Malawi - Lilongwe Agricultural Development - Second Phase - Project

FILE COPY RRESTRICTED Report No. PA-76a 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 The report moy not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION LILONGWE AGRICULTURAL DEVELOPMENT PROJECT PHASE II MALAWI April 16, 1971 Agriculture Projects Department  CURRENCY EQUIVALENTS Currency Unit - Malawi Kwacha (from Feb. 15, 1971) Currency Unit - Malawi Pound (prior to Feb. 15, 1971) MK 1.0 - ME 0.5 ME 1.0 - MK 2.0 MK 1.0 - US$ 1.20 US$ 1.0 - MK 0.833 ME 1.0 - US$ 2.40 US$ 1.0 - ME 0.417 WEIGHTS AND MEASURES 1 acre (ac) - 0.405 hectare (ha) 1 mile - 1.61 kilometer (km) 1 square mile - 639.5 acre - 259 ha 1 ton (sh ton) - 2,000 pound (lb) - 911 kilogram (kg) 1 bag - 200 lb - 91.1 kg 1 hundredweight (cwt) - 112 lb - 51.02 kg ABBREVIATIONS ADS - Agricultural Development Services CADC - Chief Agricultural Development Officer CSC - Cold Storage Company DAO - District Agricultural Officer FMB - Farmers' Marketing Board (now Agricultural Development and Marketing Board) ADMARC - Agricultural Development and Marketing Corporation (formerly) Farmers' Marketing Board IDA - International Development Association LLDP - Lilongwe Land Development Program LADP - Lilongwe Agricultural Development Project MAB - Malawi Agricultural Bank MANR - Ministry of Agriculture and National Resources PEU - Project Evaluation Unit  MALAWI LILONGWE AGRICULTURAL DEVELOPMENT PROJECT, PHASE II TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ........................... i-ii I. INTRODUCTION ...................................... 1 II. BACKGROUND ........................................ 2 A. General ...................................... 2 B. Agricultural Sector .......................... 2 III. THE LILONGWE DEVELOPMENT PROGRAM . . 3 A. The Program Area ... 3 B. Crop Marketing, Prices and Exports ........... 6 C. The Program .................................. 6 IV. THE PROJECT .. 8 A. Description ... 8 B. Detailed Features ............................ 9 V. COST ESTIMATES AND FINANCIAL ARRANGEMENTS ......... 12 A. Phlase IT Project Costs ................... ... 12 B. Proposed Financing ... 14 C. Procurement .. ....... 14 D. Disbursement ... 15 E. Accounts and Audit ... 15 VI. ORGANIZATION AND MANAGEMENT ....................... 15 A. Organization ... 15 B. Staffing ... 17 C. Farm Inputs - Credit and Cash Sales .......... 18 VII. PRODUCTION, MARKETS, FARMERS' BENEFITS AND GOVERN- MENT BENEFITS ..................................... 19 A. Yields and Output ........ ................... 19 B. Markets and Prices ....... ................... 19 This report is based upon the findings of an Appraisal Mission comprised of Messrs. A. Denness, D. Gold, F. Lowenstein, A. Cole, and a survey of agricul- tural credit by Mr. A Stoneham.  -2- Page No. C. Farmers' Benefits ....................... 20 D. Government Benefits ........................,.20 VIII. ECONOMIC BENEFITS AND JUSTIFICATION . . 21 IX. RECOMMENDATIONS ................................... 22 ANNEXES 1. Crops, Marketing, Prices and Exports 2. Agriculture in the Program Area and Changes Expected to Occur as a Result of Project Activities 3. Phase I Project Progress 4. Land Reorganization and Demarkation 5. Estimated Farm Input Use - Cash Sale and Credit Arrangements 6. Summary Proposals for the Establishment and Development of a National Seed Development and Production Association 7. Dzalanyama Ranch 8. Cost Estimates 9. Disbursement 10. Organization Chart 11. Beef Demand, Marketing and Prices 12. Government Cash Flow from the Phase I and Phase II Projects 13. Rate of Return Calculation MAP  MALAWI LILONGWE AGRICULTURAL DEVELOPMENT E'ROJECT, PHASE II SUMMARY AND CONCLUSIONS i. This report appraises a project which would be the second phase of the Lilongwe Agricultural Development Project (LADP) and for which an IDA credit of US$7.25 million equivalent is proposed. In 1968 an IDA credit of US$6.0 million (Credit 113-MAI) was made to Malawi for Phase I of the proj- ect. The first phase has progressed satisfactorily, and current estimates indicate that it will generate an economic rate of return of 11%, compared with 9% estimated at appraisal. A second agricultural credit (Credit 114-MAI for US$3.7) was also made in 1968 for the Shire Valley Development Project; this project has made good progress. ii. The LADP is an integrated program including land conservation, agricultural extension, credit and marketing facilities, the provision of water supplies, road development, farmer and staff training and the evolu- tion of social and administrative structures capable of managing, maintain- ing, and indeed improving upon it. In Malawi, where 90% of the population is dependent on subsistence agriculture, the LADP is looked upon as a fore- runner for similar programs, capable of accelerating the transition to cash- oriented farming systems and increased farm incomes and national exports. Malawi's ability to raise resources for development and reduce its external budget support requirements is dependent upon its achieving increased agricultural exports. By full development, the annual additional exports from the Phase I and Phase II project areas would be about 78,150 tons of maize worth US$2.50 million, and 22,800 tons of groundnuts worth US$4.10 million. Additionally, the production of beef for domestic consumption and import substitution would be worth about US$0.30 million each year. iii. The program area comprises about 1.1 million acres and this would become a single local Government administrative district when Phase II is initiated. The Phase I and II project areas include a total of about 521,000 acres of arable land and a 161,000 acre-ranch, and about 52,000 farmers are involved. The Phase II project would include development of the ranch, construction of about 540 miles of roads, 1,700 miles of drainage ditches, 160 boreholes, and 14 unit service centers, all of which would serve some 240,000 acres of arable land, as well as the continuation of extension, credit and marketing services throughout the areas developed under the two phases. iv. Phase II project costs are estimated at US$8.6 million equiva- lent. The proposed credit would finance 84% of project costs, covering foreign exchange costs estimated at US$3.4 million, and 74% of local cur- rency costs. The balance of US$1.3 million local costs would be met from Central Government revenues and from program farmers who would purchase some farm inputs for cash. The Government would onlend US$194,000 to the Agricultural Development and Marketing Corporation (ADMARC) at 6% over 20 years for the construction of the 14 produce markets that would be constructed  - ii - at the service centers and a fertilizer store. Project costs include US$220,000 for the experienced staff needed to set up a Malawi Agricultural Bank (MAB). These funds would be disbursed through the project authority. Where practicable, project procurement would be by international competitive bidding; goods obtained in this way would have a value of about US$1.62 mil- lion. Goods obtained within Malawi would be subject to local competitive bidding procedures. Retroactive financing amounting to about US$105,000 would be required for the initial development of the project ranch. v. The Phase I project is being carried out by a section of the Ministry of Agriculture and Natural Resources (MANR), headed by a program manager, responsible to the Permanent Secretary through the latter's Chief Agricultural Development Officer (CADO). While field management is excel- lent, the long chain of command above it has proved unsatisfactory. For Phase II, changes would be made to ensure the full support and cooperation of Government agencies. To ensure ministerial coordination, Government would set up a liaison committee of representatives from the Ministries most con- cerned with the program. The program manager would be responsible to the Under Secretary of MANR and quarterly and interim reports would be reviewed by the liaison committee. Plans for continuation of extension and local and technical support services after development is completed would be submitted to the Association for approval by June 30, 1972. The borrower would imple- ment the approved plans in accordance with a schedule which was acceptable to the Association. vi. At full development the Phase I and II areas would include about 156,300 acres of maize, 104,200 acres of groundnuts, and about 3,000 farm- ers stall-fattening an average of two beef animals each year. Average annual net farmer incomes would increase by about US$74/annum. Direct Government revenues, together with FMB operating surpluses generated by increased crop production by program participants, would cover Phase I and Phase II project costs by 1979/80, and would be sufficient to cover program area extension services and debt service costs, thereafter. In addition, estimated incremental Government revenue, mostly from consumer taxes, would amount to about US$1.0 million annually at full development. Based on current yield and price forecasts, the estimated economic rate of return from investments in the combined Phase I and Phase II projects is 13%.  MALAWI LILONGWE AGRICULTURAL DEVELOPMENT PROJECT, PHASE II I. INTRODUCTION 1.01 The project appraised in this report would be the second phase of the Lilongwe Agricultural Development Project and would be carried out by the Ministry of Agriculture and Natural Resources (MANR) (see para 6.02). 1.02 The Lilongwe Agricultural Development Prolect is an integrated ag- ricultural development program based on a plan prepared for the Government by the Bank's Agricultural Development Service (ADS) under the supervision of the FAO/IBRD Cooperative Program. This plan recommended the improvement of agricultural production on an area of about 500,000 acres in the central region of Malawi through a program which included an integrated package of soil conservation works, crop extraction roads, water supplies, marketing, storage and credit facilities, and, in particular, a greater agricultural extension and credit effort. In addition, a system of voluntary land re- organization and registration of family holdings was included in the pro- gram. The program was designed to result in the increased production and productivity of food crops such as maize, as well as cash crops, including groundnuts and tobacco, and, consequently, the development of a market-orien- tated agricultural industry. 1.03 In January 1968, IDA approved a credit of US$6 million (Credit 113-MAI) to finance the first phase of the development project. During phase I land conservation and road building have proceeded faster than planned, while the supply of farm inputs and land registration have fallen behind project targets (see para 3.19). Therefore, Government's Phase II project proposals for a rate of development of 100,000 acres/year has been reduced to 60,000 acres/year and project integration emphasized. 1.04 Development of the LADP area's livestock potential was not included in the original plan. Livestock development has substantial potential, how- ever, and consequently would form a component of the Phase II project. 1.05 This report is based on the findings of an IDA mission to Malawi in September/October 1970, consisting of Messrs. Denness, Gold, Lowenstein and Cole, and a mission by Mr. Stoneham to survey agricultural credit. 1.06 In addition to Credit 113-MAI, the Bank group has made one other agricultural credit to Malawi; this was of US$3.7 million in 1968 for the Shire Valley Agricultural Development Project (Credit 114-MAI), a project with many similarities to the Lilongwe program. Progress on this project has been good.  -2- II. BACKGROUND A. General 2.01 Malawi, a landlocked country extending some 700 miles from north to south, and 120 miles from east to west, has a total land area of about 36,000 sq miles, of which about half is cultivable. Its 1969 population of about 4.4 million is increasing at more than 3% annually, and while the average population density is 122 per sq mile, this figure is more than 250 per sq mile in the good agricultural areas, especially the central and southern regions. About 90% of the population are dependent on subsistence farming and obtain incomes less than Malawi's per capita GDP of about US$52 a year. B. Agricultural Sector 2.02 Principal subsistence crops are cereals (usually maize, the staple food), beans and other pulses including pigeon pea, which is some- times used for livestock feed. Substantial quantities of maize, surplus to family consumption requirements, are marketed, part directly to shopkeepers, and the remainder to the Farmers' Marketing Board (FMB). Except in years of a national deficit - the majority of FMB's purchases are subsequently exported. 2.03 Many farmers, particularly those in the Central Plains region, grow groundnuts and dark-fired tobacco 1/as cash crops; like cotton, the main cash crop of the lowlands, these are mainly for export. 2.04 Estimated contributisa by agriculture to GDP was K 93.2 million or 41% in 1966, while the contribution of subsistence agriculture was 27Z. In 1969 comparative figures were K 114.7 million, 37% and 24%, respectively. Lne decline in agriculture's contribution has resulted from reductions in quotas for smallholder tobacco (to avoid overproduct;ion) and to adverse weather in 1968 and 1969. 2.05 Prior to 1967, the long-term growth of agricultural production was achieved primarily by expansion of acreage. Because of the limited availa- bility of suitable agriculture land, future growth is dependent principally upon productivity increases, and a shift towards a more market-orientated agriculture. The results of projects financed under Credit 113 (Lilongwe) and Credit 114 (Shire Valley) and the Salima Lake Shore Project financed by the Federal Republic of Germany, show that productivity gains are possible 1/ Green Tobacco leaves cured in the smoke of a wood fire to produce a to- bacco darker in color than flue cured (without smoke) and used for pipes, chewing and snuff.  -3- and that farmers are responsive to cash incentives. Yields of maize, ground- nuts and cotton, obtained by farmers fully participating in these projects, have increased between 50% and 100% within the short period of two to three years. 2.06 Experience indicates that significant improvements in productiv- ity can be obtained by an integrated package program consisting of soil conservation measures, improvements in rural infrastructure, a concentrated extension and credit effort, and land reorganization and registration of holdings -- the latter provides farmers with recognizable units of land and, consequently, promotes long-term farm improvements. The success in Malawi of the integrated project approach justifies what in 1968 was a departure from the usual type of Bank/IDA agricultural project. The land-locked location of the country has made it difficult and costly to connect prom- ising agricultural areas with export evacuation routes; and the poor con- dition of existing, mainly gravel, roads and low standards of vehicle operation, make the timely support of agricultural inputs and export of agricultural produce difficult and expensive. These conditions call for the concentration of the development effort in areas where production potential is high and attention can be paid to streamlining the transporta- tion of farm inputs and exports. III. THE LILONGWE LAND DEVELOPMENT PROGRAM A. The Program Area 3.01 As shown by the map, the Lilongwe Agricultural Development Project (LADP) area comprises some one million acres of the central plateau of Malawi. The area was selected because it has the highest agricultural potential of any region of Malawi, its population is receptive to change, the country's main agricultural research and training facilities are within the area, soils are satisfactory and permit good responses to fertilizers, rainfall is adequate and reasonably reliable; and, while good agricultural land remains uncultivated through lack of village water supplies, abundant supplies of potable underground water at a depth of about 100 ft remain untapped. 3.02 General Description. The original LADP area, as defined by the Lilongwe Agricultural Development Area Order, 1967, consisted of about 500,000 acres lying to the west of Lilongwe town, the administrative and trading center of the central region. Between its southwestern boundary and the Mozambique border (see Map), there is the Dzalanyama Forest Reserve and an area of lower potential productivity which would not be developed under the project. For the second phase project, the program area would be redefined to include a net addition of 260,000 acres of high potential land, 116,400 acres of low productivity land and 161,000 acres of the Dzalanyama Forest Reserve, for the phase II project ranch; a total of 1.0 million acres.  - 4 - 3.03 The LADP area, lying at an altitude of between 3,500 and 4,000 ft above sea level consists of gently undulating plains with slopes of up to 5%, intersected with low-lying seasonal swampy areas, known locally as Dambos. Annual rainfall is 25-43 inches, almost all falling between December and March. Average temperatures range from 60