent for classifying and selling tobacco and uses BAT facilities in Kampala for the redrying, packing and storage of the crop prior to sale. III. PROJECT AREAS A. Location, Pop-lation, Soils and Climate 3.01 The project would be located in three areas: West Nile, Middle North and Kigezi (see Map). Flue-cured tobacco production is now well es- tablished in all three areas.  -4 - 3.02 The West Nile project area, comgrises six counties of the West Nile District in the north-western corner of Uganda. Tobacco is grown over a region of sbout 1,500 sq mi, which supports a population of about 200,000 persons (133 persons per sq mi). The area has good road communications with Kampala about 250 miles distant, and a railway extension to the area is under construction. 3.03 Altitude is between 3,800 and 5,000 feet, and rainfall averages 38 inches. Soils are mainly sandy loams and the combination of climate and soils is well suited to flue-cured tobacco production. There is no shortage of land for expanding tobacco production, but the area of natural woodland which provides fuel for curing the tobacco crop is diminishing. While some 8,000 acres of fuel wood plantations have already been established, thie acquisition of the relatively large blocks needed for such plantations is becoming difficult. 3.04 Largely because of its remote location, economic development in West Nile has progressed slowly. Large numbers of West Nilers work outsfde the district and, while not contributing directly to local developnment, con- stitute a substantial source of income for the district through the repa- triation of earnings. The areas major cash crops are coffee, cotton, and tobacco. The bulk of Uganda's flue-cured tobacco is grown in West Nih! anc the crop is the major source of cash income to area farmers. 3.05 The Middle North project area comprises parts of the Lango, Acholi and Madi districts. It forms part of Uganda's northern plateau, most of which lies between 3,500 and 4,000 feet in altitude. The area is less densely populated than West Nile, with about 50 persons per sq mi. It has good road and rail connections to Kampala, which is about 200 miles from the center of the area. 3.06 Rainfall pattern is bi-modal, with peaks in April/May and September/ October. Rainfall is about 40 inches, and the climate and sandy loam soils make the area suitable for flue-cured tobacco production. Fuel from natural woodland is readily available, but will diminish with any substantial increase in tobacco production. Land is available for both tobacco and fuel wood plantings. 3.07 Compared with the West Nile and Kigezi areas, economic development in the Middle North is relatively advanced. Cotton growing was introduced as early as 1910, and its production together, with the sale of a range of food crops produced in the area, has contributed significantly to the caslh income of farmers. Cotton has suffered considerable price fluctuations in recent years, however, and for this reason flue-cured tobacco production is gaining in popularity as a rsubstitute. 3.08 The Kigezi project area is situated in the Kigezi District in the south-western corner of Uganda. For the most part the area comprises broken mountainous country. Tobacco is grown on slopes at between 3,000 and 4,000  ft altitude. Population of the district is about 495,000, and its density about 335 persons per sq mi in the mountain areas, and 170 persons per sq mi on the lower slopes. Communications with Kampala are by road, part earth and part hard surfaced, totaling some 270 miles. 3.09 Rainfall is bi-modal, with peaks in April and in November. Annual rainfall varies considerably over even short distances, but is between 35 and 45 inches in areas where tobacco is grown on sandy loams. Due to alti- tude, rainfall and soil considerations, the area in Kigezi suitable for pro- fitable tobacco production is estimated to be only about 2,000 acres. Fuel from natural woodland is available only in limited quantities, and it has been necessary to establish fuel wood plantations to supply the needs of to- bacco growers. Land is available for the limited tobacco and necessary fuel wood planting programs proposed for the area under the project. 3.10 Economic development has been very restricted in this remote and relatively inaccessible area. Casb crops play a relatively unimportant role in the economy, and while attempts have been made to establish crops such as flax, coffee and vegetables, none has developed to a significant scale. Con- sequently, seasonal migration from the area has become customary. While con- ditions for large scale tobacco growing are less favorable in Kigezi than in the other areas, Government proposes to encourage development of the crop on a small scale as it offers better economic opportunities and returns to farm- ers than other crops, B. Farming Patterns and Land Tenure 3.11 Farms in the project areas average about 11 acres of cultivated land, but range from less than I acre in Kigezi, to over 16 acres in Middle North. Millet, sorghum, maize, plantains, cassava, groundnuts and sweet potatoes are important food crops in all areas. Subsistence requirements, based on current average yields of food crops, vary from 0.4 to 0.7 acres per person. The use of improved varieties, fertilizer, and pesticides in either food or cash crop production is insignificant. The Government pro- vides subsidized tractor and farm machinery hire services in the areas but only 10% of farmers use them. The remainder cultivate their farms by hand. As the project progresses it is expected that more and more tobacco growers will make use of the tractor hire service but successful carrying out of the project would not be dependent upou a greater use of these services. For the purpose of project calculations it is assumed that all farmers would use machinery hire services. 3.12 Land in the project areas is held by occupants under a traditional system of usufruct. Government, by Act of Parliament, has vested the author- ity over land in the Land Commission, and currently any person can acquire leasehold title for 49 years by written application to the Commission. Up to now, however, very few leasehold titles have been acquired under the Act,  since security of tenure is effective under the traditional system. Conse- quently loans may be made to farmers without risk of their losing control of their land. C. Production of Flue-Cured Tobacco 3.13 Basic tobacco production statistics for the three project areas are given in the following table: Flue-Cured Tobacco Statistics (1969) West Nile Middle North Kigezi Registered growers 12,400 3,000 968 Acres 3,600 2,978 484 Acres per grower 0.29 0.99 0.50 Cooperative societies 20 29 4 Size of barns (ft) 12 x 12 12 x 12 16 x 16 1 / 4-and 6-tiers- 6-tiers 6-tiers Number of barns 3,100 2,978Z/ 121 Average Yield (kg/ac, 1968) 590 191 199 Use of fertilizer (kg/ac) 136 70 n.a. 1/ Tier: a level of horizontal poles from which tobacco leaves are hung during curing. 2/ Of which 1,307 are temporary barns. 3.14 Farmers in all three areas are organized in cooperative societies. These societies provide inputs, handle and market the tobacco and grow fuel wood. Each society has a leaf-handling shed, which also serves as its to- bacco buying center. Societies in each of the three areas are organized into an apex area Cooperative Union. The Union acts largely as an agent for purchasing and distributing production inputs. 3.15 Tobacco is grown in a four to six year rotation, alternating with maize, cotton, beans and fallow, and this practice would continue. Tobacco seed is produced by BAT, and growers raise their seedlings in cooperative L.eedbeds. In West Nile and Middle North, sowing takes place in January and transplanting begins, with the early rains, at the end of February. In Kigezi, the season begins about three months later. The crop starts to mature 75 days after transplanting, and is harvested and cured in May through August in West Nile and Middle North, and in October through De- cember in Kigezi. Seedbed practices include soil fumigation, fertilize,t and pesticide applications, but these are satisfactory only in West Nile. In West Nile 136 kg/ac of compound fertilizer is used after transplanting, and the same technique is recommended for use in the other areas. No pest  control measures have yet proved necessary in the field. Growers cure their crop either in individually or communally owned barns. Barn sharing is less common in Middle North where growers cultivate about one acre of tobacco each and use barns capable of curing the production from such an area. 3.16 Poor seedbed maintenance and untimely planting currently results in poor yields in Middle North and Kigezi, due principally to the carry-over of disease and nematode infestation into the field from the seedbeds. Hus- bandry operations in these t:wo areas are often poor, as is curing, which is frequently held up because of failure to collect fuel wood on time. Addi- tional constraints are the existence of a large number of poorly constructed temporary barns in Middle North and inadequate leaf handling and baling arrangements. Because of these limitations, yields in Middle North and Kigezi in 1968 averaged under 200 kg/ac. In West Nile, however, under good BAT management and supervision the average yield in 1968 was 590 kg/ac. This is a good yield bv any African standards, and demonstrates the ability of the Uganda farmer, when properly supported, to achieve a satisfactory Level of technical efficiency. IV. THE PROJECT A. Definition 4.01 The project would add, over a four-year investment period, about 4,700 acres to Uganda's existing tobacco acreage, and would involve approxi- mately 6,000 farmers organized in cooperative societies. The project con- sists of: (a) the provision of credits to tobacco growers for the construction and improvement of tobacco barns; (b) the establishment of a revolving fund to provide new growers with seasonal production inputs; (c) the provision of credits to cooperatives for the con- struction of baling centers, office and storage facil- ities, and the establishment of fuel wood plantations; (d) the establishment of a project administration, to- gether with the basic development of cooperative union and society management staff, and of Govern- ment extension services to tobacco growers; (e) the construction of additional tobacco storage facilities at Kampala; and (f) the provision of technical assistance for the preparation of further agricultural projects.  -8- B. Detailed Features 4.02 The project would mainly provide for the introduction of tobacco on settled but presently under-utilized farms, and partly for the extension of tobacco growing by farmers who already cultivate and cure the crop. Se- lection of new farmers would be based on their past performance with other crops and on willingness to join their local cooperatives. Throughout the areas, there is increasing collective experience of tobacco which would be strengthened through improved extension services and a farmer training pro- gram to be introduced. Beyond this, the project would cater to the differ- ing tobacco production characteristics of the three project areas. In West Nile, where yields are already high, priority would be given to enlarging existing barns to improve curing efficiency, and to providing a satisfacto- ry replacement for BAT services. Additionally, a limited number of new barns, and new fuel wood plantations would be established. In Middle North and Kigezi, main objectives are both expansion of tobacco acreage and t; creased productivity. Achieving these objectives requires the cons.r!.' of new barns and tobacco handling facilities, and the establishment of ade- quate supervisory and advisory services and satisfactory arrangements for the provision of production inputs to farmers. Land suitable for tobacco is scarce and scattered in Kigezi, consequently a soil survey to locate sa- tisfactory sites would precede expansion of the tobacco acreage. Govern- ment has given an assurance that no planting would take place on any land in Kigezi before a soil survey had shown that such land was suitable for tobacco. 4.03 Tobacco acreage under the project is scheduled to increase as follows: cumulative Expansion in Tobacco Production Total Increase Existin& Year 1 Year 2 Year 3 Year 4 under Project